Expect hospital activities to improve. Both IHH Healthcare (IHH) and KPJ Healthcare (KPJ) reported higher revenue YoY, mainly driven by an increase in inpatient volume and a case-mix of more acute patients with upward price adjustments to match inflationary pressure. However, we observed that the number of patient visits has dropped slightly QoQ while the bed occupancy rate (BOR) remained flat in 1QFY24. This is widely expected due to the Ramadan holiday season. Looking ahead, we anticipate the number of inpatients and outpatients to remain strong, bolstered by medical tourism and visa-free entries from China and India.

Health tourism remains in focus. KPJ's focus on health tourism has yielded decent results, with a 19% YoY increase in revenue from RM42m to RM51m in 1QFY24, driven largely by health travellers from Indonesia, who contributed 77% of the revenue. Recently, KPJ organized a Jakarta Expo aimed at showcasing its hospitals to Indonesian patients. Going forward, KPJ plans to expand these efforts with similar events in other Indonesian cities, including Surabaya, Bandung, and Semarang. Meanwhile, IHH has completed the acquisition of Timberland Medical Centre in Kuching, Sarawak, as of 29 February. This development is expected to strengthen IHH's medical tourism segment, with over c.30% of its patient census comprising medical travellers. We view these initiatives positively, as they are likely to enhance both KPJ's and IHH's positions in the health tourism market, drive revenue growth, and further solidify their roles as leading healthcare providers in the region.

Upcoming Healthcare Financing Reform Plan. Based on a recent news article in The Star (6th June 2024), the Health Ministry will soon announce its Healthcare Financing Reform plan, aiming to strengthen and improve the national healthcare system through innovative and creative budget utilization strategies. According to the Minister of Health, Datuk Seri Dzulkefly Ahmad, it is recommended that the nation increases its healthcare spending to 6-7% of its GDP, compared to the current 5.1%, with the private sector being targeted to drive healthcare expenditure. The government is set to shortlist a total of 95 private hospitals for participation in a healthcare outsourcing program. This is aligned with the public-private partnership (PPP) initiative as mentioned in the Health White Paper. This program aims to cover cardiothoracic surgery, medical imaging, cardiology services, and nephrology, targeting to manage patient demand and reduce wait times in government hospitals and specialist centers.

Growing NCDs and ageing population. According to the latest National Health and Morbidity Survey (NHMS) 2023, nearly 2.3m adults in Malaysia are living with 3 major non-communicable diseases (NCDs), including diabetes, hypertension, and high cholesterol. The Department of Statistics Malaysia (DOSM) forecasts that Malaysia will become an ageing nation by 2030, with 15.3% of its population aged 60 and above. This trend is expected to benefit private hospitals by increasing the demand for healthcare services

Healthcare outlook remains resilient. Going forward, we maintain a positive outlook on the healthcare sector, driven by the increasing prevalence of noncommunicable diseases (NCDs) and an ageing population, which are expected to boost the demand for healthcare services.

Additionally, we have recently initiated coverage on Optimax with an Outperform rating and a target price of RM0.83, based on a 27x PER pegged to FY25F EPS of 3.1 sen. We favor Optimax for its strong financial track record and its position as one of Malaysia's leading pure-play eye specialists. Optimax's growth is supported by the rising demand for cataract and refractive surgeries, along with the Group’s ongoing expansion plans. We also have Outperform ratings on KPJ and IHH, given the rising inpatient volumes and bed occupancy rates. Overall, we remain OVERWEIGHT on the healthcare sector.

Source: PublicInvest Research - 26 Jun 2024