• Following our recent meeting with IHH Healthcare Berhad (IHH) management at Gleanegles Hospital Medini Johor, we are of the view that business growth will be driven by: i) ongoing expansion in Malaysia operations; ii) the group’s effort to continue to ramp up productivity via adoption of modern medical devices, and iii) pricing power which able the group to charge their patients at premium

• We maintain a BUY recommendation on IHH with a TP of RM7.17. Our valuation is derived based on SOP valuation with a WACC of 7% for Parkway Pantai Limited, 11% for Acibadem.

Ongoing expansion strategy for IHH's operations in Malaysia

Note that medical tourism accounted to 8% in Johor, 7%-8% in Malacca, 7% in Penang and 6%-7% in the Klang Valley. The group has guided that a substantial portion of medical tourism patients originates from Indonesia, attracted by the superior specialists available in IHH hospitals. Therefore, one of IHH's key strategies to meet the demands for both local and foreign patients is by expansion. Over the next five years, the number of beds in IHH's Malaysian operations is set to increase from 1000 to 1500, with a particular focus on Gleanegles Hospital Medini Johor, where a new block is planned to accommodate an additional 200-250 beds. Considering the 15-acre landbank in Medini, IHH envisions the potential for adding two more blocks in the future. Another expansion initiative is underway in Timberland, Kuching, where 30%-35% of patients come from Indonesia. To recap, in August 2023, IHH entered into a share purchase agreement to acquire Timberland Medical Centre, a reputable 82-bed private medical facility in Sarawak. The management has guided that the original plan is to expand this to 200 beds, with potential remodelling to accommodate up to 250 beds. These expansions are expected to positively impact IHH's Malaysian operations in the coming years, meeting the growing demand from both local and foreign patients. Additionally, scaling up infrastructure can lead to economies of scale and improved operational efficiency, potentially reducing costs per patient treated.

Innovative oncology advancements

During our recent visit, the group has showcased several roboticassisted surgical procedures at Gleneagles Hospital Medini Johor, including Mona Lisa and The Da Vinci XI. Mona Lisa, in conjunction with MRI-Ultrasound Fusion technology, facilitates automatic lesion targeting and precise template biopsy, enhancing detection accuracy. Notably, these devices are the first of their kind in Malaysia. The Da Vinci XI represents a significant advancement in surgical precision. This robotic system ensures minimal incisions and scarring through its four flexible interactive arms, surpassing the capabilities of natural human arms. On top of that, with the introduction of the first Digital PET-CT scanner in Malaysia, Gleneagles Hospital Medini Johor has emerged as a technological leader in oncology services in the southern region. This advanced technology enables faster scans, and improved lesion detection compared to older analogue PET-CT scanners, leading to more effective treatment planning. It is worth to note that the inception of oncology services at Gleneagles Hospital Medini Johor in 2019, the hospital's market share has surged from approximately 20.8% to approximately 46%, capturing about half of the oncology market share in Johor state. We believe that the adoption of innovative technologies exclusive to IHH, such as robotic-assisted surgery, will drive patient engagement and confer a competitive advantage. Additionally, we anticipate that generative AI will play a valuable role in assessing patient risk factors and predicting potential complications during and after surgery, including anatomical considerations, and surgical procedure types.

Balancing costs and care

Currently, media discussions have centered on the necessity of hiking healthcare premiums, a move propelled by the escalating global healthcare costs. Despite IHH's concerted efforts to maintain minimal pricing, the upward trend in healthcare expenses, influenced by factors such as technological advancements and energy expenditure, mandates this adjustment. Notably, technologies like robotic surgery, now considered the standard for procedures like cancer treatment, contribute to enhanced patient outcomes while simultaneously driving up costs. In response to these escalating expenses, IHH directs its focus towards augmenting value through improved patient outcomes. A key metric used to gauge cost escalations is intensity, encompassing variables such as patient condition and procedural complexity. IHH has guided that historically, intensity has exhibited an annual increase of approximately 6% to 7%. However, recent years, particularly 2021 and 2022, have witnessed a surge in intensity owing to a higher prevalence of critical patient cases. While there has been a recent stabilization, IHH anticipates intensity to hover around 4% to 5% in the foreseeable future, driven by factors like consumables, pharmaceuticals, and equipment investments. Despite the increasing costs in healthcare industry, we believe that IHH will be able to maintain its profit margins as a leading premium private healthcare provider. This positioning enables the group to command premium charges from its patients, thus facilitating the passing of costs to consumers.

Reiterate BUY at TP of RM7.17

We are maintaining our earnings forecast, pending the release of the group's financial results by end of May. We believe that the capacity of IHH's core operations in Malaysia and Singapore is to effectively utilize beds and boost hospital occupancy, particularly with the resurgence of elective treatments among local patients. Furthermore, we anticipate that the medical tourism segment will continue its upward trajectory, supported by the ongoing development of state-of-the-art facilities and personalized healthcare services. Additionally, we hold a positive outlook on IHH's organic expansion plan, given the group's commitment in adding close to 4,000 beds by 2028. On top of that, we believe that the increases in hospital admissions are further propelled by Malaysia's escalating noncommunicable disease (NCD) crisis. Chronic illnesses like diabetes and hypertension have been steadily increasing in Malaysia for decades, necessitating a rise in hospital visits. According to the Ministry of Health Malaysia, the likelihood of mortality from NCDs is projected to increase in the coming years, reaching 19.4% in 2025 and 20.0% by 2030. This increase is primarily driven by rising cancer and diabetes-related deaths, as well as sustained high figures in cardiovascular-related deaths. Maintain a BUY call with TP of RM7.17. Our valuation is derived based on SOP valuation with a WACC of 7% for Parkway Pantai Limited, 11% for Acibadem.

Source: BIMB Securities Research - 13 May 2024