• Maintain OVERWEIGHT; KPJ Healthcare (KPJ) remains our sector TopPick. We expect the private healthcare sector’s earnings growth to persist into2024 – underpinned by relatively inelastic demand, rising health awarenessamong consumers, and a rapidly ageing society anchoring genericdrugmakers’ mid- to long-term growth prospects. While the sector hasdefensive attributes, we continue to recommend that investors lean towardsdomestic-centric names, as these should offer better earnings stability.

• Healthcare service providers. The key focus for KPJ in 2024 will involvedriving efficiency (primarily for hospitals in gestation periods) and, to a greaterextent, unlock its potential value – with an ultimate objective of bridging thegap between its valuation and that of IHH Healthcare (IHH). Note that KPJ’svaluation discount against IHH’s in EV/EBITDA terms has narrowed to 5% asat 18 Jan vs the 5-year historical average of 18.5%. As for IHH, we expect itto continue focusing on improving the number of beds, as outlined by its new5-year bed count target of 3,800 units. Given the hyperinflation situationcurrently in Turkey, we believe that IHH will continue to diversify its revenuetowards patients paying in ex-Turkish lira (or TRY) denominations, whileadopting timely price adjustments to mitigate any cost pressures.

• Health tourism (HT). The outlook for HT in Malaysia remains positive, thanksto the availability of world-class facilities and services that come at competitiveprices, on top of the easy access to such healthcare and communication withmedical professionals. According to our channel check with Malaysia HealthTourism Council (MHTC), HT in the country is expected to generate revenueof MYR2bn in 2023 (8M23 actual: MYR1.4bn), surpassing its pre-pandemicpeak of MYR1.7bn in 2019. To further strengthen the HT landscape, MHTChas outlined several initiatives such as the Flagship Medical Tourism HospitalProgramme, cross-selling tourism and healthcare services and facilities,customer service digitalisation, and identifying and developing new marketopportunities.

• Pharmaceutical. Within the pharmaceutical sub-sector, we expect theimproved consumer sentiment (according to RHB Economics) to bode wellfor the demand for over-the-counter products. That said, the pick-up in exportmomentum is expected to benefit Duopharma Biotech and Kotra Industries,as revenue from their overseas markets accounts for 6% and 45% of theirturnover.

• Outlook and sector pick. We maintain our OVERWEIGHT sector rating,underpinned by relatively inelastic demand trends, coupled with rising healthawareness among consumers as well as the trend of an ageing society. KPJremains our Top Pick, premised on: i) Its strategic rebranding and upscalingexercise, ii) a gradual pick-up in the HT segment, and iii) improvement inoperating efficiency as its hospitals under gestation are expected to breakeven by 2024.

• Key downside risks: Higher-than-expected operating costs, lower-thanexpected patient visits/revenue intensity growth, and the introduction of anunfavourable drug pricing mechanism from the Ministry of Health.

Source: RHB Securities Research - 19 Jan 2024