Analysts See Potential in Healthcare Sector: Here's Why

Despite the Malaysian healthcare sector's nearly 15% increase from its December low last year, analysts continue to be bullish on the sector's potential for further growth. Motivated by the demographic trends and consistent earnings stability in Malaysia's Healthcare Service Providers, analysts from RHB and Kenanga have concurred with an 'overweight' rating for the healthcare sector.

The demand for services provided by Malaysia's healthcare industry is also increasing from overseas. According to data from the Malaysia Healthcare Travel Council (MHTC), health tourism is expected to generate revenue of 2.4 billion Malaysian Ringgit in 2024, signifying a year-over-year growth of 20% from the 2 billion Ringgit earned in 2023.

The primary drivers of this growth include three factors. First, the government decided to offer visa-free entry for up to 30 days to citizens of China and India.Dr. Mohamed Ali Abu Bakar of MHTC suggests that this visa exemption is likely to further promote healthcare tourism, as these nations significantly contribute to the number of tourists in this sector and targets 2.4 billion MYR (US$502 million) in revenue from health tourism this year. Second, world-class healthcare facilities are available in Malaysia, providing high-quality services at competitive prices. In 2023, Malaysia earned over RM1.9 billion from over a million medical tourists undergoing treatments, from heart bypasses and hip replacements, at costs much lower than in their home countries. Third, the ease of access and communication has been enhanced for healthcare tourists. Healthcare institutions in Malaysia not only offer online consultations and streamlined medical procedures but also provide corresponding language services, greatly facilitating the treatment process. Additionally, Malaysia's subsidy policy for chartered flights plays a significant role in increasing the number of flights to Malaysia, which also caters to the needs of medical travel.

The issue of population aging is being faced on a global scale. The World Health Organization (WHO) predicts that by 2050, the global population aged 60 and above may double to approximately 2.1 billion, with its proportion projected to rise from 12% in 2015 to 22% by 2050.

Malaysia is also facing the issue of an aging population. Recent DOSM data shows Malaysia's population aged 65+ rose from 7.2% in 2022 to 7.4% in 2023, totaling 2.5 million, signaling an aging trend. By 2040, DOSM forecasts a comparable size of youth (18.6%) and elderly (14.5%), with the latter group exceeding 6 million, making Malaysia an aged society. With the shift in demographic composition, the need for healthcare services within Malaysia is expected to escalate significantly.

Healthcare Service Providers (HSPs) Exhibit Strong Profit Stability. Analysts project a sustained increase in patient volumes across private hospitals, catering to both local and international demographics, with concurrent revenue enhancement. This is primarily due to a diversified case mix and greater profitability from complex medical cases. Moreover, private hospitals wield considerable pricing leverage due to the non-elastic demand for private medical services, which facilitates the transfer of increased operational costs in an inflationary environment.

"While the healthcare sector generally has defensive attributes, we continue to advocate for investors to lean towards domestic-centric names given better earnings stability," RHB Research said.

Since 2024, KPJ's stock has risen nearly 38%, and IHH shares have seen an uptick of around 5%.Based on Bloomberg data, 64% of analysts have given KPJ a buy rating, while 76% of analysts have given IHH a buy rating.

KPJ: Implementing key strategic initiatives such as centralprocurement, digital transformation plans, and asset optimization is critical for cost optimization. KPJ anticipates that profitability will gain momentum entering FY24, driven by better operational efficiency through its cost-optimization efforts and by absorbing more fixed costs by adding new beds (a 10% increase). With revenue growth driven by increased patient throughput, the group's three new hospitals – KPJ Perlis, KPJ Bandar Dato Onn, and KPJ Batu Pahat – are expected to become profitable by the end of FY24.

RHB Research noted, "KPJ Healthcare Bhd's priority is to enhance the operational efficiency of established hospitals and capitalize on Health Tourism's recovery. KPJ aims to boost its HT division's revenue share to 40% by 2028 and is actively engaging in international HT expos this year."

IHH：Patient throughput growth and revenue intensity in FY24 are expected to drive profit growth. The European business of Acibadem has already recovered. With the return of foreign patients, medical tourists from the Middle East and Central Asia are also returning to its hospitals in Turkey, and it is anticipated that the drag on profitability in Turkey will gradually ease. In Hong Kong, due to improved operational efficiency and a higher fixed cost absorption rate, coupled with rapid business growth from the opening of new beds, Gleneagles Hong Kong is expected to turn optimistic in profitability for FY24. Furthermore, IHH plans to add over 4,000 beds (a 30% increase) in Malaysia, India, Turkey, and Europe over the next five years. The previously constrained Singapore patient throughput due to staff shortages is expected to recover gradually with the addition of new beds.