KUCHING: Malaysian healthcare players are expected by analysts to benefit from demand fuelled by favourable demographics, synergies and medical tourism in 2015.
RHB Research Institute Sdn Bhd (RHB Research) sees the healthcare industry being supported by a few domestic factors, mainly the growing affluence of the population, rising health awareness and the rise in the number of elderly in Malaysia.
It noted that according to the Ministry of Health’s 2013 data, there were some 355 hospitals nationwide (40 per cent public, 60 per cent private) providing an estimated 55,000 beds in total (75 per cent public, 25 per cent private).
“This number is expected to grow in line with the increase in the aforementioned factors,” the research house said.
Meanwhile, Frost & Sullivan is expecting private healthcare players to post topline growth of 10-15 per cent annually, supported by the anticipated increase in Malaysia’s population to 31.8 million by 2018.
“We believe the scarcity of inpatient facilities and extended waiting list at public hospitals should contribute to the increase in demand,” it said.
RHB Research also views the healthy increase in inpatient admissions and revenue per inpatients by both IHH Healthcare Bhd (IHH) and KPJ Healthcare Bhd (KPJ) as a reflection of the strong underlying demand for private healthcare.
The research house noted that as at the third quarter of 2014 (3Q14), IHH’s Malaysian operation registered a 10.5 per cent and 7.7 per cent year on year (y-o-y) growth in inpatient admissions and revenue per inpatient respectively.
“At the same time, KPJ posted a 26.4 per cent in inpatient admissions and 4.9 per cent rise in revenue per patient.
Both companies’ commendable growth was on the back of the hospitals’ aggressive expansion,” it said.
Due to the rapid expansion by both hospital groups, RHB Research sees potential for further mergers and acquisitions (M&As) and joint ventures (JVs).
As earnings growth is capped by their expansions, the research house noted that hospital operators have resorted to acquiring smaller players, such as providers of medical imaging and laboratory services, to extract greater synergies and expand their product offerings.
“Also, entering into a JV ensures that the balance sheet remains light, providing room for expansion into other areas.
We anticipate this trend to continue in 2015 onwards,” it said.
Over the next three to five years, and on the back of KPJ’s and IHH’s ongoing expansion, RHB Research believes the sector’s growth will be supplemented by medical tourism.
According to Malaysia Health Tourism Council (MHTC) data, the number of medical tourists coming to Malaysia to use the country’s hospitals rose by a compound annual growth rate (CAGR) of 23 per cent in 2009-2013 to 770,000.
By 2016, the MHTC expects this figure to rise to 1.1 million.
“Both IHH and KPJ are ramping up their capacities in locations that attract more foreign patients, from near the country’s borders as well as major commercial hubs.
“These include cities in Johor, Perlis, Penang and Sabah,” the research house said.
While medical tourism currently makes up less than 10 per cent and five per cent of total revenue for IHH and KPJ respectively, the research house understands that the latter has an internal target to increase this to 25 per cent by 2020.
It added that both IHH and KPJ have guided for an annual capital expenditure (capex) of RM1.65 billion and RM350 million respectively until 2016 in order to facilitate their expansions.
However, in terms of the pharmaceutical sector, RHB Research remain cautious on the outlook for it and, in particular, Caring Pharmacy Group Bhd (Caring).
The research house noted that the pharmaceutical chain is witnessing a combination of lower-than-expected contributions from new outlets and rising competition from independent pharmaceutical outlets that have sprouted in key market centres.
Nonetheless, it sees some reprieve for the company in the second half of 2015 (2H15) when such outlets (opened in 2013 and/or early 2014) start to mature while, at the same time, their operational costs are contained via an increase in efficiencies through the implementation of new IT systems.
“Similarly, Caring’s marketing costs for these outlets is also expected to be cut as the company will not need to invest so much to promote them,” it said.
On whether the goods and services tax (GST) will affect the healthcare sector, RHB Research noted that it could lead to higher medical cost.
The research house said that the Royal Malaysian Customs Department recently provided an updated GST healthcare services guide that stipulates that drugs and medicines – other than those listed under the National Essential Medicine List (NEML) – will be subjected to GST (as opposed to being zero-rated).
At the same time, it noted that healthcare services provided by registered practitioners with licensed private healthcare facilities are exempted from the tax.
However, RHB Research said that services provided/rendered healthcare professionals that are not resident at a registered medical facility (for example, consultant physicians not based at a particular hospital) will be subjected to a standard GST rate.
It added that other ancillary services supplied by a private healthcare provider, such as the sale of medical aids, are also not tax-exempt.
“We expect the healthcare players to pass on the GST to consumers in order to mitigate the impact of the tax on their bottomlines,” the research house said.
With regards to the impact of the GST on the local healthcare sector, it noted that the Association of Private Hospitals Malaysia (APHM) has called on the Government to classify the industry as zero-listed.
“This is because private healthcare providers typically raise their cost of services by three to five per cent annually to factor in inflation.
“The APHM’s concern here is on increasing healthcare cost as a result of the implementation of the GST coupled with inflation-adjusted pricing going forward.
“Media reports state that the Government has acknowledged the APHM’s concerns that the GST will result in a rise in hospital fees.
However, it has yet to confirm the exact quantum,” the research house said.
Although the healthcare sector remains a ‘neutral’ on the grounds of its unattractive valuations, RHB Research believes the defensive nature of healthcare services in general and the promising longer-term growth prospects of the sector – on the back of capacity expansions by the operators – are good enough reasons to stay invested in selected healthcare stocks.