RHB Research has maintained “OVERWEIGHT” on healthcare sector; Whilst healthcare sector Top Pick is IHH Healthcare (IHH). Despite soft 1H22 earnings, the healthcare sector saw encouraging patient visit growth during the period (KPJ Healthcare (KPJ): +8%; IHH: +25%), while industry players are poised to leverage on the arrival of international patients post reopening of international borders in April.
For the pharmaceutical counter, RHB Research has picked Duopharma Biotech (DBB). DBB’s near-term prospects should be anchored by consumer healthcare (CHC) and the recent renewal of its MYR375m human insulin procurement contract.
Healthcare service providers. IHH’s and KPJ’s 1H22 results were below expectations. IHH was hit by the weakening TRY, the application of Malaysian Financial Reporting Standard (MFRS) 129, and diminishing COVID-19-related revenue, while KPJ was dragged by losses from its overseas units (Jeta Gardens and Indonesia segment). In terms of domestic patients’ growth, IHH fared better than KPJ after posting 18% QoQ growth in 2Q22 (KPJ: -1%). IHH also reported a better bed occupancy rate of 61% (KPJ: 56%) and revenue intensity of MYR9,588 (KPJ: MYR6,611).
Pharmaceutical. DBB’s 1H22 results beat consensus’ expectations. After adjusting for one-off items, the write-down of inventories amounted to MYR18m. The impairment of Sinopharm vaccines is expected to last until the end of 2022, even though the remaining inventory should be sold off by While the approved product purchase list (APPL) contract renewal
remains a wild card for DBB, the gradual incremental contribution from the human insulin supply contract (MYR125m pa) and meaningful CHC growth moving into 2023 should anchor its 3-year revenue CAGR growth of 10% from 2021 to 2024.
Outlook. IHH should fare better in terms of medical tourism, reflecting its state-of-the-art medical facilities and strategic geographical presence in meeting the needs of affluent patients. In terms of medical tourism revenue contribution, IHH has higher exposure than KPJ (15% vs 7%), which is in line with RHB Research’s expectation for it to leverage on its vast hospital network within the region, to capture pent-up demand from returning medical tourists. For DBB, while the CHC segment delivered better-than-expected sales in July/August, FY22 growth may be lukewarm due to the high-base effect in FY21. It is expected its CHC revenue growth to be more meaningful from FY23 onwards, driven by strong brand recognition as well as resilient consumer demand for healthcare and supplement products.
Top Pick. RHB Research continues to like IHH for its better-than-peers’ recovery, stronger strategic advantage to capture the return of medical tourists, and relatively resilient healthcare spending.
Key downside risks to our sector call: Re-imposition of border closures in local/overseas markets, lower-than-expected patient visits/revenue intensity growth, unfavourable drug pricing mechanism from the Ministry of Health.
