Healthcare sector continues to be favoured

Private hospitals look to capture lower to mid-income market

The healthcare sector continues to be a favoured one by analysts and investors alike, driven by a push for medical tourism, increasing a uence and broader insurance coverage, as well as a growing and ageing population.

As private healthcare players continue to grow their key performance indicators (KPIS), the industry could see some corporate exercises this year.

Additionally, Budget 2020 has outlined several initiatives to spur the sector, one of which is the Malaysia Year of Healthcare Travel 2020.

Plus points aside, the year will also see the introduction of drug price controls, which poses an uncertainty for healthcare players and could impact their earnings if they are not able to re-coup the loss from lower drug revenue.

In a 2020 strategy report, TA Securities highlights that there could be an in ux of new beds in existing and new hospitals for both IHH Healthcare Bhd and KPJ Healthcare Bhd, which rep-resents an increase in revenue potential.

CGS-CIMB concurs as it expects KPJ to continue to deliver healthy earnings and improved margins in 2020, driven by increased patient visits and prudent cost management.

“We also expect its newer hospitals to turn around as they exit the gestation period in 2020,” says CGS-CIMB in a healthcare sector report.

KPJ targets to add about 450 new beds in 2020 for three hospitals, which comprises KPJ Kuching at 70 beds, Kluang Specialist at 90 beds and KPJ Damansara at 30 beds, as well as the expansion of existing hospitals of about 250 beds.

Meanwhile, for IHH, Maybank IB Research notes that a key event to watch for would be its 31%-owned Indian hospitals operator Fortis’ court hearing on Feb 3, 2020.

“A positive outcome whereby the court rules that Fortis did not violate its ‘status quo’ court order, could see IHH’S share price re-rate.

“IHH’S share price has been weak due to a decline in core net pro t and the ongoing court case against Fortis,” the research house says.

Notwithstanding that, IHH continues to see growth in its existing operations in Malaysia, while its Gleneagles Hong Kong will continue to narrow down its losses, following the com-missioning of more beds.

According to TA Securities, IHH will add a total of 450 beds and 140 beds for Gleneagles Shanghai and the expansion of Pantai Ayer Keroh, respectively.

The research house reckons that IHH’S earnings before interest, taxes, depreciation and amortisation (Ebitda) margins are to remain attish at 21.5% due to the gestation period of Gleneagles Chengdu and Gleneagles Shanghai.

In line with the expansion plans of IHH and KPJ, TA Securities does not discount the possibil-ity of corporate exercises from the two players.

For one, IHH is considering divesting some assets to rebalance its portfolio.

Economics Times reports that IHH is planning to sell its 62% stake in Continental Hospitals and 74% share in Global Hospitals back to their original promoters. Recall that, in 2015, IHH acquired a 51% stake in Continental Hospitals for about Us$45.4mil (Rs281 crore) and subse-quently increased it to 62%.

In the same year, it also purchased a 74% stake in Global Hospitals for close to Us$200mil (Rs1300 crore).

On the other hand, KPJ continues to search for prospective buyers for Jeta Gardens, Australia which has been a ected by the ongoing Aged Care Royal Commission and increase in Home Care packages by the Australian government.

Apart from that, healthcare players will stand to bene t from the Budget 2020 initiative to spur medical tourism.

Medical tourists, particularly those who hail from Indonesia, Singapore, and China, is a growing segment of patients for private healthcare players.

Finance Minister Lim Guan Eng, in his Budget 2020 speech, noted that medical tourism has charted an annual 17% growth from 2015 to 2018.

In 2018, medical tourism generated Rm1.5bil revenue receipts from 1.2 million healthcare travellers.

The government’s allocation of Rm25mil to the Malaysia Healthcare Tourism Council will strengthen the position of the country as the preferred destination for health tourism in Asean for oncology, cardiology and fertility treatment.

On the proposed drug price control, the Ministry of Health is still formulating the mechanism to nalise the right model and reference benchmark prices.

The rationale behind this is to reduce the usage of original or patented drugs, and in turn, re-place them with generic drugs to lower the healthcare expenditure.

Maybank IB Research reckons that the drug price controls could be announced in early 2020.

As such, this could result in lower drug sales revenue for the hospitals.

In order to mitigate this, hospital players will likely raise other charges to maintain their margins.

“We believe private hospitals will be able to cover the loss if selling price of drugs is con-trolled (about 20% of revenue) by increasing the consultation fees, bed charges and medical devices.

“Note that the Health Ministry has recently announced that the cabinet has agreed to deregu-late the fee structure for private clinics.

“As such, private sector doctors will be able to determine their own consultation fee rates,” says TA Securities.

Overall, analysts maintain their “overweight” or “neutral” stance on the healthcare sector.

It remains to be seen how healthcare players can navigate through the challenges ahead and it will be interesting to see the quantum of bene ts that the Malaysia Year of Healthcare Travel 2020 will bring.

Meanwhile, an interesting trend quietly developing is partnerships between private operators and the government to build hospitals that cater to lower income groups.

The rationale for this development is simple: while the middle class tends to be able to a ord private medical care, the lower income groups are left to the overloaded government health-care services.

There is a huge gap in the level of healthcare between these two operators.

It is common knowledge that the waiting times in government hospitals are lengthy. Patients diagnosed with critical illnesses, which are often time sensitive, face long waiting lists for surgeries and radiological imaging, along with distant physician follow-up dates. Understanding the need to help relieve some of the patient load at government hospitals, private hospitals like Sunway Healthcare are proposing to take on selected cases at preferred rates for the government.

However, other players are looking to provide private healthcare for the lower income groups at cheaper rates.

On a larger scale, an example of this new public-private initiative is Sinmah Capital Bhd, which through a joint venture, is embarking on building a full service integrated public-private university hospital.

In partnership with Amegajaya Medical Planning Group, Sinmah will develop the hospital, with Universiti Teknologi MARA as the clinical partner operating the hospital. How would a model like that work? While most hospitals would have a pro t margin of around 25% to 30%, a business model like Sinmah’s would see slightly lower margins, hovering around 10% to 15%.

Sinmah group managing director Datuk Fong Kok Yong tells Starbizweek that “a healthcare business can make lots of money, but we are prepared to take a big cut.

“Whatever said and done, you must make your 10% to 20% pro t margin for the purpose of a sinking fund.”

Another company embarking on this is Paragon Globe Bhd, through Builtech Acres Sdn Bhd, which is the holding company for Sepang Medicity Sdn Bhd.

On Nov 7, 2019, Builtech had entered into an agreement with Selgate Healthcare Sdn Bhd and Sepang Medicity Sdn Bhd to build and operate a 121-bed medical centre for 15 years with an option to renew for another 15 years.

Selgate Healthcare is a unit of Perbadanan Kemajuan Negeri Selangor.

We also expect (KPJ’S) newer hospitals to turn around as they exit the gestation period in 2020.

Source: The Star 

Posted on : 04 January 2020
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Last Updated : Thursday 21st May 2020