This article first appeared in The Edge Financial Daily on February 13, 2020
Healthcare sector
Maintain overweight: The recent coronavirus (Covid-19) outbreak is likely to have minimal impact on the Malaysian healthcare sector in the near term. Nevertheless, for the long term, we believe rising healthcare awareness arising from the outbreak should be positive for the sector. We maintain our “overweight” rating on the healthcare sector and recommend investors to position defensively in the sector. Our top pick is Apex Healthcare Bhd. On a positive note, a possible retraction of proposed medicine price controls, potentially due to already-competitive pricing in Malaysia and the fear of losing access to the latest and most innovative single-source medicines, could be a positive catalyst for private hospital operators.
We think that the Covid-19 outbreak is likely to have only a muted impact on private hospital operators as private hospitals are required to report and refer such cases to public hospitals and the national infection centre based on the ministry of health’s guidelines. While we note that pharmaceutical players could potentially benefit from a surge in demand for products related to prevention of seasonal viral diseases with similar symptoms, the impact on their respective bottom lines is likely to be minimal.
Although not entirely recession-proof, healthcare spending is relatively inelastic and less prone to market uncertainties. Healthcare stocks under our coverage have long-term adjusted betas of below one, displaying low sensitivity of the sector to global growth.
We gather that the proposed medicine price controls may not materialise in the near term possibly because medicine prices in Malaysia are already relatively competitive. Alternatively, declaration of prices may be encouraged to improve transparency and encourage competition. We think that possible calling off of the proposed medicine price controls could help to mitigate the current overhang for private hospital operators.
We continue to like the sector for its defensiveness and long-term growth prospects. Going into 2020, we recommend positioning in the pharmaceutical space as a potential earnings recovery play and beneficiary of the government’s initiatives to liberalise drug distribution in the country. Key downside risks include sharp declines in patient volumes, higher-than-expected start-up losses for new hospitals, execution risk, currency risk, product recall risk and regulatory risk. — Affin Hwang Capital, Feb 11