Health expenditure to increase to 4.4% of GDP by 2030

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Healthcare sector
Maintain neutral:
Global population growth is to lead the growing demand for healthcare services. The United Nation’s Department of Economic and Social Affairs forecasts that world population will reach 9.6 billion and 10.9 billion in 2050 and 2100 respectively.

The world’s population is growing and at the same time, ageing. Over the past years, the population of the major part of the world is moving into the 65 and above age bracket.

The Population Reference Bureau projects that in 2050, the population aged 65+ will be 2.5 times more than the population aged 0 to 4.

This provides opportunities for healthcare services due to: (i) higher occurrence of age-related diseases; (ii) higher requirement for diagnosis and hospital-based treatment; and (iii) longer duration of care during the recovery phase.

The increase in wealth implies a trend towards the improvement of basic living standards, including better nutrition, sanitation and healthcare.

Euromonitor International Ltd projects that Malaysian consumer spending on health goods and medical services will expand at a compound annual growth rate of 6.9% from 2011 till 2020.

In a growing and ageing population alongside rising wealth, it is likely to see increasing spending in the healthcare sector.

The Ministry of Health has projected that health expenditure will increase from 3.7% of gross domestic product (GDP) in 2011 to 4.4% of GDP by 2030.

Judging from the abovementioned aspects, demand for healthcare will continue to grow resiliently supported by global population growth, ageing demographics, a more affluent community, and growing demand.

This is undisputable. However, given the lack of rerating catalyst(s) that could significantly boost earnings as well as the rich valuation of some healthcare stocks, we maintain “neutral” on the sector.

The catalysts would be global population growth, ageing demographics, a more affluent community, resilient healthcare demand, and the proliferation of medical tourism.

The risks include political, regulatory, competitive and foreign exchange risks, and the introduction of medicine price control; and the implementation of the goods and services tax (GST).

We maintain “neutral” on the sector with the following ratings: IHH Healthcare Bhd (“sell”, target price (TP): RM4.16, based on sum-of-parts valuation). Our TP is higher as we update our model with the latest list of hospital expansion projects.

Pharmaniaga Bhd (“buy” TP: RM5.30, 14.5 times financial year 2015 [FY15] earnings per share [EPS] pegged to 10% discount to United States peers).

Caring Pharmacy Group Bhd (“sell”, TP: RM1, 15.5 times calendar year 2016 EPS pegged to two times discount to peers average). Adventa Bhd (TP: RM1.20, 19 times FY15 EPS pegged to 25% discount to Asian healthcare players). — HLIB Research, Jan 30


This article first appeared in The Edge Financial Daily, on February 4, 2015.