This article first appeared in The Edge Financial Daily, on December 28, 2015.

KUALA LUMPUR: Healthcare, an industry which generally enjoys inelastic demand, is expected to remain resilient next year in spite of the possibility of a slight slowdown due to rising cost of living and the weak ringgit.

Two major Bursa Malaysia-listed industry players, IHH Healthcare Bhd and KPJ Healthcare Bhd, registered positive earnings for their respective nine-month period ended Sept 30, 2015 (9MFY15). IHH saw a year-on-year (y-o-y) growth in net profit of 0.6% to RM518.1 million, while KPJ Healthcare’s net profit came in 16.1% higher at RM108 million.

In a note to clients dated Nov 27, TA Securities wrote that IHH saw a slowdown in patient traffic for 9MFY15 by -0.2% y-o-y, which was attributed to the weaker post-goods and services tax (GST) consumption. As for its operations in Turkey, there was also slower traffic of -1% y-o-y in the same period, which was due to the long periods of holiday.

Nevertheless, the situation is not worrying as the slight slowdown in patient traffic at IHH’s hospitals in Malaysia will pick up over time, an analyst who wishes to remain anonymous told The Edge Financial Daily, as the group caters to more complex medical cases and will be looking to further tap into the medical-tourism growth area.

“Healthcare in general is a very defensive industry, and for IHH in particular, [as] it caters to a premium market. Their clients have the financial means and are not sensitive to cost pressure.

“The group will also be looking at medical tourism to support its earnings, especially patients from the Middle East, as Malaysia is still a cheaper destination compared with others, and we have lower revenue per patient,” the analyst said.

Meanwhile, KPJ’s growth for the 9MFY15 period was attributed to higher revenue from existing hospitals and newly-opened ones, namely KPJ Rawang in March 2014 and KPJ Bandar Maharni in June the same year.

The group will be opening nine new hospitals across the country by 2019, which will see an increase from its existing capacity of 2,851 beds to more than 4,200 beds.

CIMB Research analyst Saw Xiao Jun told The Edge Financial Daily that the success of the group’s expansion plan outside the dense urban areas will very much depend on its pricing strategy, given the existence of public hospitals.

“They will need to manage the cost well,” Saw said, adding that the country has seen a steady growth of insurance purchase in recent years, which should in turn support the expansion of the group to serving the population outside urban areas.

Further, there will always be professionals working in areas or jobs that offer decent pay, he said.

“The healthcare industry will always grow because of an ageing population. Older people will be the ones to boost demand, either in private or public healthcare,” Saw noted.

He added that while the second quarter of financial year 2015 (2QFY15) and 3QFY15 did see some slowdown in patients seeking medical treatment, given the weakened consumer sentiment post-GST introduction, demand for private healthcare is expected to resume its growth trend once the general public adapts to the new tax.

AmResearch analyst Max Koh said as hospital operators, both IHH and KPJ have done reasonably well despite the inflation pressure in the overall market.

“Whether or not there is a slowdown in the economy, people still need treatment. With private healthcare, patients typically receive coverage from employers. It all comes down to operational efficiencies. I believe that demand will continue to persist in 2016.

“It is just a matter of whether or not their (KPJ and IHH) margins will be sustainable,” Koh added.