Strong demand to benefit healthcare companies

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Heathcare sector
Maintain overweight on overall sector:
Nearly 100 investors and 10 companies participated in our inaugural Healthcare Corporate Day yesterday. The consensus was that Malaysia has huge demand potential for healthcare products and services.  Strong demand will benefit the companies that are involved in the healthcare value chain, from hospital operators and pharmaceutical players to rubber product manufacturers.

We maintain “overweight” on the hospital and pharmaceutical sectors as they are the direct beneficiaries of stronger  demand. We retain our “neutral” call on the rubber glove sector due to intensifying competition as manufacturers rush to grab a share of the growing nitrile segment.

All Malaysian companies have laid out ambitious expansion plans and most think that double-digit growth in revenue this year is achievable. They do not expect the goods and services tax (GST) to affect their profit margins significantly as their products are either exempted from it or they are confident of passing through the additional costs to their customers. However, we are less sanguine about the outlook on profit margins of hospitals and rubber glove makers.

For hospitals, although the players are prepared to raise charges to offset the higher costs resulting from the GST, this may slow the demand growth for their services. GST and other subsidy cuts will hit the purchasing power of the middle class the hardest. This should dissuade the middle class from switching to private hospitals from the heavily subsidised public hospitals.

For the glovemakers, the excess nitrile capacity could result in intense price competition in the industry, which will eventually lead to difficulties in passing through the higher operating costs to customers.  We believe the pharmaceutical companies’ profit margins will be stable, as they can pass through the higher cost to their customers and as there is no major overcapacity issue.

We advise investors to be selective. For hospitals, we like IHH Healthcare Bhd as its operations are diversified across various geographies and it targets the high-income group.

We prefer Pharmaniaga Bhd for exposure in the pharmaceutical sector and Kossan Rubber Industries Bhd for glovemakers because of its reasonable valuations and good track record. — CIMB Research, Oct 23

This article first appeared in The Edge Financial Daily, on October 24, 2014.