Healthcare sector
Maintain overweight: The government, regulators and foreign insurance players appear to have come to a compromise on the requirement to divest 30% of their equity stakes to local partners. This compromise has taken the shape of the B40 Healthcare Protection Fund (B40HPF) as announced in Budget 2019. The proposed B40HPF to be managed by Bank Negara Malaysia will provide the B40 segment with: i) free protection against 36 critical illnesses of up to RM8,000 per annum (pa); and ii) up to 14 days of hospitalisation income at RM50 per day (RM700 pa).The scheme essentially represents a shift of patient volumes to the private sector backed initially by a private sector-led funding model.

 
This policy shift essentially provides: 1) a federal framework for public private partnerships between the ministry of health (MoH) and private hospitals; 2) it is in line with the goal of bridging the gap of insurance coverage for the B40 segment; and 3) in our view, sets in motion a structure for a national healthcare insurance scheme similar to Medicare (Australia) and NHS (UK) in future, whereby healthcare is funded by the public, lessening the burden on the government’s coffers.

The cap of RM8,000 per annum will limit accessibility to major treatments (surgeries). We are inclined to believe that the scheme would be channelled towards ancillary services — diagnostics (MRI, CT scans and pathology) at private hospitals, thus potentially increasing the utilisation rates of nascent medical equipment albeit at a volume discount rate. Downside risk to the sector arising from the B40HPF would stem from credit risk similar to the experiences of KPJ Healthcare Bhd with the Badan Penyelenggara Jaminan Sosial scheme in Indonesia. This was largely caused by loosely defined treatment coverage under the scheme, resulting in a mismatch between treatment provided and charges the schemes proprietor were willing to pay. Nonetheless, stakeholders in Malaysia would be well-equipped to navigate these virgin waters drawing on experiences from our neighbours.

Pharmaniaga Bhd remains competitive for the concession model due to their: a) expertise in cold chain pharmaceutical logistics and distribution; and b) the margins from the concession business is unattractive (approximately 1-2% to attract other distributors who enjoy greater margins from distributing to the private sector. We expect Pharmaniaga to continue with the concession which expires in November 2019, and potentially renewed on an annual basis whilst the MoH trashes out new service-level terms and agreements. This was also the case in the last concession cycle signed in 2011.

We believe that a seismic fundamental shift is occurring within the local healthcare space. We prefer KPJ (“buy” at target price [TP]: RM1.27) over IHH Healthcare Bhd (“hold” with TP: RM5.32) as geographically, KPJ has presence in every state, except Terengganu and Melaka.  Network-wise, it also has a higher number of hospitals (26) which cover the semi-urban areas and smaller towns, thus enabling it to tap on a larger proportion of the B40 segment. — Hong Leong Investment Bank Research, Jan 11