As expected, Budget 2014 placed a strong emphasis on the issue of rising healthcare needs and measures to enhance affordability for all Singaporeans. The government expects demand for medical services to grow given an aging population and advancement in treatment techniques which has helped prolong life expectancy rates.

Some of the key highlights include:

(i) Raising the CPF employer contribution rate by one percentage point for all workers, which will be channelled to employees’ Medisave Account. We believe this will increase manpower costs for all companies.

(ii) Increasing subsidies for general Specialist Outpatient Clinics (SOCs) services for the lower- and middle-income group from 50% each to 60% and 70%, respectively. We believe this will increase waiting times at public healthcare institutions and could incentivise the middle-to-upper income group to seek treatment at private specialist clinics instead. Raffles Medical Group [BUY; FV: S$3.61 under review] and IHH Healthcare Berhad [NON-RATED] will likely be key beneficiaries given their large network of specialist clinics.

(iii) Lower- and middle-income families will receive subsidies for MediShield Life which will help to boost their insurance coverage.

(iv) The Pioneer Generation will receive more healthcare aid, such as a further 50% off their subsidised bills at SOCs and more benefits from the Community Health Assist Scheme (CHAS).

(v) Developing quality people in the healthcare sector. We believe the government will seek to increase the pool of healthcare professionals, which will help to alleviate the issue of manpower shortages. However, we expect manpower costs to increase for healthcare players as salaries will likely have to be increased further to attract more people into the industry.

The aging demographics, rising affluence and increasing burden on the public healthcare sector would likely support the growth momentum of the private healthcare sector, although we expect cost pressures to increase as well.

Maintain OVERWEIGHT on the healthcare sector. Our top pick in the sector is Raffles Medical, which is rated BUY with our fair value estimate of S$3.61 currently under review after its 4Q13 earnings announced this morning.

Source: OCBC Research - 24 Feb 2014