2023 Revenue Under Pressure; Corporate Client Acquisition To Drive Growth
With certain low-synergy and low-margin businesses to be eliminated, PAGD expects its revenue to be under pressure and profit margins to improve in 2023. It constantly acquires multichannel users and expects its corporate client acquisition to drive growth for 2023. We lower our 2023 revenue growth estimates from 19% yoy to -15% yoy to reflect the company’s weaker-than-expected revenue growth outlook in the short term. Downgrade to HOLD with a target price of HK$18.00.
WHAT’S NEW
• We had a meeting with Ping An Healthcare and Technology Company (PAGD) on 28 Jun 2023. Here are the key takeaways.
STOCK IMPACT
• Expects revenue to be under pressure in 2023. PAGD continues to improve its business mix and targets to complete the elimination of certain low-margin businesses that have low synergy with its upgraded strategies in 2023, eg B2B online health mall, original equipment manufacturer (OEM), and group purchasing businesses. Management indicates that the company’s revenue may be under pressure in 2023 due to the phasing out of these low synergy businesses. We previously expected PAGD’s revenue to grow by 19.1% yoy in 2023. Given that the low-synergy businesses to be eliminated had accounted for a significant proportion of 2022’s revenue, we believe the company’s near-term revenue growth outlook
would be weaker than expected.
• Expect further improvement in profit margins in 2023. PAGD expects to see further improvement in its profit margins due to: a) increasing revenue contribution of high-margin businesses, and b) significant cost control efforts under its Strategy 2.0 Continuum. In particular, to focus more resources on the businesses that highly synergise with its strategies, it plans to strategically switch from self-operated (1P) model to third-party (3P) model for its online drug sales business. Meanwhile, the company expects its selling expenses and administrative expenses to account for 15% and 10% of the total revenue, respectively. Management expects the company to achieve breakeven from 4Q24.
• Constantly acquiring multichannel users. PAGD continuously makes smooth progress in acquiring multichannel users for its medical services under its Strategy 2.0 Continuum. It had 978 corporate clients and 3m B-end paying users as at end-Dec 22, representing a penetration rate of 3% and 20% in Ping An Group’s paying corporate clients served and corporate employees covered. It had 34m F-end paying users as at end-Dec 22, representing a penetration rate of 15% in Ping An Group’s paying financial customers. These indicate much room for PAGD to acquire corporate clients (B-end) and financial customers (F-end) leveraging Ping An Group’s channels. The company expects a revenue growth CAGR of 10-12% and 30-40% for its F-end business and B-end business, respectively. It expects its B-end business to be a key growth driver in 2023.
• Sufficient cash to support business operation and M&A activities. PAGD had a cash balance of Rmb3.7b and no bank borrowings as at end-Dec 22. According to the company, it has cash and equivalent resources of Rmb12.5b on hand. We believe its cash balance is sufficient to support its business operation and M&A activities. The company remains cautious on M&As, and tends to look at high-quality targets with high synergy with its core business. It previously acquired Ping An Smart Healthcare at a total consideration of US$98m in Oct 22, which aims to enhance its medical technology capabilities to empower medical services eg family doctors, chronic disease management and specialised auxiliary diagnosis.
EARNINGS REVISION/RISKS
• We revise our revenue growth assumptions downward from 19.1% yoy to -14.7% yoy for 2023, to reflect the company’s weak revenue growth outlook in 2023 due to a change in business mix. Despite the potential weak 2023 revenue figures, we still like the company’s clear business model and believe the upgraded strategy bodes well for long-term growth. • Risks: a) Sector policy changes, and b) intensifying competition.
VALUATION/RECOMMENDATION
• Downgrade to HOLD with a lower target price of HK$18.00 to reflect the company’s weaker-than-expected revenue growth outlook in the short term, based on 3.4x 2023F P/S multiple (assigning 3x 2023 EV/sales for medical services, 2x 2023 EV/sales for health services). Its peers such as Ali Health and JD Health are currently trading at 1.9x FY24F P/S and 2.3x 2023F P/S respectively.