Sinohealth Earnings: Less Operations Risk in the Near Term, but Long-Term Outlook Still Muted

We are raising our fair value estimate for Sinohealth 02361 to HKD 3.80 from HKD 3.00 after the company generated positive operating profits and achieved modest revenue growth of 20% year on year for first-half 2023. We view the positive profit as a sign of stability that provides some visibility into future operations for Sinohealth in the near term, at least, as the number of clients increased to 623 from 842 year on year. We believe that the incremental clients represent the normalizing of operations after the coronavirus pandemic reduced its clientele by 33% in 6 months, leading us to doubt whether the company could recover. While we view its profitability as a significant improvement, there are still abundant risks given that the number of clients is still below end-2021 levels, which represents challenges of achieving robust growth despite being a company in an upstart and nascent stage. Therefore, despite our fair value estimate increase we believe that there are still major execution and competitive risks for Sinohealth given the industry remains fragmented and highly competitive, and the adoption of its software-as-a-service solutions is not guaranteed.

Sinohealth reported first-half 2023 revenue of CNY 145 million and adjusted operating profit of CNY 18 million compared with a CNY 6 million loss in first-half 2022. Despite Sinohealth showing modest growth and stability, its SaaS business, which we expect to be the main long-term growth driver, only increased 45% year on year and this still slightly lags behind near-term company guidance of 50%. While an increase in our fair value estimate represents lower operational risk, it is not indicative of our view on soft demand and a muted outlook for Sinohealth. The company reiterated that SaaS clients should return to the previous growth forecast, but the company lowered its general and administrative expenses by 19%, which could imply that SaaS growth may be further muted given the reduction in salespeople.