Concerns Are Overblown Regarding Potential Restrictions of Third-Party Online Sales of Drugs

On June 17, China’s Food and Drug Administration held a discussion on potential revisions to the “Regulation on the Implementation of the Drug Administration Law of the People’s Republic of China,” and one change contains unspecified language restricting third-party platforms from online sales of drugs. The stock decline on June 22 for JD Health and Alibaba Health, or AliHealth, is likely related to the potential regulation reported from new source, Sina Finance. However, we believe that concerns are likely overblown given that the language is still unclear whether and how this would impact their businesses. Furthermore, even if regulations were to directly affect the third-party platforms of the two companies, the impact to valuations would be limited given the proportion of third-party revenue on their platforms and that this would not affect the two companies’ self-operating businesses. Given the recent decline in their stock prices, we believe that the entry point looks attractive compared with our fair value estimates.