KingMed and Adicon Earnings: Cutting Fair Value Estimates on Weak Earnings

Following worse-than-expected sector-wide performance, we cut our fair value estimates for no-moat-rated independent clinical laboratories, or ICLs, KingMed and Adicon by reducing revenue growth for 2024 and 2025. We initially forecast a low-single-digit revenue decline in 2024 for KingMed and Adicon to reflect a larger covid-related revenue base in the first half of 2023. However, we underestimated the impact of anti-graft campaigns, introduced in the second half of 2023. In addition, the weak economy in China has constrained local government budgets. We now see the reduction in overall industry revenue as reflecting a new base given reduced requests for elective lab tests. As a result, we reduce KingMed's and Adicon's fair value estimates to CNY 30.80 and HKD 9.90, respectively, from CNY 32.40 and HKD 11.40. Within our ICL coverage, we prefer Adicon over KingMed. We think Adicon has more room to expand given its smaller base while its reinvestment plan reflects more caution.