Company Reports

We lower our fair value estimate for Alibaba Health to HKD 4.00 per share from HKD 6.70 after the company held a management call and indicated that fiscal 2024 (ending March) revenue is expected to decline 5% year on year. Comparatively, this is worse than peer JD Health’s full-year 2023 revenue performance, which declined 0.3% year on year. In addition, Alibaba Health provided revenue guidance for fiscal 2025 and expects it to only increase 15% year on year. While headwinds were expected in the second half of 2023, given comments made by JD Health due to the reduced consumption of pandemic-related items, the decline was worse than we had anticipated. We also have new concerns over the long-term growth recovery, given that Alibaba Health's revenue guidance in 2025 is below our previous forecast of the mid-20s. The company provided other minor details, including that demand for medical devices and healthcare products remains strong. Alibaba Health also expects an incremental revenue stream coming in from its advertising business in the future.

We expect narrow-moat Alibaba Health, or AliHealth, to benefit from low saturation in healthcare e-commerce. The business is still in the early phase where it is focused on mass user adoption and should see robust growth in the near term, and now is set to integrate advertising business into its platform to another incremental revenue stream. It also plans to add cloud-based AI to develop the platform into a one-stop shop for healthcare products, services, and digital hospital for its users.

We expect narrow-moat Alibaba Health, or AliHealth, to benefit from low saturation in healthcare e-commerce. The business is still in the early phase where it is focused on mass user adoption and should see robust growth in the near term, and now is set to integrate advertising business into its platform to another incremental revenue stream. It also plans to add cloud-based AI to develop the platform into a one-stop shop for healthcare products, services, and digital hospital for its users.

We maintain our fair value estimate of HKD 6.70 for Alibaba Health after it reported fiscal first-half 2024 revenue of CNY 13.0 billion which was 3% more than our estimate and represents 13% year-on-year growth. More importantly, its operating margin expanded 230 basis points to 2.0% year on year which is encouraging as it made progress toward its long-term steady-state target of high-single digits. The company refrained from providing guidance but given the readthrough from JD Health, its main peer, we estimate full-year revenue to increase at a slower pace as online healthcare e-commerce platforms are expected to experience many lower sales from pandemic-related items. However, we expect sales to normalize next year and for non-pandemic-related items to grow at 25%-30% year on year as indicated by its peer. The company briefly mentioned that its goal was to have absolute net profits increase by 20%-30% each year. We reiterate our positive outlook that Alibaba Health should see further scale and margin expansion while enjoying a dominant market share position within healthcare e-commerce which requires both logistics and licensing infrastructure to enter. The company expects some consolidation in the industry in the next one to two years as smaller peers may not be able to operate efficiently.

We recently spoke with the management teams of several healthcare companies to get an update on the progress of the anticorruption movement in China’s healthcare sector to assess how this could affect companies under our coverage for the long term. We believe that this will likely become a long-term driver for companies that provide data-driven studies to facilitate research and drug promotion, such as Medlive and Yidu, as they provide doctors a legitimate medium for them to prescribe medicines that could otherwise be perceived as taking kickbacks from pharmaceutical companies. We believe that the anticorruption movement is likely a positive for the long-term clinical development of drugs and this should provide transparency for hospital policies. As for healthcare e-commerce companies such as JD Health and Alibaba Health, we believe the initiative is likely to have less of an impact on their revenue growth in the long term, as they rely on greater healthcare retail demand. However, we think the policies could provide greater consumer confidence for online retail—and we estimate penetration of healthcare e-commerce is low at 5%-10% in China.

We expect narrow-moat Alibaba Health, or AliHealth, to benefit from low saturation in healthcare e-commerce, leading to 30% year-on-year revenue growth for the next two years. The business is still in the early phase where it is focused on mass user adoption and should see robust growth in the near term.

We keep our HKD 6.70 fair value estimate for Alibaba Health, after the company reported fiscal second-half 2023 revenue of CNY 15.3 billion, a 36% year-on-year increase, which was better than our estimate of CNY 13.8 billion due to rising demand from China’s unexpected reopening. Recurring operating margins improved 450 basis points year on year to 0%, which reflected our assumptions that AliHealth would reach breakeven half a year ahead of its previous target of fiscal year 2024. Management reiterated previous guidance that it should achieve double-digit revenue growth next year and that operating margin will continue to expand, but did not provide any updates to prior forecasts. We believe that AliHealth’s growth story remains intact, and our model assumption remains relatively unchanged. AliHealth continues to be in a leading position in an industry that requires licenses and efficient buildout of specialized logistics, and we believe the company’s network of 39 warehouses—of which 28 are pharmaceutical warehouses—represent barriers to entry. We view the recent pullback in AliHealth shares as representing an attractive opportunity to accumulate positions, given the 37% upside to our fair value as of the May 23 closing price.

We expect narrow-moat Alibaba Health, or AliHealth, to benefit from low saturation in healthcare e-commerce, leading to 30% year-on-year revenue growth for the next two years. The business is still in the early phase where it is focused on mass user adoption and should see robust growth in the near term.

We are raising our fair value estimate for Alibaba Health, or AliHealth, to HKD 6.70 from HKD 6.10 after the company showed accelerated break-even ahead of its target date of fiscal 2024. The company reported fiscal first-half 2023 revenue of CNY 11.5 billion, a 23% year-on-year increase, and in line with PitchBook consensus. More importantly, recurring operating margins improved 600 basis points to a 0.3% loss year on year for the half year. While the company was noncommittal about long-term operating margins, we increase our margin assumptions to reflect break-even by the end of fiscal 2023, which raises our valuation. Given peer comps, we believe AliHealth could reach the low teens for operating margins in the long term, which is reflected in our model. Despite the increase in valuation, we believe that most of AliHealth’s upside is already reflected in the current share price after the Nov. 29 surge.

We expect narrow-moat Alibaba Health, or AliHealth, to benefit from low saturation in healthcare e-commerce, leading to 30% year-on-year revenue growth for the next two years. The business is still in the early phase where it is focused on mass user adoption and should see robust growth in the near term. However, the business remains loss generating, and after seeing positive operating margins in fiscal first-half 2021, AliHealth returned to losses this year in fiscal first-half 2022. It hopes to break even by fiscal year 2025 as the platform scales up more users, leading to greater gross merchandise value, or GMV, and by cutting down on sales and marketing expenses. Given the low saturation for healthcare in e-commerce, we forecast AliHealth's GMV to continuously grow by double digits until its target break-even date of fiscal year 2025 as well.

We expect narrow-moat Alibaba Health, or AliHealth, to benefit from low saturation in healthcare e-commerce, leading to 30% year-on-year revenue growth for the next two years. The business is still in the early phase where it is focused on mass user adoption and should see robust growth in the near term. However, the business remains loss generating, and after seeing positive operating margins in fiscal first-half 2021, AliHealth returned to losses this year in fiscal first-half 2022. It hopes to break even by fiscal year 2025 as the platform scales up more users, leading to greater gross merchandise value, or GMV, and by cutting down on sales and marketing expenses. Given the low saturation for healthcare in e-commerce, we forecast AliHealth's GMV to continuously grow by double digits until its target breakeven date of fiscal year 2025 as well.

Pending legislation was released late on Sept. 1 that relates to the sale of medical products and drugs on e-commerce platforms such as JD Health and Alibaba Health. Under this latest draft of the legislation, there will be some restrictions to the types of drugs that can be sold on China’s healthcare e-commerce platforms, but none are material to JD Health or Alibaba Health’s overall businesses. We view this legislation as a positive for the two companies as it should mitigate regulatory risk for their long-term operations.

On June 22, China’s National Radio and Television Administration and Ministry of Culture and Tourism released new regulations governing livestreaming, with guidelines that amount to a code of conduct for online livestreamers covering matters such as the qualifications required to livestream certain professional topics, for example medical and livestreamers’ tax liabilities. We believe there will be more specific responsibilities for internet audiovisual platforms, which could increase compliance costs. However, the regulations do not contain specific penalties if platforms are found to be negligent by the government, and we think performers face much greater risk. Article 15 and 16 of the regulations indicate the government will strengthen supervision and inspection as well as enforcement of rules for internet audiovisual platforms, agencies, and livestreaming hosts. If content and livestreamers violate these rules, platforms will need to deal with violations properly and quickly. Article 17 stipulates that internet performance, platforms, and agencies need to strictly adhere to statutory duties and obligations, enhance training and education, daily management, and guidance of standards for livestreamers. For example, internet hosts who commit serious or repetitive misconduct should be stopped and not allowed to conduct internet performance on another platform or use another account. We think that further regulations will be created if misconduct continues. At this stage, we expect the regulations will have an immaterial impact on the Chinese internet companies under our coverage. We maintain our fair value estimate, earnings estimates, moat and uncertainty ratings for Tencent Music, NetEase Cloud Music, Bilibili, Alibaba Health, JD Health, Alibaba, JD.com, and Pinduoduo.

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.

On May 31, 2022, China’s State Council released a set of official measures aimed at the recovery of the economy following recent lockdowns and headwinds from COVID-19. The specific implementation of these policies is left to be determined by local and regional governments, as well as State Council’s ministries and directly affiliated agencies. While the timing is still unclear, these measures are set to become law in the near term. These measures do not cause any material changes to our fair value estimates for now, but we want to highlight which internet names are included and assess the potential benefits in the long run.

We expect narrow-moat Alibaba Health, or AliHealth, to benefit from low saturation in healthcare e-commerce, leading to 30% year-on-year revenue growth for the next two years. The business is still in the early phase where it is focused on mass user adoption and should see robust growth in the near term. However, the business remains loss generating, and after seeing positive operating margins in fiscal first-half 2021, AliHealth returned to losses this year in fiscal first-half 2022. It hopes to break even by fiscal year 2025 as the platform scales up more users, leading to greater gross merchandise value, or GMV, and by cutting down on sales and marketing expenses. Given the low saturation for healthcare in e-commerce, we forecast AliHealth's GMV to continuously grow by double digits until its target breakeven date of fiscal year 2025 as well.

Alibaba Health, or AliHealth, reported second-half fiscal 2022 revenue of CNY 11.2 billion today, a 34.3% increase year on year and 3.5% higher than our estimate—though we lower our fair value estimate to HKD 6.10 from HKD 7.20, on the outlook of lower long-term gross margins. However, we still believe that valuation looks attractive at this entry point, given that management provided visibility toward breakeven in the near term. Despite better-than-expected results, gross margin was flat at 20% year on year due to a greater proportion of lower-margin direct sales, or 1P, business. Revenue for its 1P business was CNY 9.8 billion this half, representing a 36.4% increase, but its third-party, or 3P, Tmall marketplace platform revenue declined 5% year on year to CNY 986 million. Core operating margin declined 200 basis points to negative 4.5% due to a 40% increase in sales and marketing expense year on year, but management expects overall operating cost to slow down.

We think China will most likely allow the majority of U.S.-listed Chinese companies to submit their audit working papers to the U.S. regulators. This is because: 1) most of these firms do not possess sensitive data that is subject to national security controls, and 2) the Chinese government seems determined to resolve Public Company Accounting Oversight Board, or PCAOB, auditing challenges. Should there be no deal between China and the U.S. over the Holding Foreign Companies Accountable Act, or HFCAA, we still expect the China internet and consumer companies that we cover to navigate through without value destruction. This is because most of the China internet and consumer companies we cover either have U.S. primary listings and secondary listings in Hong Kong (Alibaba, JD.com, NetEase, Trip.com, Baidu, Weibo and Yum China), or they are primary listed in Hong Kong (Tencent, CMGE, Meituan and Alibaba Health). So even if delisting occurs, investors can convert U.S. shares into Hong Kong shares. While Pinduoduo has yet to list in Hong Kong, it already meets the Hong Kong secondary listing requirement. Therefore, we expect Pinduoduo to apply for a Hong Kong listing if a delisting looms. In our view, it is possible that the cloud businesses of Alibaba and Baidu, and some of their artificial intelligence, or AI, businesses are deemed sensitive by Beijing, as their customers include Chinese state-owned enterprises and the Chinese government. In such a case, we think it is more likely for these three companies to list primarily in Hong Kong and abandon their U.S. listings, as opposed to reducing their stakes in these cloud business to qualify as associate investments or minority investments, given the strong growth potential of the enterprise cloud industry in China. Therefore, the fair value estimates of the China internet and consumer firms we cover remains unchanged.

We are initiating coverage of narrow-moat Alibaba Health, or AliHealth, with a fair value estimate of HKD 7.20 as the firm should benefit from industry-wide tailwinds--as healthcare e-commerce is one the few niches that should see above-average growth for the retail and consumer defensive sectors in China due to low saturation. We expect a near-term healthy outlook with revenues growing 30% year on year for the next two years, but believe the company could be vulnerable to long-term risk of low operating margins due to increasing competition.

We expect narrow-moat Alibaba Health, or AliHealth, to benefit from low saturation in healthcare e-commerce, leading to 30% year-on-year revenue growth for the next two years. The business is still in the early phase where it is focused on mass user adoption and should see robust growth in the near term. However, the business remains loss generating, and after seeing positive operating margins in fiscal first-half 2021, AliHealth returned to losses this year in fiscal first-half 2022. It hopes to break even by fiscal year 2025 as the platform scales up more users, leading to greater gross merchandise value, or GMV, and by cutting down on sales and marketing expenses. Given the low saturation for healthcare in e-commerce, we forecast AliHealth's GMV to continuously grow by double digits until its target breakeven date of fiscal year 2025 as well.