Company Reports

We will discontinue analyst coverage of Adicon on or about Nov. 12, 2025.

Adicon's first-half revenue declined 13.3% and KingMed's declined 22.8%. Consequently, Adicon's adjusted operating margin of 7.1% and KingMed's 5.0% are both around 600 basis points less than last year due to lower average selling prices and operating leverage.

Adicon is China’s third-largest independent clinical laboratory in terms of clinical testing revenue. Unlike some of its competitors, Adicon is a pure play and does not sell testing products. Following the entry of Carlyle Group as a major shareholder in 2018, Adicon has expanded its operations to its current portfolio, testing 4,000 items in 2024. It aims to continue deepening its network by building self-operated laboratories and co-developing labs with hospitals or medical institutions. Given China's low ICL penetration rate of around 7% compared with about 35%-65% in established markets such as Japan, Europe, and the US, we believe that Adicon has ample room for growth. As such, our projected five-year revenue compound annual growth rate is 10.2%.

US President Donald Trump said that the US tariffs on pharmaceutical imports may increase to 150% or even further to 250% in one to one and a half years.

Adicon's 2024 revenue declined 11.6% annually, lower than our expected 1% decrease. The miss was largely driven by a higher base from 2023 due to covid-related sales and a 6.1% lower average selling price. Consequently, the 2024 gross margin of 37.7% is 2.7 percentage points lower than our initial assumption. We adjust our 2025-27 forecasts accordingly, as the near-term industry visibility is currently low. Hence, we cut our fair value estimate for no-moat-rated Adicon to HKD 8.20 per share from HKD 9.90. However, our view of Adicon benefiting from growing opportunities as China’s smaller hospitals outsource laboratory work remains unchanged, and we still think Adicon is worth owning over the long run.

Adicon is China’s third-largest independent clinical laboratory in terms of clinical testing revenue. Unlike some of its competitors, Adicon is a pure play and does not sell testing products. Following the entry of Carlyle Group as a major shareholder in 2018, Adicon has expanded its operations to its current portfolio, testing 4,000 items in 2024. It aims to continue deepening its network by building self-operated laboratories and co-developing labs with hospitals or medical institutions. Given China's low ICL penetration rate of around 7% compared with about 35%-65% in established markets such as Japan, Europe, and the US, we believe that Adicon has ample room for growth. As such, our projected five-year revenue compound annual growth rate is 10.2%.

We raise Adicon’s and KingMed's Morningstar Uncertainty Ratings to Very High from High to reflect more stock price volatilities. Our Uncertainty Rating is calculated based on historical share price volatility and company-specific risks. We maintain our view that Chinese independent clinical laboratories are at the early expansion stage and, therefore, have inherently greater unknowns than US ICLs under our coverage. The rating updates do not affect our fair value estimate as we have already factored in risks around accounts receivable and potential regulatory shifts in the next five years. We continue to see Adicon's share price as undervalued. We think KingMed's share price is getting expensive because of the DeepSeek-related sentiment rally (for more, please see our Feb. 19 note "DeepSeek Excitement Triggers China Healthcare Sector Flutters, but No Change to Fundamentals").

Adicon is China’s third-largest independent clinical laboratory in terms of clinical testing revenue. Unlike some of its competitors, Adicon is a pure play and does not sell testing products. Following the entry of Carlyle Group as a major shareholder in 2018, Adicon has expanded its operations to its current portfolio, testing 4,000 items in 2023. It aims to continue deepening its network by building self-operated laboratories and co-developing labs with hospitals or medical institutions. Given China's low ICL penetration rate of around 7% compared with about 35%-65% in established markets such as Japan, Europe, and the US, we believe that Adicon has ample room for growth. As such, our projected five-year revenue compound annual growth rate is 8.1%.

China healthcare stocks under our coverage, with the exception of medical distributors, have surged 10% to 50% since the end of January, following excitement over DeepSeek. While artificial intelligence may help improve efficiency in the sector, we don’t know if and when the benefits will materialize, so we believe the recent share price rally reflects a shift in investor sentiment on previously oversold stocks. Namely, Sino Biopharm (up 19%), WuXi Biologics (up 34%), and KingMed (up 56%), are reaching or surpassing our fair value estimates. However, we think CSPC (up 10%), Innovent (up 16%), and Adicon (up 21%) are still attractive.

Adicon is China’s third-largest independent clinical laboratory in terms of clinical testing revenue. Unlike some of its competitors, Adicon is a pure play and does not sell testing products. Following the entry of Carlyle Group as a major shareholder in 2018, Adicon has expanded its operations to its current portfolio, testing 4,000 items in 2023. It aims to continue deepening its network by building self-operated laboratories and co-developing labs with hospitals or medical institutions. Given China's low ICL penetration rate of around 7% compared with about 35%-65% in established markets such as Japan, Europe, and the US, we believe that Adicon has ample room for growth. As such, our projected five-year revenue compound annual growth rate is 8.1%.

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.

Adicon is China’s third-largest independent clinical laboratory, or ICL, in terms of clinical testing revenue. Unlike some of its competitors, Adicon is a pure play and does not sell testing products. Following the entry of Carlyle Group as a major shareholder in 2018, Adicon has expanded its operations to its current portfolio, testing 4,000 items in 2023. It aims to continue deepening its network by building self-operated laboratories and co-developing labs with hospitals or medical institutions. Given China's low ICL penetration rate of around 7% compared with about 35%-65% in established markets such as Japan, Europe, and the US, we believe that Adicon has ample room for growth. As such, our projected five-year revenue compound annual growth rate is 8.1%.

We initiate coverage on Adicon with a no-moat rating and a fair value estimate of HKD 11.40 per share, indicating an upside potential of around 30%. Adicon is the third-largest independent clinical laboratory in China, with 36 centralized labs and over 4,000 test items available as of 2023. We think Adicon is undervalued. In our view, it is worth buying in the long run due to the long-term secular tailwind of an underpenetrated ICL rate in China and increasing demand for outsourced testing.