Alibaba Health Earnings: Users Increasing, Growth and Margin Expansion Intact; Shares Are Cheap

We keep our HKD 6.70 fair value estimate for Alibaba Health 00241, 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.