We maintain our fair value estimate at HKD 18 for no-moat Ping An Health 01833 although first-half 2023 revenue disappointingly fell 20% year on year to CNY 2.2 billion, a 33% decline sequentially. Management indicates that restructuring is complete and the development phase of its new business began in July, so we should see a lesser drag to second-half performance. The market appears to like this news, with shares up over 5% on Aug. 25. At the current share price, we believe that the market is already assuming that the company can achieve modest growth, but we believe it may be too early to assume success. We note that average medical service revenue per client declined by 43% year over year in the June half, which suggests that robust long-term revenue growth may still be a challenge. We think the shares are fairly valued and would prefer to wait for more tangible signs of a durable growth recovery.
Ping An Health’s new business model focuses on selling discretionary insurance and wellness packages only. The company is starting to focus less on selling drugs and providing consultations. We have high expectations for it to demonstrate modest near-term growth. It didn’t provide any updates to long-term profitability but mentioned that it expects to accelerate its breakeven ahead of the previously targeted 2025-26. However, we are wary, as the past three reporting periods have disappointed and visibility remains limited.
We maintain our forecast for operating losses to continue through 2025. While we expect gross profit to resume growth in 2024, revenue will have to reach over CNY 8.0 billion before the operating line turns profitable. This implies 46% growth from our 2023 projected revenue, and current macroeconomic headwinds may slow sales progression. Hence, we still see risk of disappointment.
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