Ping An Healthcare Updates Lower Revenue Growth for 2022

We retain our fair value estimate of HKD 18 for Ping An Healthcare after the company indicated 2022 revenue will likely come in at CNY 6.1 billion. This is lower than its prior guidance of CNY 6.5 billion, given back in third-quarter 2022. This translates to a 16% year-on-year decline versus our previous estimate of a 12% decline. The worse-than-expected results were due to widespread pandemic controls in the second half of 2022, according to management. Despite an increase of 400 corporate clients during the year, average revenue per corporate client decreased to CNY 2,000 compared with CNY 4,100 in 2021 in our model—given weak spending sentiment for healthcare and checkup services, in our view. Management also indicated that gross margin in the second half of 2022 stayed flat versus the first half. While we believe both revenue growth and gross margins would modestly rebound in 2023 with the removal of COVID-19 measures, we view that these catalysts are already incorporated in the current valuation. We believe that the temporary spike in valuation during December 2022 was frothy and reaffirm our view that the lack of short-run catalysts will continue to pressure its valuation.

Although Ping An Healthcare’s 2023 financial results and outlook will not be released until mid-March, management reiterated its strategy to downsize low-profitability businesses, including its healthcare e-commerce business. Higher-margin corporate client services will remain the long-term focus of the company, which should provide upside in gross margin. As a result, we modeled a gradual ramp-up of gross margin to 35.5% in 2031 from 23.3% in 2021. In addition, we think selling, general, and administrative expenses cost as a percentage of revenue will trend down due to the contraction of low-margin businesses. Over the longer run, we expect operating losses to further narrow and the company to achieve operating breakeven in 2025, in line with management’s forecast.