Ping An Healthcare’s Profitability Improves

We keep our HKD 18 fair value estimate after Ping An Healthcare 01833 reported second-half 2022 revenue and profitability in line with previous company guidance released in February. Revenue of CNY 3.33 billion was in line with our and PitchBook expectations of CNY 3.27 billion and reflects a 7% decline year on year. The firm also reported a second-half 2022 recurring operating loss of CNY 526 million, also in line with our expectations. Profitability improved as recurring operating loss margin narrowed 1,000 basis points to negative 16%. While the results were unsurprising given previous guidance, it is surprising that the company hopes to break even in 2023. While breakeven is not out of reach, it will hinge on the company adding incremental corporate clients at a similar rate as the second half of 2022, when it gained 210 clients. We believe that average revenue per corporate client also needs to remain relatively stable in 2023 for breakeven, given that it declined 36% year on year in 2022. We are modeling Ping An Healthcare to achieve operating profit in 2024 but believe there could be downside risk to our valuation if the company cannot add enough clients or its revenue per client goes down significantly.

The full-year revenue decline was due to the company’s ongoing transformation to a managed-care service provider from a physical goods vendor. During the process, the company is focused on corporate transactions rather than individual, which has led to lower revenue but increased gross margin by 400 basis points to 27.3%. Other than gross margin, sales and marketing expense significantly declined 37% year on year, which also contributed to the improvement. While we are encouraged that Ping An Healthcare has visibility as to breakeven given the recent uncertainty, we believe operating expenses will need to be disciplined as it pivots toward a new concept. Despite a path toward breakeven, we believe there are many uncertainties that raise the investment risk profile.