Sinohealth SaaS Still Expected To Drive Growth; Events Business Recovering

We are raising our fair value estimate for Sinohealth 02361 to HKD 3.00 from HKD 2.50 after the company showed that its data-driven publication and events business returned to normal operations, as it can freely hold physical exhibitions where patrons can buy tickets. Although revenue has not fully returned to precoronavirus levels, the 233% increase from first-half 2022 suggests that participants remain interested in the healthcare data solutions industry and could recover fully in 2023. We are slightly more encouraged about Sinohealth’s prospects given the recovery of one of its three main businesses, but this doesn’t alleviate our main concerns over long-term adoption of its software. We believe in the long term, software as a service should still determine the majority of the valuation for Sinohealth. SaaS revenue grew 36% year on year, which is less than the 60%-70% CAGR that the company forecast before. Management indicated that SaaS clients could return to its forecast growth after the reopening, but we believe there could be risks to management’s forecasts and still have an unfavorable view of Sinohealth’s risk/reward. We believe there is still a lot of uncertainty given the industry remains fragmented, and adoption of its SaaS is not guaranteed with plenty of competitors that also provide Big Data solutions.

Sinohealth reported second-half revenue of CNY 235 million, an 8% increase year on year, that came in below our estimate of CNY 254 million. Sinohealth reported adjusted operating profit of CNY 27 million that also came in below our estimate of CNY 38 million due to greater operating expenses as the company is preparing to expand its SaaS business on a larger scale. Data insight solutions, which accounted for the majority of 2022 revenue, added 20 clients bringing the total to 277 clients. Despite SaaS being the long-term driver of the business, we believe DIS remains important in leveraging its existing clients toward long-term adopters of its software.