Date: 27th September 2024
Broker: UOB Kay Hian
Company Overview
Alibaba Health Information Technology (Ali Health) is the leading internet healthcare company in China. It operates across pharmaceutical direct sales, pharmaceutical e-commerce platforms, and healthcare and digital services. Its stock is listed on the Hong Kong Stock Exchange under the ticker 241 HK.
FY25 Growth Projections
Ali Health has provided guidance for 10% year-over-year revenue growth and a 5.5% net margin for FY25. Although the company has lowered its revenue growth projection from 15% to 10% due to a weaker-than-expected business environment, it expects to maintain robust adjusted net earnings growth with a compound annual growth rate (CAGR) of 33% over FY25-27. This is driven by strong demand for healthcare products and synergies from Alimama’s marketing business.
Key Business Drivers: Non-Drug Healthcare Products
The company’s non-drug healthcare products are a key growth engine. Despite the weaker economic environment, demand for non-drug healthcare products remains strong. In particular, sales of healthcare products, including nutritional supplements and medical devices, have shown robust growth of 20-30% year-over-year during April to September 2024. This product segment is expected to continue driving growth in both its pharmaceutical direct sales (1P) and e-commerce platform (3P) businesses in FY25.
Synergies from Alimama’s Marketing Business
Ali Health continues to benefit from synergies with Alimama’s marketing business, which it acquired in January 2024. The marketing business contributed revenue of approximately RMB 200 million in January to March 2024, adding to the growth of its pharmaceutical 3P business. The company expects the marketing business to generate RMB 500 million in FY25, increasing to RMB 900 million by FY27. This segment is seen as a key earnings growth driver, with high after-tax net margins of 75%.
Optimism on Prescription Drugs
While the prescription drug business underperformed in the first half of FY25 due to weaker demand for some loss-making products, Ali Health remains optimistic about long-term growth. The company is adjusting its product mix, focusing on higher-margin products like GLP-1 and newly approved innovative drugs, such as semaglutide. It expects a stronger performance from this segment in the second half of FY25 and beyond.
Financial Position and Cash Flow
As of March 2024, Ali Health holds a strong cash position with RMB 9.55 billion in cash. Operating cash flow surged by 322% year-over-year, reaching RMB 1.08 billion. This cash reserve provides ample resources to support business expansion, especially in high-margin non-drug products and digital upgrades.
Impact of Ant Group’s Acquisition of HaoDF
In September 2024, Ant Group completed its acquisition of HaoDF, an online medical consultation platform, incorporating it into Alipay’s healthcare division. Despite this, Ali Health anticipates limited impact on its business, as its core revenue—96% of total revenue—is generated from pharmaceutical e-commerce. The company views telemedicine as lacking a successful monetization model at this stage and continues to focus on its pharmaceutical e-commerce business.
Earnings Projections and Forecast
UOB Kay Hian revised its FY25 revenue and adjusted earnings growth estimates downward to reflect Ali Health’s updated guidance. The broker now expects 10.1% year-over-year revenue growth and 34.2% adjusted earnings growth. Over the FY25-27 period, Ali Health’s revenue and adjusted net profit are projected to grow at a 15% and 33% CAGR, respectively.
The company remains well-positioned to capitalize on strong demand for healthcare products, improved operations, and continued synergies from its marketing business.
Valuation and Recommendation
UOB Kay Hian maintains a “BUY” rating for Ali Health, raising its target price to HK$4.70, based on a 2.1x FY25F Price-to-Sales (P/S) ratio, implying a 31.7x FY25F Price-to-Earnings (PE) ratio. The stock is currently trading at a discount compared to its peer JD Health, which trades at 1.5x P/S and 22.6x PE. The broker sees solid demand for healthcare products, a positive earnings outlook, and significant synergies from Alimama’s marketing business as key growth drivers.
Share Price Catalysts
Potential catalysts for the stock include solid FY25 revenue growth, strong demand for non-drug healthcare products, and continued synergies from its marketing business.
