1H FY23 (end-Sep 2022) rev grew 22.9% yoy, broadly in line w/ its ~20% growth guidance and our projection
We lifted FY22E/23E adj. NP projection to RMB377mn/RMB296mn from RMB-25mn/14mn to reflect its improving operating leverage
We maintain SOTP TP at HKD9.8. Maintain BUY on its great traffic synergy w/ Alibaba (BABA US) and leading position in internet healthcare
　　e-Pharmacy remains the major driver
　　Pharmaceutical direct sales revenue maintained strong growth at RMB10,082mn (+24% yoy), thanks to robust AAU growth (~+33% yoy to 120m) and strong growth in prescription drug business (+46.2% yoy).
　　Healthcare and digital service grew ~+75% yoy to RMB419mn driven by higher adoption of online healthcare services through multiple terminals (including T-mall, Alipay, “Dr. Deer” APP, Freshippo and AMap).
　　Revenue from pharmaceutical e-commerce platform was flat at RMB1,000mn (vs. RMB999mn/RMB997mn in 1H/2H FY22). The muted growth may reflect a continued soft total GMV growth (we reckon total GMV grew ~+10-15% yoy in 1H FY23E vs. ~+40-45% CAGR over FY17- 22). We expect the growth divergence between 1P and 3P likely to continue over the course of next few years. Overall GPM maintained stable at 20%, but adj. EBIT margin notably turned positive to 1.6% (vs. negative 4.2% in 1H FY22) thanks to broad-based reduction on expense ratios from S&GA (down 3.3ppts) to fulfilment (down 2.4ppts) to R&D (down 0.6ppt). As a result, Co. returned to adj. net profit of RMB315mn (vs. negative RMB336mn in 1H FY22). Co. affirmed its continued endeavours in enhancing operating leverage.
　　Strengthens infrastructure to solidify its leading position
　　We remain cautious on the regulatory side over next 12mo on the back of a string of tighter rules (e.g. the Measures for the Supervision and Administration of Online Drug Sale《药品网络销售监督管理办法》will be effective from Dec 1st, 2022). That said, we believe the stricter policy offers opportunities for industry leaders as higher barriers to internet+ healthcare market entry may deter inferior service providers from entering the market. Co. highlighted its Hangzhou Tangqi Warehouse, which is one of the largest digital drug warehouses in Asia, has commenced operation with maximum daily delivery capacity up to 1mn orders.
　　Maintain BUY with SOTP TP unchanged at HKD9.8
　　We kept SOTP TP at HKD9.8 as its LT profitability outlook remains cloudy on the backdrop of lack of favourable policies. Key risks: macroeconomic risk, regulatory risk, COVID-19 outbreak, etc.