1H22 earnings in line. PA Good Doctor (PAGD) reported 1H22 revenue of RMB2,828mn, down by 26% YoY and adjusted non-IFRS net loss of RMB390mn.
The net loss significantly narrowed from RMB791mn in 1H21, which was mainly attributable to the Company’s Strategy 2.0 to switch customer acquisition channel from individual customers to corporate clients as well as various cost saving measures during the period. Gross profit margin (GPM) increased 4.0ppts to 27.3% in 1H22 from 23.3% in 2021, due to the Company’s proactive reduction in the low- margin online mall business. The number of registered users increased by 4.2% from 423mn as of Dec 2021 to 441mn as of Jun 2022 and the cumulative number of paying users in the last twelve months reached 40mn, representing a conversion rate of monthly paying users of 32.0% (vs 24.8% as of Dec 2021).
Strategy 2.0 delivered initial positive results, despite the business interruption caused by COVID-19 lockdown in major cities in China. Different from individual customer acquisition, off-line visits are necessary and critical to win corporate customers under Strategy 2.0. PAGD’s main targeted corporate customers are mid- to large-sized SOEs and private companies which are typically headquartered in major cities in China. Given major cities took strict travel restrictions due to COVID outbreak in 1H22, PAGD’s off-line corporate customers acquisitions were forced to a pause. However, the cumulative number of corporate clients served by PAGD reached 749 as of Jun 2022 (compared with 520 as of Dec 2021) and covered more than 2mn paid employee and corporate clients (compared with more than 1mn as of Dec 2021), indicating increasing penetration of PAGD’s services among corporate clients and their employees. PAGD’s service coverage still has significant room for growth. According to the Company, its total accessible market includes ~70mn corporate employees which refers to mid- to large-sized companies with business connections with Ping An Group.
Net loss continues to narrow. Besides the significant improvement in GPM in 1H22, selling and marketing expense ratio further dropped to 18.5% in 1H22 from 24.0% in 2021, driven by the inherent cost saving and economies of scale from health management services for corporate clients. We expect PAGD to generate positive net profit from 2025E.
Maintain BUY. Due to the negative impact from pandemic in 1H22, we forecast PAGD’s revenue to change by -12%/ +23%/ +21% YoY with adjusted net losses of RMB990mn/ RMB665mn/ RMB116mn in FY22E/ 23E/ 24E. Our TP remained largely unchanged at HK$28.40, based on a 10-year DCF model (WACC: 11.1%, terminal growth rate: 3.0%) to reflect PAGD’s long-term growth prospect.