Due to the negative impacts from COVID and reduction of low-synergy business with its Strategy 2.0 Continuum, we expect PA Good Doctor (PAGD) to experience a temporary revenue decline of 14% YoY in 2022E. However, we expect the Company to deliver good gross profit margin (GPM) improvements and cost savings in 2022E as its Strategy 2.0 transition started to take effect.Going forward, we expect PAGD’s business to regain positive growth of +23%/ +20% YoY in 2023E/ 24E, considering the post-pandemic business resumption and the growing penetration rate of PAGD’s medical services in China healthcare industry. Accordingly, we forecast PAGD’s adjusted net losses to narrow to RMB969mn/ RMB645mn/ RMB137mn in 2022E/ 23E/ 24E.
　　Solid business development through the bumpy 2022. PAGD’s Strategy　2.0 Continuum had delivered initial positive results in 2022, despite business interruption caused by COVID lockdowns and the change of COVID control policies in China. The cumulative number of corporate clients served by PAGD reached 749 as of Jun 2022 (vs 520 as of Dec 2021) and covered more than 2mn paid employees and corporate clients (vs more than 1mn as of Dec 2021), indicating an increasing penetration of PAGD’s services among corporate clients and their employees. With the lift of COVID-related travel restrictions in China, we expect PAGD’s off-line corporate customer acquisitions to fully resume to its normal pace in 2023 and beyond. In the meantime, PAGD further strengthened its online and offline capabilities via major acquisitions. In Oct 2022, PAGD entered into an agreement to acquire 100% equity interests of Scientia Smart Health Tech with a consideration of US$97mn, enhancing PAGD’s service capabilities in smart big data platform, chronic disease management and connections with doctors and medical institutions.
　　Expect to see continuous margin improvements. GPM increased to　27.3% in 1H22 from 23.3% in 2021, due to PAGD’s proactive reduction in its online mall business. Besides, selling & marketing expense ratio also dropped to 18.5% in 1H22 from 24.0% in 2021, driven by the inherent cost savings and economies of scale from providing health management services for corporate clients. We anticipate to see similar trends in GPM and selling & marketing expense ratio in 2H22E. With the revenue structure optimization and cost saving effect within its Strategy 2.0 Continuum, we see good chances for PAGD to sequentially increase GPM (27.5%/ 30.5%/ 31.8% for 2022E/ 23E/ 24E) and narrow adjusted net loss in 2022-24E. The Company is on track to generate positive net profit from 2025E, in our view.
　　Maintain BUY. Our TP remained largely unchanged at HK$28.15, based on a 10-year DCF model (WACC: 11.1%, terminal growth rate: 3.0%) to reflect PAGD’s long-term growth prospect.