Better-than-expected narrowing of net loss in 2022. PA Good Doctor（PAGD） reported 2022 revenue of RMB6,160mn, down by 16% YoY, and adjusted non-IFRS net loss of RMB848mn, narrowed by 40% YoY. PAGD’s revenue slightly missed our forecast/ consensus by 2.8%/ 4.5%, respectively, while adjusted non-IFRS net loss beat our forecast/ consensus by 12.4%/ 20.3%, respectively, thanks to the continuous margin improvements and cost savings under its Strategy 2.0 Continuum. In 2022, gross profit margin （GPM） increased by 4.1 ppts, mainly supported by the GPM improvement of 4.2 ppts from its health service segment. Selling and marketing expense ratio dropped by 6.0 ppts in 2022, due to the inherent cost savings and economies of scale from providing health management services to corporate clients.
　　Encouraging business developments in 2022. PAGD’s Strategy 2.0　Continuum had delivered positive results in 2022, despite business interruption caused by COVID lockdowns. The cumulative number of corporate clients served by PAGD reached 978 as of Dec 2022 （vs 520 as of Dec 2021） and covered ~3mn paid employees within those corporate clients （vs more than 1mn as of Dec 2021）， indicating an increasing acceptance of PAGD’s health management services among corporate clients and their employees. Noted that the number of corporate clients and their paid employees for PAGD’s services represented only ~3% and ~20% of the total number of corporates and their employees within PA Group’s business ecosystem, leaving ample room for further business expansion for PAGD. 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.
　　Margin improvements to continue under Strategy 2.0 Continuum. GPM　increased to 27.4% in 2022 from 23.3% in 2021, due to PAGD’s proactive reduction in the low-margin online mall business. Besides, selling & marketing expense ratio declined to 17.9% in 2022 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 similar trends in GPM and selling & marketing expense ratio in 2023 and thereafter, contributing to the narrowing of adjusted non-IFRS net loss.
　　Maintain BUY. We cut our TP from HK$28.15 to HK$24.24, based on a 10- year DCF model （WACC: 11.1%, terminal growth rate: 3.0%） to reflect our lowered earnings forecasts. Going forward, we expect PAGD to regain positive revenue growth of +12.4%/ +13.5%/ +14.4% YoY in 2023E/ 24E/ 25E, 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 loss to be sequentially narrowed to RMB702mn/ RMB288mn/ RMB40mn in 2023E/ 24E/ 25E.