We expect PA Good Doctor （PAGD） to experience a revenue decline of 7.0% YoY in 1H23E, mainly taking into consideration its proactive reduction of low- synergy business with its Strategy 2.0 Continuum. However, we see the Company to continue to record positive progress on expanding its health management business for enterprise clients amid its strategic transition. We expect the Company to deliver good gross profit margin （GPM） improvements and cost savings in 1H23E as its Strategy 2.0 transition takes effect. We expect PAGD’ business growth to turn positive starting from 2H23E, considering the post-pandemic business normalization and the growing penetration of online medical services in China healthcare industry.
　　Macro economy normalization laying a solid foundation to execute Strategy 2.0 Continuum. Different from individual customer acquisition, off-line visits are necessary and critical to win corporate customers. 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. Recalling that, despite continuous business interruption caused by COVID control measures in 2022, PAGD still managed to grow the cumulative number of corporate clients to 978 as of Dec 2022 （vs 520 as of Dec 2021）， indicating an increasing acceptance of PAGD’s health management services among corporate clients which typically have strong purchasing power. Note that the number of corporate clients served by PAGD represented only ~3% of the total number of corporates clients within PA Group’s business ecosystem, leaving ample room for further business expansion for PAGD. Thus, we expect the momentum of exploring business opportunities on enterprise clients to accelerate in 2023E and beyond.
　　Margin improvements resulted from the changing revenue mix and cost savings under Strategy 2.0 Continuum. The high-margin medical services accounted for 42.5% of PAGD’s total revenue in 2H22, compared with 31.2% in 2021. GPM increased to 27.4% in 2H22 from 23.3% in 2021, due to the volume reduction of low-margin online mall business. Besides, we expect PAGD to have a better operating efficiency in next three years driven by inherent cost savings and economies of scale from providing health management services to corporate clients, contributing to the narrowing of adjusted net loss.
　　Maintain BUY. Our new TP of HK$23.89 is based on a 10-year DCF model （WACC: 11.1%, terminal growth rate: 3.0%） to reflect our positive view on PAGD’s leading position in China’s online healthcare industry in long-term. We forecast PAGD’s revenue to slightly decline by 1.3% YoY in 2023E and to regain positive growth of +12.6%/ +14.9% YoY in 2024E/ 2025E, respectively. To factor in margin improvements and cost savings brought by Strategy 2.0 Continuum, we model PAGD to narrow its adjusted net losses to RMB727mn/ RMB345mn/ RMB85mn in 2023E/ 24E/ 25E, respectively.