PA Good Doctor （PAGD） reported 1H23 revenue of RMB2,222mn, down by 21.5% YoY and adjusted non-IFRS net loss of RMB249mn, narrowed by 41.7% YoY. The significantly narrowed adjusted net loss was mainly driven by the execution of its Strategy 2.0 Continuum to focus on corporate （B-end） clients as well as various cost saving measures during the period. In 1H23, PAGD had largely completed its business adjustment, through which the Company proactively reduced low-synergy businesses with its Strategy 2.0 Continuum. PAGD had achieved accelerated progress with B-end clients and we expect the trend to continue, considering the post-pandemic business normalization and the growing penetration of online medical services in China healthcare industry.
Accelerating progress of Strategy 2.0 Continuum after pandemic.
　　Different from individual customer acquisition, off-line visits are necessary and critical to win B-end customers. With the lift of COVID-related travel restrictions in China, PAGD’s off-line B-end customer acquisitions has resumed normal pace in 2023. The cumulative number of corporate clients served by PAGD reached 1,198 as of Jun 2023, compared with 978 as of 2022 and 520 as of Dec 2021, indicating an increasing acceptance of PAGD’s health management services among B-end clients which typically have strong purchasing power. Revenue from B-end strategic business substantially increased by 88.9% YoY to RMB449mn in 1H23, accounting for 20.2% of total revenue （vs 8.4% in 1H22）。 PAGD penetrated less than ~2.5% of corporates clients within PA Group’s business ecosystem, leaving ample room for further business expansion of PAGD.
　　Continuous margin improvement under Strategy 2.0 Continuum. In 1H23, PAGD had largely completed its business adjustment, through which the Company proactively reduced low-synergy businesses with its Strategy 2.0 Continuum. The business adjustment materially affected the Company’s revenue performance in 1H23. However, PAGD has achieved impressive improvement on bottom-line. Gross profit margin （GPM） has consistently improved from 19.4% in 2H21 to 32.2% in 1H23, mainly attributable to the GPM increase of medical services （from 23.6% in 2H21 to 42.9% in 1H23） and the decrease of sales from low-synergy businesses. Additionally, PAGD continues to optimize its operating margins thanks to effective cost savings and economies of scale from health management service business. In 1H23, admin expenses excluding R&D expenses dropped by 27.1% YoY, which contributed to the net loss reduction.
　　Maintain BUY. Our TP of HK$23.80 is based on a 10-year DCF model with WACC of 11.1% and terminal growth of 3.0%. We forecast PAGD’s revenue to decline by 18.0% YoY in 2023E and to grow by 14.0%/ 16.1% YoY in 2024E/ 2025E, respectively. To factor in margin improvements and operating cost savings under Strategy 2.0 Continuum, we model PAGD to narrow its adjusted net losses to RMB583mn/ RMB267mn in 2023E/ 24E， respectively, and to turn positive to RMB73mn in 2025E.