With the deepening of the reform of the medical and health system, Internet health care is expected to become an important starting point of policy and continue to contribute to the construction of medical federation. The accelerated development of the company's drugs has contributed to the sustained and rapid growth of income, the rate of expenses has declined steadily, and profits have been gradually released. The company will strengthen its investment on the supply side of e-commerce and diagnosis and treatment business, and is expected to further open up its business model and maintain its "overweight" rating in the future.

Items: 1) on October 8, the Medical Reform leading Group of the State Council issued the "opinions on the implementation of deepening the Reform of the Medical and Health system in Sanming City, Fujian Province", proposing to promote the construction of medical consortia, enhance the clinical specialist capacity of county-level hospitals, and improve the contract service for family doctors. 2) on August 20, People's Daily stressed the compliance and safety of prescription drugs on the Internet, and the company is expected to strengthen the safety and compliance of the online drug purchase process, in line with the general direction of industry and policy development.

With the deepening of the reform of the medical and health system, Internet health care is expected to become an important starting point of policy and continue to contribute to the construction of medical federation. Recently, the State Council Medical Reform leading Group issued the implementation opinions on deeply popularizing the experience of Sanming City in Fujian Province and deepening the Reform of Medical and Health system, proposing to promote the construction of medical consortia, enhance the clinical specialist capacity of county-level hospitals, improve family doctor contract services, deepen the reform of health insurance payment methods, and implement multiple and compound health insurance payments based on disease types. The experience of Sanming medical reform has changed from "attention promotion" to "in-depth promotion", and the reform of the national medical and health system has been accelerated. Internet medical treatment as an important means of graded diagnosis and treatment and medical insurance control fees, and pharmaceutical e-commerce as an important part of the pharmaceutical supply chain is expected to develop at an inflection point. Alibaba Health Information Technology's health insurance in Qingdao and Guangzhou is carried out in the form of individual accounts, which is completely matched with patients' independent decision-making, does not excessively pursue the growth of online medical insurance payments, gives priority to improving coverage, and continues to improve awareness through pilot cities.

At the same time, speed up the integration of medical services, divided into two parts: medical deer and local health care, in which Medical Deer was released in September this year, including consultation, search, and community discussion. the first step of its strategy is to strengthen medical search. through high-frequency information services superimposed with the provision of mild disease solutions, attract customer traffic and provide further doctor services.

The number of annual active users is growing rapidly, and the e-commerce / diagnosis and treatment supply side continues to strengthen. In fiscal year 2021, Alibaba Health Information Technology achieved an income of 15.518 billion yuan, an increase of 61.7% over the same period last year, and a profit of 343 million yuan, reversing losses over the same period last year. The adjusted net profit was 631 million yuan, an increase of 198.5% over the same period last year, and GMV reached 123.2 billion yuan, an increase of 47.5% over the same period last year.

By the end of fiscal year 2021, the number of annual active users of Tmall pharmaceutical platform exceeded 280 million, a sharp increase of 90 million over the same period last year, or a growth rate of 47 per cent. The increase in the number of users supported the company's GMV growth, and the GMV growth rate basically matched the number of annual active users. Among them, the number of active users in the drug purchase year exceeded 81 million, indicating that users' habits have rapidly extended from the purchase of health care equipment to the drug purchase scene. On the supply side, in the e-commerce part, Tmall Pharmaceutical platform has served more than 23000 merchants, an increase of 8000 over the same period last year. On the diagnosis and treatment side, there are nearly 60000 contracted doctors, an increase of nearly 18000 over the same period last year.

The proportion of drugs continues to increase, the cost-scale effect begins to appear, the rate of implementation and administrative expenditure is lower, helping to accelerate the release of profits. By the end of fiscal year 2021, the revenue of pharmaceutical e-commerce maintained rapid growth, and the revenue of pharmaceutical proprietary business and pharmaceutical e-commerce platform increased by 62.5% and 67.9% respectively compared with the same period last year. Among them, the drug revenue of self-owned pharmacies increased by 86.1% compared with the same period last year, and the proportion of drugs increased to 64.8%. Against the backdrop of the increase in the proportion of the company's prescription drugs, the company's overall gross profit margin remained 23.3%, the same as the previous fiscal year, reflecting the gradual formation of economies of scale on the cost side of the company's categories such as OTC. By the middle of fiscal year 2022, the company's OTC+ prescription drugs accounted for 61.7% of its total revenue, mainly prescription drugs for chronic diseases, and is expected to show rapid growth in the later period. In terms of compliance costs, in fiscal year 2021, the share of self-operating income in compliance costs decreased from 13.5% to 12.3%; in terms of administrative costs, the rate of administrative costs decreased from 2.3% to 1.9% in fiscal year 2021. In fiscal year 2021, the company targeted to strengthen the research and development and promotion of entry-level applications such as medical deer APP, and the rate of sales expenses and R & D expenses increased slightly. With the strengthening of large-scale effects such as warehousing and logistics in the future, the company's net profit margin is expected to continue to improve.

Risk factors: the expansion of the diagnosis and treatment side is not as expected, and the GMV growth rate of Tmall medical platform is not as fast as expected.

Investment suggestion: the accelerated development of drugs helps the company's income to grow at a high speed, the company's expense rate drops steadily, and profits are gradually released. The company strengthens its efforts on the supply side of e-commerce and diagnosis and treatment business, and is expected to further open up the business model in the future. Combined with the annual report and interim business progress, we adjust the company's revenue forecast for fiscal year 2022-2023 to 230,33.4 billion yuan (the original forecast is 255cm 35.4 billion yuan), adding 45.6 billion yuan to revenue for fiscal year 2024; adjusting the company's net profit forecast for fiscal year 2022-2023 to 64pm 1.02 billion yuan (original forecast is 837pm 1.254 billion yuan), adding 1.55 billion yuan to the forecast for fiscal year 2024. With reference to the valuation of companies in the same industry, JD Health and Ping An Healthcare And Technology, the company is given 5x PS in 2022, corresponding to a market capitalization of 167.5 billion yuan / HK $195 billion and a target price of HK $14.50, maintaining a "overweight" rating.