[Medicine, Pharmaceuticals, BL, E-S, UM, M Industry, AR Step Y] has entered a period of rapid development. The penetration rate of China's pharmaceutical e-commerce industry is expected to continue to rise due to the upgrading of domestic consumption and increased awareness of online drug purchases. In terms of competitive pattern, the pharmaceutical e-commerce industry has shown a clear Matthew effect in terms of traffic, while in terms of geographical distribution, most pharmaceutical e-commerce companies are concentrated in the Yangtze River Delta and Pearl River Delta regions. We believe that with the continued release of industry penetration dividends, there is still some room for growth in the size of the pharmaceutical e-commerce market.

Short-term perspective: Alibaba Health's pharmaceutical e-commerce business is expected to continue to grow rapidly, driven by the pandemic. The pharmaceutical e-commerce business has achieved performance growth through both self-operation and platforms. The pandemic has driven consumers to prefer online drug purchases. The current financial situation is that the company's adjusted net profit is under phased pressure, changing from positive to negative. The fee rate declined steadily during the period, and the ability to control fees increased. In terms of self-operated pharmaceutical business, the prescription drug business is growing rapidly, and warehousing and logistics are constantly expanding; in terms of pharmaceutical e-commerce platform business, categories are constantly expanding, and new pharmaceutical retail continues to be deeply cultivated. We believe that in the context of the “pharmaceutical division” policy, the trend of outflow of prescriptions and domestic substitution will not change, and the company's pharmaceutical e-commerce business is expected to benefit from it. Furthermore, after three years of the pandemic, consumers have had a more direct experience with the convenience brought by Internet healthcare, and the online medical user base has grown rapidly. With the improvement of the domestic epidemic, the advantages of online drug purchases have become more obvious, consumers' awareness of online drug purchases has increased markedly, and some consumers have become long-term customers of Ali Health in the post-pandemic era.

Long-term view: As the aging trend of society intensifies and digital transformation continues to deepen, Ali Health's medical service business and digital infrastructure business will usher in a wider development space. In terms of the Internet medical business, Ali Health successfully acquired Xiaolu Traditional Chinese Medicine and injected new vitality into the Internet healthcare information community through the “Yilu App+Alipay Healthcare Channel”. In the digital infrastructure business, traceability business coverage continues to expand, and technical barriers are gradually being formed; in the digital medical business, relying on the digital advantages of Ali, upstream and downstream cooperation has been fruitful, helping the informatization and intelligence of traditional medicine.

Profit forecast and investment advice: The company is one of the leaders in the pharmaceutical Internet industry. Given the strong growth momentum of the company's retail pharmacy business, the online platform business is gradually maturing. The company is estimated to have revenue of 309.17/359.10/41,555 billion yuan for fiscal year 2024 to fiscal year 2026 (FY2024-FY2026), net profit of 722/9.45/1,155 billion yuan, and earnings per share of 0.05/0.07/0.09 yuan/share, covering the first time that the company was given a “buy” rating.

Risk warning: risk of policy adjustment, increased competition in the industry, risk of profit falling short of expectations, etc.