The company's revenue for 2023 was slightly lower than expected, but the net loss was better than expected due to improved gross margin and reduced expenses. The business restructuring process (which began in November 2021) has been largely completed within 2023, and we expect the company's revenue to return to growth in 2024E. Maintain the “hold” rating and reduce the target price to HK$15.
Revenue for 2023 was slightly lower than expected, but net losses were better than expected due to improved gross margins and reduced expenses. In 2023, the company continued to clear out strategic synergy and low gross profit businesses, resulting in revenue of -24.7% YoY to RMB 4.67 billion, lower than expected. The increase in gross margin (+5.3 ppts year over year) and cost reduction (-25%/-15% of sales expenses/ management expenses) offset the impact of the decline in revenue. The adjusted net loss for the whole year decreased by 64.1% year on year to RMB 320 million, better than expected.
There is steady growth on the F side, and rapid expansion of B-side revenue from a low base. By customer type, in 2023 revenue:
1) F-side (financial customers) revenue +14.8% YoY to RMB 2.20 billion, number of paying users +7% to 26.3 million, ARPU +7.5% YoY. In 2023, the company's F end annual paid user penetration rate was only 11% (vs. Ping An Group's individual customers exceeded 200 million). The company indicates that F-side revenue can maintain the growth rate of Low-Teens in 2024;
2) B-side (enterprise customers) revenue was +81.2% YoY to 1.08 billion yuan, the number of paying users was +75% YoY to 5.1 million, and the cumulative number of service companies increased by 530 to 1,508 over the same period last year.
In 2023, the company's B-side customer penetration rate was 2.7% (vs. Ping An Group's healthcare-related payment companies exceeded 55,000). The company indicates that B-side revenue can maintain a medium double-digit growth rate in 2024; 3) C-side (individual users) is the main part of the strategic adjustment, with revenue -62% YoY to RMB 1.39 billion. Due to the basic completion of strategic adjustments and the company's current focus on F-side and B-side customers who are more willing to pay, we expect C-side revenue to remain flat year-on-year in 2024.
The company's AI will continue to focus on diagnostic assistance and efficiency optimization in the short term. The decline in management fees and sales expenses in 2023 was partly due to digitalization and AI. The market has paid a lot of attention to medical+AI recently, but we believe that the company's AI application scenarios are still relatively limited. Currently, it is mainly used for: 1) assisted diagnosis: assisted disease risk assessment, triage, patient information collection, and case prefilling through AI; and 2) optimizing operational efficiency: processes can be simplified and re-engineered through AI. Looking forward to the future, the wider application of AI still needs to be expanded and improved over a long period of time.
Maintaining the “hold” rating, the target price was lowered to HK$15.0. Based on updated financial information and business information, we lowered the 2024E adjusted non-IFRS net loss to $230 million and the 2025E adjusted non-IFRS net loss to net profit, mainly due to the revenue reduction.
At the same time, we introduced the 2026 forecast. The company was given a 2x target of 2025E P/S, the target price was lowered to HK$15.0, and the “hold” rating was maintained. The target valuation multiplier is below the 3-year historical average of 0.8 standard deviations.
Investment risks: Policy changes; revenue falls short of expectations; expenses are greater than expected; break-even is later than expected.