Yunkang Group reported 2023 revenue of RMB891.5mn, down by 76.3% YoY, primarily due to the sharp decline of diagnostic testing demand for COVID-19 in China. The blended gross margin improved to 36.5% in 2023 (+1.7 ppts), mainly due to enhanced operation efficiency and effective cost control. The selling expense rate increased to 16.9% (+8.6 ppts) since the proportion of non- COVID business increased substantially which required more marketing activities than COVID business. The administrative expense rate climbed to 21.5% (+11.2 ppts). Moreover, Yunkang Group recorded impairment losses on financial assets of RMB104.6mn, which were mainly provisions for trade receivables. As a result, Yunkang Group recorded a net loss of RMB101.9mn in 2023.

Solid growth of non-COVID business. In 2023, Yunkang Group's revenue decreased by 76.3% YoY to RMB891.5mn; while the Company's non-COVID business increased by 26.9% YoY. We estimated that the proportion of revenue generated from COVID business has declined from approximately 80% in 2022 to approximately 1% in 2023. Therefore, we think the revenue will resume normal growth in 2024E driven by the solid performance of its core business such as pathology diagnosis, infectious diseases testing, genetic diseases diagnosis and routine testing, etc.

Diagnostic testing services for medical institution alliances became the largest business segment. As of 31 Dec 2023, Yunkang Group has established 416 jointly constructed on-site diagnostic centers (vs. 398 at the end-2022), serving over 1,500 medical institutions. Thanks to the continuous expansion of medical institution alliance network, diagnostic testing services for medical institution alliances became the largest business segment of Yunkang Group in 2023, accounting for 48.3% of the Company's total revenue (vs. 44.7% in 2022).

Remaining RMB1.2bn trade receivables with an aging period of 1 to 2 years. In 2023, Yunkang Group recognized an impairment loss on trade receivables of RMB337.6mn. As of 31 Dec 2023, Yunkang Group's trade receivables with an aging of one to two years/ over two years amounted to RMB1,194.5mn/ RMB123.1mn, respectively, which accounted for 64.5%/ 6.7% of the total trade receivables. Yunkang Group established a specialized credit control team to mitigate the risks of trade receivables.

Maintain BUY. Considering the decreased COVID business, we lowered our estimates on the Company's revenue to RMB981mn/1,098mn in 2024E/25E. We estimated that revenue from diagnostic testing services for medical institution alliances will increase by 13%/ 15% YoY in 2024E/25E while revenue from diagnostic outsourcing services will grow by 8%/ 10% YoY in 2024E/25E. We revised our DCF-based target price to HK$13.78 (WACC: 10.0%, terminal growth rate: 3.0%).