The company turned a loss into a profit in 1H24, exceeding market expectations, but the revenue side performance was still weak, and the profit was due more to the improvement in the cost ratio during the period. The C-side business continues to drag down revenue growth due to strategic adjustments, but 1H24's C-side revenue share has fallen to 13%, and the company's revenue is close to returning to positive growth. However, we are still awaiting more certainty when the company's revenue will return to positive growth and signs that profit margins will gradually expand, maintain the “hold” rating, and adjust the target price to HK$11.4.
1H24 surpassed expectations and turned a loss into a profit, but revenue side performance was still weak. 1H24 revenue -6% year-on-year to RMB 2.09 billion; gross margin remained flat at 32.3% year over year; the cost ratio of 1H24 decreased by 18 pcts year over year, driving the company's 1H24 net profit/adjusted net profit to a year-on-year profit of 56.65 million/89.74 million yuan (vs Visible Alpha agreed: loss of 53 million yuan), and the net profit level performance exceeded market expectations.
There is steady growth at the F end, and the company continues to tap the Group's customer resources. The company's F-side (financial customer) 1H24 revenue was +3% year-on-year to RMB 1.12 billion, and the growth rate was relatively steady. The company continues to explore Ping An Group's comprehensive financial business customer base. While helping the Group's financial business acquire customers, stickies, and insurance premium control, the number of 1H24 paid users increased by 7% to 14.8 million through family doctors and pension managers. The number of individual customers of Ping An Group exceeds 0.23 billion (1Q24 data). Based on this, it is estimated that the F side penetration rate is about 6%, and there is plenty of room for long-term improvement.
B-side growth is strong, and ARPU is growing significantly. The company's B-side (corporate customers) revenue was +59% YoY to RMB 0.71 billion, and the number of paying users was +2% YoY to 2.6 million. Revenue growth was driven more by ARPU. ARPU grew due to the company's focus on high-quality enterprises, using “physical examination+” products as an entry point to strengthen cross-sales between products. By the end of 1H24, the company had a cumulative total of 1,070 “medical examination+”/“health care+” enterprise customers, with a cumulative total of +48%/+39% year-on-year.
Revenue is nearing a return to positive growth, and focus on the room for subsequent rate improvements. Previously, the main reason for the decline in the company's revenue was that the C-side business, which accounted for a large share of revenue, drastically reduced the revenue scale under strategic adjustments. Currently, the C-side revenue share has dropped from 59% to 13% in 2022. The subsequent impact on total revenue has been relatively limited, and the company's revenue is close to returning to positive growth. In addition, thanks in part to digitalization and AI, 1H24's sales and management expenses rate dropped by a total of 18 pcts, and short-term profit margin expansion potential (potential to increase gross margin and room for declining rates) can be focused on.
Maintain the “hold” rating and adjust the target price to HK$11.4. The company's 1H24 profit exceeded our expectations, but we are still waiting for more certainty when the company's revenue returns to positive growth and signs of gradual expansion in profit margins to maintain its “hold” rating. The company was given a 2.3x target of 2025E P/S, and the target price was adjusted to HK$11.4.
Investment risks: Policy changes; revenue growth falls short of expectations; profitability improvements fall short of expectations.