Ali Health's revenue and earnings for FY2021 fell short of market expectations and were affected by negative market sentiment. We lowered our target price to HK$21 and adjusted our holding rating.

FY2021 results fell short of market expectations. Revenue increased 62% year over year to RMB 15.5 billion, 7% lower than market expectations. The gross profit margin was 23.3% the same as last year, and strong growth in low-margin prescription drug revenue offset the increase in gross margin brought about by the effect of scale. Net profit for the year was RMB 340 million, which was 24% lower than market expectations. The adjusted net profit was RMB 630 million, up 199% year on year and still below market expectations of 13%. By sector, 1) Pharmaceutical self-operated revenue increased 63% year on year to RMB 13.2 billion; 2) Pharmaceutical e-commerce platform revenue increased 68% year on year to RMB 2 billion; Tmall Pharmaceutical platform GMV increased 48% year on year to RMB 123.2 billion; 3) Healthcare service revenue increased 12% year over year to RMB 280 million; 4) Digital infrastructure business grew steadily by 34% to RMB 52.93 million. Also, the AI and medical big data service provider that the company invests in will probably go public in Hong Kong, according to Bloomberg.

Negative market sentiment may affect the room for stock prices to rise in the future. As a shareholder of Ali Health, Ant Financial provides an Alipay platform to connect the registration and payment of various hospitals. Meanwhile, Ant Financial's listing was blocked and interviewed by various regulatory authorities; parent company Alibaba was also investigated and fined by the General Administration of Market Supervision for alleged monopoly. As a result, uncertainty about the parent company's own business has brought negative market sentiment, which may affect Alibaba Health's future stock price growth space.

Lower the rating to “hold” and lower the target price to HK$21. We are concerned that Ali Health may be negatively affected by the parent company's market sentiment, and that FY2021's revenue and earnings fell short of market expectations. Therefore, we lowered the revenue growth rate. FY2022/23/24E growth rate was 54%/44%/35% respectively, the rating was lowered to “hold”, and the target price was lowered to HK$21, corresponding to PS multiples of 9.8x and 6.8x in 2022 and 2023, respectively, which is at the industry average level.

Investment risks: Internet healthcare competition is fierce; Alibaba and Ant Financial face policy risks; offline medical resource expansion is not as good as expected.