Pharmaceutical e-commerce is the second development curve of pharmaceutical Internet industry. In 2019, the overall market size of the pharmaceutical Internet is close to 190 billion yuan, and we subdivide the industry into three tracks: medical informatization, pharmaceutical e-commerce and online medical services. Among them, pharmaceutical e-commerce benefits from its clear business model and the largest market, which is expected to maintain rapid growth in recent years and the next five years, surpassing medical informatization to become the focus of the current industry development.

Among them, we focus on Alibaba Health Information Technology, a leading pharmaceutical e-commerce enterprise.

China's pharmaceutical e-commerce track is the absolute leader. The company takes cloud pharmacy business as its core business, which is divided into two parts: pharmaceutical e-commerce platform business and pharmaceutical proprietary business. Business revenue accounts for 96.95% of the company's total revenue in fiscal year 2020; the company's ownership structure is clear, and the new generation of management is in line with the company's development; the company's financial indicators are healthy and achieved its first profit in mid-2020. Under the scale effect, the company's large groups have obvious operational advantages, and the main business has the ability of sustainable development.

Industry bathing policy and the rising sun of the times. The state cancels the restrictions on online sales of prescription drugs, accelerates the "prescription outflow", liberalizes policies such as outpatient chronic disease consultation fees and drug expenses to enjoy medical insurance reimbursement, and the period of rapid development of pharmaceutical e-commerce has arrived. In addition to prescription drugs, non-pharmaceutical health products are similar to consumer goods, which are sensitive to marketing and have many brands, so they are suitable for online sales. We believe that the development prospect of pharmaceutical e-commerce is broad, and the market size is expected to exceed 1.5 trillion in 2030.

The company's self-management + platform management focus is clear and good for the company's sales, stock conversion capacity and stock undertaking capacity to enhance the company's profitability. First of all, the company's proprietary business and platform business focus on the sales of pharmaceutical and non-pharmaceutical health products respectively; we believe that the gradual improvement of self-business online licensed pharmacist customer service and other services can quickly enhance the brand effect of self-run stores in the field of drug sales, help the proprietary business seize the prescription outflow dividend, and it is expected that the drug trading volume of the self-operated business will be close to 130 billion yuan in 2030, accounting for 49% of online drug sales. Platform business: as the online sales nature of non-pharmaceutical health products converges with the online sales model of consumer goods, the platform business relies on strong traffic ports such as Ali's rich e-commerce experience and hand Amoy, which can continue to improve the online penetration of the company's non-drug health products. Secondly, the company's operation involves three stock conversion and two stock carrying capacity: stock, ① 's e-commerce business relies on Ali's huge consumer resources, the company's annual active consumers in mid-2020 increased by 56% over the same period last year, we expect the company's annual active consumers to maintain rapid growth in the short term, and the number of annual active users is expected to reach 650 million in fiscal year 2030, providing a solid guarantee for the company's business development. At the same time, the five major categories of health products and health products covered by ② platform business coexist in Tmall stores and bazaar shops. Tmall's store sales concentration is increasing year by year, which is good for the platform business revenue that only cooperates with Tmall. In addition, ③ has not yet acquired two categories of nutritional supplements and dietary supplements, which accounted for 27% of sales in fiscal year 2020, and is expected to be acquired in the future, increasing the proportion of sales of the two categories of Tmall stores from 0.645% to 3%, increasing the company's profitability. Increment, the company enhances its competitiveness through the free pharmaceutical service of licensed pharmacists and the continuous improvement of the business marketing ability of the platform. so that the company has the ability to undertake the increment of out-of-hospital drug market and the increasing online rate of non-drug health products caused by prescription outflow. Like other categories, the growth rate of the company's proprietary business revenue from 2019 to 2020 was 91.33% and 92.43% respectively, and the total GMV growth rate of e-commerce was 48.75% and 40.34% respectively. The overall internal and external environment is favorable, and we expect the sales of the two major sectors of the company to maintain rapid growth in the next three to five years; in the long run, the business of pharmaceutical e-commerce tends to mature, and the penetration rate of various items of the company will slow down, close to the online growth rate of various industries, and we expect that in fiscal year 2030, the company's pharmaceutical e-commerce GMV will exceed one trillion yuan, and its leading position of pharmaceutical e-commerce is solid.

The other two major businesses cooperate with the development of pharmaceutical e-commerce business, and the three major business departments in the future will jointly accumulate the blue ocean market of pharmaceutical Internet. The company's online medical service business and medical information business, through online consultation, retrospective code inquiry and other business plates, cooperate with the development of the company's pharmaceutical e-commerce business, and constantly improve its customer acquisition capacity and user loyalty. stabilize the company's leading position in pharmaceutical e-commerce. In the long run, the company will continue to explore two major business profit models, enhance the company's revenue capacity, and build a large healthy ecological closed loop at the same time.

Profit forecast: we believe that the company's pharmaceutical e-commerce business will maintain its absolute main business advantage and maintain stable performance growth in the next three to five years; although the company's online medical services and medical information business will speed up industrial layout and exploration, but it is difficult to achieve performance in the short term. The company achieved its first profit in mid-2020. Considering the company's leading position in the pharmaceutical e-commerce track, the company's profitability will continue to improve, but the main business accounts for too large a proportion of the overall market, so it is difficult to achieve subversive volume in the short term. Therefore, we reduce the company's 22-24 fiscal year return net profit forecast to 699960 RMB (the original home net profit forecast for 22-23 years is as follows:

7.05RMB 1.402 billion yuan). GMV is an important standard to measure the performance of e-commerce companies, so we use P/GMV method to evaluate the company. We give the company a corresponding multiple of 1.57x for fiscal year 2022 P/GMV based on the company's 2021A P/GMV multiple (which closed on June 24, 2021). We forecast that the company's GMV for fiscal 2022 will be about RMB 174.06 billion, which corresponds to a market capitalization of HK $332.72 billion, so we lowered our target price to HK $24.67 (the original target price was HK $30.17) and maintained our "recommended" rating.

Risk hint: pharmaceutical Internet regulation policies have been introduced, the company's business needs to be constantly adjusted to adapt to supervision, and the company's revenue may not be as good as expected.