On 21 Aug, NHH released its 1H23 results and during the earnings call, mgmt. provided additional information on its business and financials. In terms of sales channel breakdown, revenue of ColoClear from hospital, DTC and private health checkup centres accounted for 52%, 43% and 5% of total revenue. In opposite, hospital channel of Pupu Tube and UU Tube only accounted for 1-2%, while DTC was the major channel, accounted for 2/3 and 4/5 of total revenue respectively, followed by private health checkup centers. In terms of sales expenses breakdown, it is composed of 15% staff costs, 30% advertising & marketing costs, c.29% hospital channel costs and c.26% DTC costs. It is the first time for NHH to achieve 12-month adj. net profits in 2H22 and 1H23. Mgmt. set a goal of achieving adj. NPM of 20%+ in 2025, and expects to achieve a cash balance in 2024 at the earliest, and a positive cash flow in 2025. On 22 Aug, NHH announced to buy back 857,500 shares, being c.0.19% of the total issued shares, with the total payment of c.HK$15m. We believe that the buyback, taken right after the blackout period ends, comes as expected and will boost the market sentiment to some extent. We maintain our earnings forecasts for NHH, while increasing the number of shares by c.7% based on the latest disclosure, resulting in a c.7% cut on core EPS. We raised WACC from 11.1% to 12.0% to reflect the recent market volatility, thus our DCF- based TP is cut from HK$68 to HK$56. Maintain BUY.

Key Factors for Rating

Sales channel breakdown. For ColoClear, sales revenue from hospital channel, DTC channel and private health checkup centres channel accounted for 52%, 43% and 5% of total revenue, respectively, in 1H23. Among the hospital channel, revenue from public hospitals, private hospitals and clinics accounted for 6%, 32% and 50%, respectively. Mgmt. expects hospital channel to remain as the main channel that occupies at least half of the revenue composition. For Pupu Tube, almost 2/3 of its revenue came from DTC channel, 1/3 from private health checkup centres channel, and hospital channel only accounted for 1-2% of total revenue. For UU Tube, 4/5 of its revenue was from DTC channel, and 1/5 from private health checkup centres channel, and similar to Pupu Tube, hospital channel only took up 1-2% of total revenue.

Sales expenses breakdown. Sales and marketing expenses ratio decreased from 87% in 1H22 to 70% in 1H23, and mgmt. maintains the expectation for the ratio in FY23 to decrease to 60-65%. The sales and marketing ratio is composed of 15% staff costs, 30% advertising & marketing costs, c.29% hospital channel costs and c.26% DTC costs, according to the mgmt.

Achieved adjusted net profits for the first time. The company's overall gross margin reached 91% in 1H23, with all three commercial products' GPM having improved respectively. The company recorded an adj. net profit of RMB61m in 1H23, as compared to the adj. net loss of RMB106m in 1H22. This is the first time for the company to achieve 12-month adj. net profits in 2H22 and 1H23. Mgmt. set a goal of achieving adj. NPM of 20%+ in 2025, and expects to achieve a cash balance in 2024 at the earliest, and a positive cash flow in 2025.

Buyback comes as expected. On 22 Aug, NHH announced to buy back 857,500 shares, being c.0.19% of the total issued shares, with the total payment of c.HK$15m. We believe that the buyback, taken right after the blackout period ends, comes as expected and will boost the market sentiment to some extent.

NHH responded to the recent short seller report circulated through non-public channels. Some of the key highlights include:

1) The public hospitals and private health checkup centres (not a major revenue source) that the report referred to respectively accounted for less than 3% and less than 10% of ColoClear's revenue and are seeing explosive growth; In 1H23, ColoClear's revenue from public hospital channel was c.RMB14.5m with 11,3000 units' revenue-recognised volume;

2) ColoClear's terminal price in the hospital channel is above RMB1,500 per unit, much higher than RMB500 suggested in the report; In 1H23, ColoClear's revenue from hospital channel was c.RMB225m with 172,000 units' revenue- recognised volume, implying that the revenue per recognised unit was c.RMB1,483;

3) The major sales channels of Pupu Tube are DTC channels and private health checkup centres; the public screening projects that the report cited accounts for less than 1% of Pupu Tube's total revenue and are never a primary sales channel;

4) Regarding sales volume on e-commerce platform, NHH's Tmall Flagship Store realised c.RMB40m sales in 2022; it set up specific SKUs and linkages valid for specific promotion hours, which usually cannot be captured by third-party systems and may render the report's data source inaccurate;

5) NHH has 140 testing employees as of June 2023 instead of 40 as claimed by the report;

6) Exact Sciences has not and NHH believes that it would not claim any IP infringement given different detection technology, detection site selection and probe and primer designs of ColoClear and Cologuard.

Key Risks for Rating

1) Slower-than-expected sales ramp-up; and 2) higher-than-expected account receivables.

Valuation

We maintain our earnings forecasts for NHH, while increasing the number of shares by c.7% based on the latest disclosure, resulting in a c.7% cut on core EPS. We raised WACC from 11.1% to 12.0% to reflect the recent market volatility, thus our DCF-based TP is cut from HK$68 to HK$56. Maintain BUY.