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l  We initiate China’s digital healthcare sector with a SELL rating.

l  Online pharmacy valuations have greatly surpassed offline while we believe the split between online B2C, O2O and offline will be 1/3 each in out-hospital.

l  PAGD’s valuation still depends on drug sales. YIDU should be valued as a system integrator instead of a medical big data company, in our view.

 

Online pharmacy has too great expectations

Despite China having an outsized healthcare spending on drugs, 65% of drugs are still sold in hospitals. The transition to retail will happen but state Rx procurement will both delay the process and depress on price. Offline pharmacies’ overwhelming sales force suits China’s lack of hierarchical diagnosis (分级诊疗). The solution to hospital crowding will be increasing supply. Lastly, Meituan is already a formidable player in drug O2O which we believe will build its own drug distribution capability like grocery. All these led to China’s retail drug sales being only 20% of US yet the market caps of JDHealth and AliHealth have reached 80% of Walgreens Boots and CVS Health’s global pharmacy businesses.    

 

Commercial insurance is beautiful but profit picture is moot

China achieved world-leading life expectancy with world-beating level of spending. Profitability will not reach the level of US providers. Commercial insurance plays a critical role in the profitability of US healthcare providers but we believe in China public healthcare insurance will stay, expand and dominate.

 

PAGD has the best LT prospects but numbers still don’t add up

A parent with the largest commercial health insurance market share and a successful subscription business model are PAGD’s unique advantage that will protect its margins as it enters Rx drug sales. But PAGD is still too expensive.

 

YIDU has noble aspirations that not yet matched with reality

We calculate the total public R&D spending on medical and life science to be Rmb25bn a year. As an enabler, YIDU already captured 1.5% of it in 2020. We believe YIDU today is more of a healthcare IT system integrator than a big data platform. We believe its gross margin of 30-40% is not sustainable in the long run.

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