Three major Chinese online health management platform companies control more than 50% of the market share. But each of them had declined by at least 65% from their highs this year, wiping out nearly HK$1 trillion in market capitalisation!
- JD Health International (6618:HK) down 67% from HK$198.50 to HK$64.35, HK$425 billion market cap decline
- Ping An Healthcare and Technology Co Ltd (1833:HK) down 81% from HK$148.50 to HK$28.30, HK$138 billion market cap decline
- Alibaba Health Information Technology Ltd (241:HK) down 76% from HK$30.15 to HK$7.08, HK$311 billion market cap decline
JD Health and Ping An Healthcare had their IPOs in recent years, and at this point, they are trading below the IPO price. This means that pretty much almost all investors who purchased shares from the open market are nursing losses.
What caused the steep decline?
Allocation of resources for regulatory compliance
It all started when the Ant Financial IPO was put on hold indefinitely, leading to months of continuous regulatory actions by various Chinese government bodies. Accordingly, any stock in the internet industry had to spend time and effort to focus on complying with the new regulatory measures. This reallocation of resources eventually resulted in share price declines and tapered revenue growth.
Regulations for the internet healthcare industry
For the online health management platforms, two measures directly impacted the industry:
- The China’s National Health Commission released a draft regulation to set entry requirements for the internet healthcare industry. The draft poses some strict requirements, such as a ban on online consultations for initial diagnoses. It also prohibits the practice of linking doctors’ income to the sales of drugs and medical devices.
- The China’s Food and Drug Administration announced that drugstore chains will be forbidden from selling prescription medicines on the internet. Meanwhile, non-prescription medicines sold online will be scrutinised by the authorities using standards as strict as those for offline sales.
Additional responsibilities for online health management platforms
Online sellers of non-prescription drugs will be held responsible for the quality and safety of the drugs they distribute. Hence, they must ensure regulatory compliance in the transportation and storage of the drugs.
Platforms will also be required to conduct audits on their vendors to ensure that they meet the required standards. This will be done by inspecting and supervising the delivery service providers selected by drug sellers.
What to think of the regulatory measures?
As it is when other regulatory measures are imposed, there tends to be differing schools of thought. On the one end, some think that China is now un-investable, and the requirements are draconian.
On the other end are those believing that the regulations are reasonable and overdue; necessary for the improvement of the existing ecosystem and the proper growth of the companies involved.
But regardless of their views, companies have to spend time and effort assessing and adhering to these new regulations. Some may also take it one step further so as to hold themselves to a higher standard, thereby deepening their perceived alignment with the Chinese government’s policies.
Inevitably, it is the smaller players who do not adhere to regulations that suffer the biggest impact. In contrast, the big players could gain more market share in the longer run.
Is there an upside to all this?
China is a major healthcare economy with sizable and increasing healthcare expenditure, brought about by favourable demographic trends such as GDP per capita growth and ageing population.
Since COVID-19, the growth potential for Internet healthcare has accelerated and grew substantially. While the recent policy measures impacted share price significantly, it is worth noting that the government has enacted multiple favourable policies in the past. These include legalising and standardising online consultation, providing support for reimbursement from medical insurance for such online consultation, and permitting online prescription and online sales of prescription drugs.
Comparing the list of healthcare services provided by each entity, there is also potential for scope expansion in width and depth by each major player. This would expand their total addressable market significantly.
Valuations: Ping An vs Alibaba Health vs JD Health vs Teladoc
The share prices of these three companies are near all-time lows.
In the table below, we had a quick look at their valuations. We have also included US stock, Teladoc, as a peer comparison and found the predictions quite reasonable based on P/S and P/B. This is considering that the revenue growth for the next 12 months is forecasted to be at least 40%.
| Stock Price | Price/Book | PE Ratio | Price/LTM Sales | Revenue | Revenue CAGR (5y) | Revenue Forecast (Finbox) | Revenue Growth | |
| Ping An Healthcare (1833:HK) | HK$ 28.30 | 1.9X | -17.7X | 3.5X | 9.55B | 89.8% | 9.19B | 43.3% |
| Alibaba Health Information Technology Ltd (241:HK) | HK$7.08 | 5.8X | -490.6X | 4.6X | 21.38B | 207.3% | 26.78B | 40.1% |
| JD Health International (6618:HK) | HK$64.35 | 4.5X | -14.5X | 7.4X | 29.15B | NM- | 35.18B | 65.7% |
| Teladoc Health Inc (TDOC:NYSE) | HK$728.01 | 0.9X | -18.4X | 8.0X | 14.49B | 69.9% | 15.77B | 114.7% |
Concluding statements
As China continues enacting various regulatory measures (and it is anyone’s guess as to when it will end), share prices may continue to trend lower.
However, with the Omicron variant of the COVID-19 virus rearing its ugly head, these online health management platforms may once again see the light of the day. The Chinese government may slow down its regulatory changes to allow these platforms to focus on providing essential services and care to their customers during these trying times.
