AliHealth FVE Cut to HKD 6.10, but Entry Point Still Attractive Given Updated Visibility Toward Breakeven

Alibaba Health, or AliHealth, reported second-half fiscal 2022 revenue of CNY 11.2 billion today, a 34.3% increase year on year and 3.5% higher than our estimate—though we lower our fair value estimate to HKD 6.10 from HKD 7.20, on the outlook of lower long-term gross margins. However, we still believe that valuation looks attractive at this entry point, given that management provided visibility toward breakeven in the near term. Despite better-than-expected results, gross margin was flat at 20% year on year due to a greater proportion of lower-margin direct sales, or 1P, business. Revenue for its 1P business was CNY 9.8 billion this half, representing a 36.4% increase, but its third-party, or 3P, Tmall marketplace platform revenue declined 5% year on year to CNY 986 million. Core operating margin declined 200 basis points to negative 4.5% due to a 40% increase in sales and marketing expense year on year, but management expects overall operating cost to slow down.