Company Reports

Sinohealth is in the middle of its ramp-up phase and management guided for overall revenue to increase approximately 25% on a three-year CAGR from 2022-25. We expect revenue growth to be driven by its SaaS segment through the acquisition of incremental clients in the long term, but in the near term its data insight solutions segment is the backbone of the business and accounted for the 63% of revenue in first-half 2022. The DIS business should serve as a bridge for Sinohealth until it can reach greater adoption of its SaaS product, where revenue generation is likely on a recurring subscription basis. For now, Sinohealth is vulnerable to low switching costs as the data insights segment resembles more of a consultancy, where fees are charged on a per-project basis. While management indicated that it has a 95% retention rate of its “core” clients, there is no contractual obligation for clients to remain with Sinohealth. The addition of SaaS should help build a backlog of contracts and provide some visibility for Sinohealth. SaaS represents only 14% of revenue in first half 2022 but the company is optimistic for the business and guided to 50% growth on a three-year CAGR.

We maintain our fair value estimate of no-moat Sinohealth at HKD 4.20 per share after it reported first-half 2024 revenue of CNY 160 million which represents a 10% year-on-year growth, with only a 3% increase in clientele during the same period. Comparatively, first-half 2023 revenue grew 20% year on year. Although peak seasonality occurs for pharmaceutical and research corporates during the back half of the year due to fewer budget constraints, the sharp decline in clients to 869 from 1,288 sequentially is concerning. While we are encouraged by its operating margin expansion of 390 basis points year on year with signs of consistent profitability, we believe revenue deceleration for a startup in the digital healthcare data industry with low industry saturation carries risks. Its software-as-a-service segment grew 52% year on year but accounts for only 23% of total revenue and still lags previous company expectations of 60%-70%. Its events business generated CNY 39 million, growing 21% year on year and accounting for 24% of revenue, while its big data solutions segment declined 5% year on year despite a 40%-50% 3-year CAGR. Given how highly fragmented the digital healthcare industry remains, we are concerned with such declines as there will be more competition given AI innovation from peers.

We are raising our fair value estimate for Sinohealth to HKD 4.20 per share from HKD 3.80 after the company generated profit for the second year in a row and is beginning to show that its business model is viable. We are encouraged that Sinohealth’s clients increased 45% year on year in 2023 to 1,288. However, despite the improved profitability and incremental client base, there are still some operating risks, in our view, given that the software-as-a-service segment, which is the only recurring revenue business, is still only 14% of total revenue. We expect this segment to be the long-term valuation driver for Sinohealth, but the industry remains highly fragmented and competitive, and future adoption of the software is not guaranteed. The company is still in an upstart phase, which means that execution risks remain. While our fair value estimate increase reflects Sinohealth’s progress, we believe the company will need to show investors that it can grow its SaaS revenue and clients continuously and robustly before we are more comfortable with recommending the stock.

Sinohealth is in the middle of its ramp-up phase and management guided for overall revenue to increase approximately 25% on a three-year CAGR from 2022-25. We expect revenue growth to be driven by its SaaS segment through the acquisition of incremental clients in the long term, but in the near term its data insight solutions segment is the backbone of the business and accounted for the 63% of revenue in first-half 2022. The DIS business should serve as a bridge for Sinohealth until it can reach greater adoption of its SaaS product, where revenue generation is likely on a recurring subscription basis. For now, Sinohealth is vulnerable to low switching costs as the data insights segment resembles more of a consultancy, where fees are charged on a per-project basis. While management indicated that it has a 95% retention rate of its “core” clients, there is no contractual obligation for clients to remain with Sinohealth. The addition of SaaS should help build a backlog of contracts and provide some visibility for Sinohealth. SaaS represents only 14% of revenue in first half 2022 but the company is optimistic for the business and guided to 50% growth on a three-year CAGR.

We are raising our fair value estimate for Sinohealth to HKD 3.80 from HKD 3.00 after the company generated positive operating profits and achieved modest revenue growth of 20% year on year for first-half 2023. We view the positive profit as a sign of stability that provides some visibility into future operations for Sinohealth in the near term, at least, as the number of clients increased to 623 from 842 year on year. We believe that the incremental clients represent the normalizing of operations after the coronavirus pandemic reduced its clientele by 33% in 6 months, leading us to doubt whether the company could recover. While we view its profitability as a significant improvement, there are still abundant risks given that the number of clients is still below end-2021 levels, which represents challenges of achieving robust growth despite being a company in an upstart and nascent stage. Therefore, despite our fair value estimate increase we believe that there are still major execution and competitive risks for Sinohealth given the industry remains fragmented and highly competitive, and the adoption of its software-as-a-service solutions is not guaranteed.

Sinohealth is in the middle of its ramp-up phase and management guided for overall revenue to increase approximately 25% on a three-year CAGR from 2022-25. We expect revenue growth to be driven by its SaaS segment through the acquisition of incremental clients in the long term, but in the near term its data insight solutions segment is the backbone of the business and accounted for the 63% of revenue in first-half 2022. The DIS business should serve as a bridge for Sinohealth until it can reach greater adoption of its SaaS product, where revenue generation is likely on a recurring subscription basis. For now, Sinohealth is vulnerable to low switching costs as the data insights segment resembles more of a consultancy, where fees are charged on a per-project basis. While management indicated that it has a 95% retention rate of its “core” clients, there is no contractual obligation for clients to remain with Sinohealth. The addition of SaaS should help build a backlog of contracts and provide some visibility for Sinohealth. SaaS represents only 14% of revenue in first half 2022 but the company is optimistic for the business and guided to 50% growth on a three-year CAGR.

We are raising our fair value estimate for Sinohealth to HKD 3.00 from HKD 2.50 after the company showed that its data-driven publication and events business returned to normal operations, as it can freely hold physical exhibitions where patrons can buy tickets. Although revenue has not fully returned to precoronavirus levels, the 233% increase from first-half 2022 suggests that participants remain interested in the healthcare data solutions industry and could recover fully in 2023. We are slightly more encouraged about Sinohealth’s prospects given the recovery of one of its three main businesses, but this doesn't alleviate our main concerns over long-term adoption of its software. We believe in the long term, software as a service should still determine the majority of the valuation for Sinohealth. SaaS revenue grew 36% year on year, which is less than the 60%-70% CAGR that the company forecast before. Management indicated that SaaS clients could return to its forecast growth after the reopening, but we believe there could be risks to management’s forecasts and still have an unfavorable view of Sinohealth’s risk/reward. We believe there is still a lot of uncertainty given the industry remains fragmented, and adoption of its SaaS is not guaranteed with plenty of competitors that also provide Big Data solutions.

We are initiating Sinohealth with a fair value estimate of HKD 2.50 and our expectation is that its up-and-coming SaaS product will be a stable, long-term growth driver. Sinohealth’s value proposition to clients is its provision of retail data that will allow healthcare manufacturers and corporations to make better strategic decisions. The company aggregates retail data from pharmacies in China and then provides analysis to its clients where fees are generated on a per-project basis. These types of projects make up 63% of revenue as of first-half 2022, which makes Sinohealth vulnerable to low switching costs as its clients are not obligated to remain with the company beyond projects, which highlights future cash flow uncertainty. The company wants to reduce such uncertainty by building a SaaS business, which provides similar data, but follows a recurring subscription model that would help build a backlog of contracts and provide visibility into near-term revenue generation. Our valuation is based on our expectations that SaaS revenue, driven by client acquisitions, will continue to grow at a robust pace in the near term as the company guided to a three-year CAGR of 45%-50% revenue growth.

Sinohealth is in the middle of its ramp-up phase and management guided for overall revenue to increase approximately 25% on a three-year CAGR from 2022-25. We expect revenue growth to be driven by its SaaS segment through the acquisition of incremental clients in the long term, but in the near term its data insight solutions segment is the backbone of the business and accounted for the 63% of revenue in first-half 2022. The DIS business should serve as a bridge for Sinohealth until it can reach greater adoption of its SaaS product, where revenue generation is likely on a recurring subscription basis. For now, Sinohealth is vulnerable to low switching costs as the DIS segment resembles more of a consultancy, where fees are charged on a per-project basis. While management indicated that it has a 95% retention rate of its “core” clients, there is no contractual obligation for clients to remain with Sinohealth. The addition of SaaS should help build a backlog of contracts and provide some visibility for Sinohealth. SaaS represents only 14% of revenue in first half 2022 but the company is optimistic for the business and guided to 40-50% growth on a three-year CAGR.