Is Ping An Good Doctor an Overhyped Stock?

The coronavirus pandemic has not only given a boost to the healthcare sector as demand for health-related services has skyrocketed.

It has also shifted the majority of people’s day-to-day activities online. China’s online healthcare market has been a rising star in these unconventional times.

So it’s no surprise that Ping An Healthcare and Technology Co Ltd (SEHK: 1833), an online healthcare services provider also known as “Ping An Good Doctor”, has benefitted.

Although the company reported a lower-than-expected net loss in 2019, it is poised for great things in 2020. First off, it has a rapidly expanding customer base in China and is also likely to see more robust growth in its online medical services.

Big climb in share price

Since the start of January, the group’s share price has shot up, increasing by more than 40% at its peak. In recent weeks though, the share price has tumbled.

This is likely due to broader market sell-offs but it has still remained at higher levels than any time before January.

Yet for investors whose goals are set for the long term, the question remains: will this trend of growth persist as the pandemic comes under control? Put another way, is Ping An Good Doctor’s stock price overvalued?

Deeper look at the business

Established in 2015 and having gone public on the Hong Kong Stock Exchange in 2018, Ping An Good Doctor’s services span health mall, consumer healthcare, online medical services, and health management and interaction.

The healthcare services are achieved through a network of partner medical institutions, hospitals, medical professionals, and pharmacies, which is growing at an exponential rate.

Notably, the group has not yet delivered a profitable financial year so far. However, it has been able to narrow its net loss for the third consecutive year.

Its total revenue, cost of revenue, and gross profit have been consistently expanding for the past five years. By the end of 2019, the group’s monthly paying users had increased by 26% on a yearly basis to three million.

As is often the case with tech companies, the group operates on relatively high margins (a gross margin 23.1%, though down by 4.2% year-on-year).

Such performance is on par with, if not better than, one of its most prominent industry competitors, AliHealth (whose gross margin is estimated to be around 22 to 23 per cent). AliHealth’s business is also running on narrowing net losses.

Healthy cash flow

Although profit has not been generated thus far, the group is not short on cash. In fact, its cash and cash equivalents at the end of 2019 experienced a fivefold increase compared to 2018. This mainly resulted from returns from investing activities.

The negative cash generated from operating activities has contracted significantly; a positive sign for the business’s health.

In light of the group’s increase in revenues, its capital expenditures have slightly decreased from last year’s level. What this show is that it’s able to cut down expenses while achieving growth in revenues.

Outlook for the next round of growth

Broadly speaking, the group’s business is met with a largely supportive macro environment. On the one hand, the Chinese government pledged to push the development of internet healthcare.

On the other hand, China’s ageing population and the rise of private healthcare in the country mean that many untapped opportunities for health services companies are awaiting.

In November 2019, the group acquired a 20% stake in Hydee Software, an information service provider of pharmacies. This was to help the business speed up the process of establishing an online-and-offline health network of wider coverage.

Its ongoing healthcare venture with Southeast Asian-focused ride-hailing app Grab, called GrabHealth, was launched in Indonesia in late 2019.

Additionally, it’s in the process of hiring hundreds of doctors in the country to combat Covid-19 – an indication that the group’s ambition lies well beyond its home market.

Foolish conclusion

The Covid-19 outbreak in China may have accelerated the business growth for Ping An Good Doctor, but it has already embarked on an upward path a while before the pandemic hit.

The rising share price over the past years since its IPO has also told a convincing story. The bottom line is, it will need to keep delivering compelling results for its investors but so far many signs bode well for the company.

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