Having a rich dad can help with capital and connections when a company is at the ‘infant’ stage. But being independent comes sooner or later. When shall that be for Ping An Good Doctor? Or will it not come at all?
► Ping An Good Doctor faces challenges from every segment of the business and gradually gets stuck as it comes close to the ceiling of traffic conversion from Ping An Group.
► The market overvalues Ping An Good Doctor, giving high expectations of WeDoctor and other to-be-public Internet healthcares.
Ping An Good Doctor (01833:HK), the online healthcare service provider backed up by the most prominent Chinese insurance group, has released its 2020 semi-annual financials: a revenue of CNY 2,747 million at 20.9% up and a net loss of CNY 214 million at 22.1% down.
Besides, the online healthcare – the business segment pivoting Ping An Family Doctor – brought more revenue by 10.5% to 25.3% during the first half-year.
All these numbers seem reasonable to the majority. The new chief board has done a responsible job amid the pandemic crisis by catching the current of online healthcare and the company is also seeking global expansion.
However, the company's performance is only seemingly good. The revenue structure that indicates the market's recognition of the business model also conveys a worrying fact that Ping An Good Doctor has not built a well-established moat.
The majority of Ping An Good Doctor's revenue comes from health malls (or online pharmacies); they accounted for 56% and 57% in 2018 and 2019. This is a much-contested arena where two e-commerce giant-backed players have joined in the fight: Ali Health and JD Health. Users on Taobao/Tmall and JD.com, the two leading e-commerce platforms, can access online pharmacies. Even though Ping An Good Doctor can leverage traffic from the insurance platform, the amount is still way less than that on an e-commerce platform.
It may be argued that there can hardly be enough online pharmacies to satisfy China's consumer market. Indeed, only a small share of the Chinese consumer market can bring over half the revenue of Ping An Good Doctor. However, it also indicates a lower threshold, especially for e-commerce. It is not unlikely that Pinduoduo, the third largest e-commerce in China, will enter this area and take the market away.
The consumer healthcare is practically an online-to-offline (O2O) model. The craze of the O2O business rose in 2014 as the Internet spread across all kinds of industries. Since the O2O business model walked into adversity, the Chinese medical cosmetology industry has brought the O2O model to a new era, with representative companies such as SoYoung Technology and Gengmei. To catch up on the wind, Ping An Good Doctor and other online healthcare platforms also include this service as their consumer healthcare, connecting online users and offline store services.
Online healthcare under Ping An Good Doctor includes online consultation platform service and the family doctor service – the pillar business in the company's differentiation strategy. However, JD Health also launched a similar function, JD Family Doctor, which provides a doctor-team service, including doctors specializing in different areas.
From the business competition above, Ping An Good Doctor is faced with fierce competition in each segment but still owns the advantage – being backed by the most prominent insurance group. It is not easy to provide a comprehensive insurance-based payment solution, especially in the setting of China's complicated insurance system. It is still a question mark that this is an exclusive resource owned by Ping An Good Doctor.
Many market watchers, regardless of being inbound or outbound, give an 'overvaluation' credit to Ping An Good Doctor. We value the company by dissecting the business portfolio and comparing each business against the most relevant competitor based on the P/S ratio.
From the relative valuation above, Ping An Good Doctor's online healthcare segment is valued at a multiple of 34.51x, the average of itself and Ali Health’s. Ping An Good Doctor's online healthcare covers online consultations, online registration and family doctor, while Ali Health doesn't provide family doctor. The two companies do not perfectly fit but still are very comparable to some degree. Even though JD Health or WeDoctor can be one of the most comparable candidates for Ping An Good Doctor, the first one is listed on National Equities Exchange and Quotations (NEEQ) and the second one has not gone to public yet.
There could be several rationales behind the gray area or the market premium shown above. First, the market highly appreciates the boom in the traffic (monthly active users, newly registered users, etc.) and the increasing conversion rate during the last few years (from 2.7% in 2017 to 4.0% in 2019). Plus, even though the company has not profited yet, the healthy cash flow from the investing activities conveys a positive signal. Last but not least, Ping An Group (02318:HK) will always be the most reliable back-bone for the young healthcare platform, providing business traffic and technology & financial support.
There could be synergies among the four segments, and there could be that the health mall is under-valued. However, considering JD Family Doctor, Ping An Good Doctor's different business cores, the family doctor business may not be that unique as before. Moreover, JD can still play the healthcare business around with JD Finance, JD Logistics and JD Digital while Ping An can only go with the insurance.
To conclude, Ping An Good Doctor will not become the top player only because Ping An Group is backing it up. Undoubtedly, the company needs to work harder on a deeper business moat. Not pivoting on logistics delivery, online malls or family doctors, it can get more ambitious by providing full access to the public health payment system.
So far, PAGD has been doing this in some tier-three and pilot cities. As the only Internet healthcare company with an insurance background, it has a first-mover advantage allowing it to do more profound work on the healthcare payment solution service.
Specifically, the platform can first penetrate below-tier-three cities where most patients rely heavily on public insurance. They are continually struggling with insufficient medical resources and the complicated Chinese insurance system. The whole business chain between Internet healthcare and insurance service is also part of the potential market investors buy.
The timing issue is another key to opening the vast market other Internet giants have aimed for. Tencent-backed Water Drop, Alibaba-backed Ant Finance and JD.com-backed JD Finance – these three are seemingly very fierce rivals.
It is always easier to take on a blank insurance market than to ask users to replace another insurance company.