Alibaba Health: Leading Internet Healthcare Company In China (OTCMKTS:ALBHF)

Elevator Pitch

I assign a Neutral rating to Chinese internet healthcare company Alibaba Health Information Technology Limited (OTCPK:ALBHF, 241:HK).

The support and backing of its parent and controlling shareholder Alibaba Group (BABA) is Alibaba Health’s key competitive advantage. Alibaba Health benefits from a strong brand equity and low customer acquisition costs due to its association with Alibaba Group and the “Alibaba” brand. Looking ahead, Alibaba Health’s key growth opportunities are in prescription drugs and medical & healthcare services.

But there are hurdles that need to be overcome for Alibaba Health to realize the growth opportunities in prescription drugs and medical & healthcare services. It might take a while for most or all the provinces in China to implement the changes relating to reimbursements for online medical services and products to on a nation-wide basis in the country; and the conversion rate for paid medical consultation services could be potentially lower than expected. Also, Alibaba Health’s valuations are unattractive at 15.8 times consensus forward next twelve months’ Enterprise Value-to-Revenue.

I will consider turning Bullish on Alibaba Health if the growth for its prescription drugs and medical & healthcare services businesses is better than expected going forward.

Readers have the option of trading in Alibaba Health shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the ticker ALBHF, or on the Hong Kong Stock Exchange with the ticker 241:HK. For those shares listed as ADRs on the OTCBB, note that liquidity is low and bid/ask spreads are wide.

For those shares listed in Hong Kong, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Hong Kong Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $90 million, and market capitalization is above $39 billion, which is comparable to the majority of stocks traded on the US stock exchanges.

Institutional investors which own Alibaba Health shares listed in Hong Kong include The Vanguard Group, Capital Research Global Investors, BlackRock, Krane Funds Advisors, and Veritas Asset Management, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers and Fidelity, or international brokers with Asian coverage like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.

Company Description

Alibaba Health Information Technology is the healthcare business arm of Chinese internet giant Alibaba Group, which has a 57% deemed interest in Alibaba Health via two of its subsidiaries. In its FY 2020 (YE March) annual report, Alibaba Health notes that the company’s vision is “facilitating medicine through big data and using the Internet to change the face of healthcare to provide fair, affordable and accessible medical and healthcare services.”

Alibaba Health derived 84% and 13% of the company’s 1H FY 2021 revenue from its core pharmaceutical direct sales and pharmaceutical e-commerce platform businesses, respectively. The pharmaceutical direct sales business sells health supplements, over-the-counter drugs and prescription drugs through its direct online stores, Alibaba Health Pharmacy and Alibaba Health Overseas Flagship Store; while the pharmaceutical e-commerce platform business, acquired from Alibaba Group, relates to the sale of healthcare products on Tmall’s (China’s largest B2C e-commerce platform) Pharmaceutical Platform.

Its other businesses, medical & healthcare services and tracking & digital health, contributed the remaining 2% and 1% of Alibaba Health’s top line, respectively in 1H FY 2021. The company’s medical & healthcare services business provides various services, such as health consultation services, health screening and vaccine booking services, among others. Separately, its tracking & digital health business offers drug & vaccine tracking services for pharmaceutical manufacturers and provincial governments with its Ma Shang Fang Xin tracking platform and explores new healthcare business opportunities in Big Data, Artificial Intelligence, and other new technologies.

Support And Backing Of Parent Is Alibaba Health’s Key Competitive Advantage

The support and backing of Alibaba Group is Alibaba Health’s key competitive advantage in operating in China’s internet healthcare market. As highlighted above, Alibaba Group is Alibaba Health’s parent and controlling shareholder.

In its core pharmaceutical direct sales and pharmaceutical e-commerce platform businesses, Alibaba Health has an edge over most of its competitors due to its strong brand equity, low customer acquisition costs, and the synergies between the company itself and Alibaba Group’s other sister companies.

First, Alibaba Health has strong brand equity, thanks to its association with the Alibaba Group and the “Alibaba” brand.

Trust is a key factor in e-commerce transactions, and this is especially true for the sale of pharmaceutical and healthcare products, as inferior and counterfeit products can have a serious negative impact on consumers’ health. Alibaba Health’s direct online stores, Alibaba Health Pharmacy and Alibaba Health Overseas Flagship Store, have the Alibaba brand name, and its pharmaceutical e-commerce platform business sells on Tmall which also benefits from its association with Alibaba Group.

The Alibaba brand also helps Alibaba Health to partner and collaborate with leading pharmaceutical manufacturers and retail chain pharmacies. This, in turn, allows the company to offer pharmaceutical and healthcare products from leading brands, which further builds consumer confidence and trust in the products sold at its direct online stores and pharmaceutical e-commerce platform. As of September 30, 2020, Alibaba Health’s Tmall Pharmaceutical Platform has in excess of 100 flagship stores set up by leading pharmaceutical manufacturers.

Secondly, Alibaba Health has relatively low customer acquisition costs compared with other smaller independent competitors and new start-ups. Instead of devoting significant resources and capital to buying digital ads and running digital campaigns to promote one’s brand and attract online buyers, Alibaba Health’s direct online stores benefit from internet traffic diverted from Alibaba Group’s other leading platforms and services, such as Tmall, Taobao (e-commerce), and Alipay (digital payments). For the 12 months ended September 30, 2020, Alibaba Health’s direct online stores had over 65 million annual active users.

More importantly, this helps Alibaba Health’s other businesses as well. Alibaba Health can cross-sell medical & healthcare services health consultation services and health screening to internet users who visit the company’s direct online stores and pharmaceutical e-commerce platform. In other words, the company’s other businesses also benefit from low customer acquisition costs, which is only possible with the backing of parent and controlling shareholder Alibaba Group.

Thirdly, there are significant synergies between Alibaba Health and Alibaba Group’s other sister companies. One example is that Alibaba Health has a cloud computing services agreement with Alibaba Cloud, a subsidiary of Alibaba Group, which is the third-largest Infrastructure as a Service (IaaS) player globally. In its FY 2020 annual report, Alibaba Health highlighted that its “Ma Shang Fang Xin” tracking platform which offers drug tracking services, is “capable of processing mega-sized big data and supporting several hundred thousand corporate users at the same time”, thanks to the “strong computational and data processing capacity of Alibaba Cloud”.

Another example is Alibaba Health’s partnership with Alibaba Group’s AliPay. Alibaba Health is the sole exclusive operator of Alipay’s healthcare channel, which gives it access to AliPay’s user base and network. AliPay and Tencent’s (OTCPK:TCEHY, OTCPK:TCTZF, 700:HK) WeChat Pay dominate China’s mobile and online payment market with a combined market in excess of 90%. AliPay’s network of healthcare players includes more than “35,000 contracted medical institutions, including more than 4,000 Class II and Class III hospitals”, according to the company’s 1H FY 2021 results announcement.

Growth Opportunities In Prescription Drugs And Medical & Healthcare Services

Going forward, I see prescription drugs and medical & healthcare services as areas offering the most attractive growth opportunities for Alibaba Health.

In its recent 1H FY 2021 results announcement released on November 25, 2020, Alibaba Health emphasized that the “accelerated deployment of the direct prescription drug sales business will provide the Group with a new momentum for long-term, sustainable and rapid development”. The company has various initiatives in place to increase its sale of prescription drugs in the future, such as increasing the number of SKUs (Stock Keeping Units), targeting users with chronic diseases (customer lifecycle approach), and entering into partnerships with pharmaceutical companies (e.g. AstraZeneca’s (AZN) anti-cancer drugs were first launched in Alibaba Health’s direct drugstores in September 2020).

Deloitte expects the China retail pharmaceutical market to grow at 7.0% CAGR, from RMB312 billion in 2019 to RMB408 billion in 2023. The key growth driver is the Chinese prescription drugs sub-segment, which is forecasted to expand at a CAGR of 8.5% over the same period, as compared to the 5.4% for OTC drugs. In Deloitte’s June 2020 research report, it is highlighted that “the expansion of prescription outflow, the development of internet hospitals, and the deregulation of online pharma sales” are the key growth drivers for prescription drugs in China.

Restrictions on the sale of prescription drugs in the online channel

According to a September 2019 Lexology article, “prescription drugs may be sold online by MAHs (Marketing Authorization Holders), drug distributors and third-party e-commerce portals” under the New Drug Administration Law, with the exception of “vaccines, blood products and other high-risk drugs under special control”.

Nevertheless, it is important to note that reimbursements for online medical services and products remain a significant hurdle in the growth of the online prescription drugs market in China. An article published on The China–Britain Business Council website on August 28, 2020 noted that “pre-Covid, the national health insurance scheme didn’t make reimbursements for drugs bought online or through telemedicine apps in all but the rarest cases”. On the positive side of things, “eligible online medical services are now included in the national insurance system” in China post-COVID-19, according to a June 8, 2020 China Daily news article. However, it might take some time for all the provinces in China to implement the changes imposed by the National Healthcare Security Administration on a nation-wide basis in the country.

Separately, the medical & healthcare services business segment of Alibaba Health, which accounted for a mere 2% of the company’s 1H FY 2021 revenue, has ample room to grow.

Alibaba Health’s medical & healthcare services business saw segment revenue increase +43.3% YoY, from RMB122.7 million in 1H FY 2020 to RMB175.9 million in 1H FY 2021. Looking ahead, the growth momentum for its medical & healthcare services business could accelerate with a new “Dr. Deer” internet healthcare app launched (renamed and revamped from the earlier “Ali Health” app) in September 2020. In its 1H FY 2021 results announcement, the company refers to “Dr. Deer” as a “one-stop convenient online medical and healthcare services” provider, which offers “medical information search, medical consultation, medical appointment, vaccination appointment, health screening appointment and drug express delivery” services.

As mentioned earlier, Alibaba Health is the sole exclusive operator of Alipay’s healthcare channel, and the company’s medical & healthcare services business benefits from Alipay’s network of 35,000 contracted medical institutions as of September 30, 2020, which more than doubled as compared to 15,000 contracted medical institutions as of March 31, 2020. Another sign of the medical & healthcare services business growth is the fact that in the past six months, Alibaba Health added close to 10,000 doctors (total of more than 39,000 as of end-1H FY 2021) to its team of medical professionals who offer online medical consultation services.

On the flip side, Alibaba Health’s medical & healthcare services business offers both free and paid medical consultation services, and it is always challenging to convert free users into paying users. As a comparison, the annual average conversion rate of paying users for Hong Kong-listed Chinese online medical consultation services provider Ping An Healthcare And Technology Co. Ltd. (OTC:PIAHY, 1833:HK) was 4.0% in FY 2019. Alibaba Health has yet to release the information on its conversion rate of paying users publicly.

Valuation

Alibaba Health trades at 20.0 times trailing twelve months’ Enterprise Value-to-Revenue and 15.8 times consensus forward next twelve months’ Enterprise Value-to-Revenue based on its share price of HK$22.50 as of November 27, 2020.

In comparison, its peers, Ping An Healthcare And Technology and Teladoc Health (TDOC), are valued by the market at consensus forward next twelve months’ Enterprise Value-to-Revenue multiples of 12.9 times and 15.8 times, respectively.

Risk Factors

The key risk factors for Alibaba Health are a longer-than-expected time for most or all the provinces in China to implement the changes relating to reimbursements for online medical services and products on a nation-wide basis in China, a lower-than-expected conversion rate for paid medical consultation services, and new regulations & policies that have a negative impact on the Chinese internet healthcare market in general.

Note that readers who choose to trade in Alibaba Health shares listed as ADRs on the OTCBB (rather than shares listed in Hong Kong) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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