Sinohealth Earnings: Growth Slow, but Outlook Improving Due to More Clients; Raise Fair Value by 11%

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.