Initiating Sinohealth With HKD 2.50 FVE; SaaS Expected to Drive Long-Term Growth, but Risks Abundant

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.