Medlive Earnings: Promising Growth but Antigraft Policy Lowers Our Outlook and Fair Value by 24%

We lower our fair value estimate for Medlive 02192 to HKD 10.00 from HKD 13.20, despite it reporting first-half 2023 revenue of CNY 173 million. This was a 31.5% increase year on year, in line with its full-year revenue guidance of 30% growth. While the stock reacted by gaining 6% on Aug. 30—which likely signals greater investor confidence that company operations are normalizing and recovering after the pandemic, where it lost 20% of clients in first-half 2022—we believe China’s antigraft crackdown in the healthcare sector could create new risks that could significantly lower near-term demand. While the company did not change its full-year guidance, our impression was that it was uncertain if it could meet its prior full-year guidance. We also believe that the lower demand and the uncertainty could lower Medlive’s long-term steady-state operating margin of 30%. Given that the firm generates 91% of revenue from facilitating targeted pharmaceutical advertisements to doctors, we are pre-emptively lowering our revenue growth estimates for 2023 and 2024 to mid-20% from low-30%, which lowers our valuation.

Despite short-term headwinds, we still believe that Medlive’s growth and margin expansion remain intact in the long term. Medlive saw paid clicks increase 34% and also increased clientele by 48% year on year to 124 customers. We also believe the company will have lower long-term execution risks given its relationship with Japan’s M3, which exerts significant influence over Medlive. M3 has established itself as a successful healthcare advertising leader in Japan and Medlive is able to follow the blueprint to avoid missteps. Even with the share gains seen on Aug. 30 as well as China’s anticorruption campaign, we believe the current price presents an attractive entry point for Medlive and long-term tailwinds remain for the development of China’s healthcare sector.