Advice for Ping An's Good Doctor -- Stop Smoking So Much Cash

(Bloomberg Gadfly) -- Dealing with sickness is recession-proof, especially in a country as big as China. That doesn't make it an automatic money-spinner, as the health portal of China's Ping An Insurance (Group) Co. is finding.

Good Doctor is sounding out investors for a Hong Kong flotation that could raise at least $1 billion. The app, which offers online consultations and other healthcare services, has 32.9 million monthly active users and is the first of a cluster of fintech spin-offs Ping An is planning to take advantage of Hong Kong's renewed love affair with IPOs.

It's a disruption model whose time has come: The average outpatient waiting time in China is about three hours, while diagnosis takes a mere eight minutes. Formally known as Ping An Healthcare & Technology Co., Good Doctor's ambition is to become the "largest healthcare ecosystem in the world."

That's no moonshot; monetizing those aspirations is a different matter.

Good Doctor posted a net loss of 1 billion yuan ($159 million) last year, from 758.2 million yuan in 2016, even as revenue more than tripled to 1.87 billion yuan. Its cash burn remains high: The app consumed a net 485.1 million yuan last year.

Advice for Ping An's Good Doctor -- Stop Smoking So Much Cash

Selling supplements is Good Doctor's biggest revenue earner, followed by online consultations, with advertising a tiny portion. That may be just as well: The potential pitfalls of health ads were demonstrated when regulators punished Baidu Inc. following the death of a student who underwent an experimental cancer treatment he found using China's biggest internet search engine.

Still, advertising is high margin. Competition is also rife in all of Good Doctor's main businesses. The app competes closely with Tencent Holdings Ltd.'s WeDoctor, which had 27 million monthly active users as of the end of last year and is currently raising around $500 million at a valuation of $5.5 billion.

The problem is there aren't that many specialist doctors in China, according to Smartkarma analyst Ke Yan. That means health apps are duking it out for the same limited number of public-hospital oncologists, say. There are also plenty of rivals offering supplements, health checkups and genetic testing. 

Advice for Ping An's Good Doctor -- Stop Smoking So Much Cash

Good Doctor's strength is its parent Ping An: It has access to the Chinese insurance giant's 90 million customers and 1.4 million life agents, as Bernstein analyst Linda Sun-Mattison notes. That gives the company a much stronger head-start than WeDoctor.

At some point, Good Doctor will have to find customers outside the Ping An nest. For the time being, its dependency is growing. The parent contributed 46 percent of revenue last year, up from 42 percent in 2016.

As with every hot tech play in China, the app's strength depends on being in the government's good graces. This week, regulators banned online diagnoses that aren't preceded by an initial face-to-face meeting with a doctor, according to Bernstein. 

There may also be risks to Good Doctor's financial health from the government's crackdown on the insurance industry, which developed a reputation for cowboy ways during the rise of now-seized Anbang Insurance Group Co. For instance, a decision by Beijing to bar agents from selling any products other than straight insurance would hurt Good Doctor's Health Mall operations.

Still, the IPO will fly, a happy proposition for SoftBank Group Corp. which piled $400 million into the app and another Ping An unit that helps hospitals access patients' medical records. Besides the Hong Kong IPO frenzy, there's a dearth of healthcare stocks available for investors. The sector accounts for 2.7 percent of the MSCI China Index, compared with a 13.7 percent weighting in the S&P 500.

Just don't expect the business to be in rude health for a while yet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

To contact the author of this story: Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net.

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