Alibaba Incubates a Health Risk for Investors

(Bloomberg Opinion) -- Jack Ma just sowed the seed of another decacorn – a startup worth more than $10 billion – on the Hong Kong stock exchange.

Largely ignored by analysts, Alibaba Group Holding Ltd.’s health unit suddenly woke from a long hibernation last month, soaring 58 percent in two weeks to reach a market value of $8.7 billion. Most of the rally came before Alibaba Health Information Technology Ltd. announced the $1.4 billion purchase of healthcare assets from its parent.

That deal aside, the surge probably has something to do with Ali Health’s bid to attract institutional investors. Last week, its management attended Morgan Stanley’s China Summit in Beijing, seeking one-on-one meetings with investors. Earlier, mainland Chinese fund managers received a business presentation from the firm, a copy of which I obtained.

Such a maneuver is highly unusual for a mid-cap company that doesn’t even hold quarterly earnings calls. But once Ma, Alibaba’s chairman and founder, convinces professionals to pile in, Ali Health could well be transformed into a blue chip. 

The company, whose online pharmacy accounts for 88 percent of revenue, painted a rosy picture in its presentation. Currently, hospitals sell about 68 percent of drugs in China, whereas in developed countries, the bulk of distribution is done through retail channels. By 2020, hospitals will outsource 260 billion yuan ($41 billion) of drug sales to online and offline pharmacies, Ali Health reckons. That’s a big market for a firm that generated only 2.4 billion yuan of sales in its latest fiscal year ended in March.

The pitch looks opportunistic. Healthcare is showing by far the best return among sectors on China’s stock market this year, as investors shun industries with any debt and go looking for the next Pfizer Inc. Wuxi Apptec Co., a biologics manufacturer, soared to a $20 billion market cap after going public in Shanghai in early May. Such gains can only burnish the appeal of owning a slice of China’s largest e-pharmacy.

But Ali Health has a troubled past. Its parent’s 2014 investment in the shell company that was the vehicle for the unit’s backdoor listing breached Hong Kong takeover rules, a panel under the city’s Securities and Futures Commission ruled in April 2016. (Alibaba said it believed it had fully complied.)

Investors who piled into Ali Health shares during the 2015 stock market frenzy – when speculation was rife that the healthcare unit would be folded into the parent – would have lost two-thirds of their money within three months if they bought at the peak.

Alibaba, meanwhile, did very well. By consolidating Ali Health in 2015, the e-commerce giant managed to book a non-cash gain of $2.9 billion, boosting net income at a time when global investors were questioning the health of China’s economy and had pushed its shares below their IPO price.

The future may be no less fickle. Ali Health is talking up using artificial intelligence to improve diagnostic efficiency. But the hot spot for healthcare this year is biotech rather than AI. Case in point: Ping An Healthcare and Technology Co., an Ali Health competitor, is now below its IPO price, while biotech firms Sino Biopharmaceutical Ltd and 3SBio Inc. have soared.

For investors, there’s also the risk that Ali Health will sell more stock to take advantage of its ballooning valuation. 3SBio and Genscript Biotech Corp. fell more than 7 percent in Hong Kong on Tuesday morning after share placements. Both firms had rallied more than 40 percent this year.

This stock fever should perhaps carry a health warning.

©2018 Bloomberg L.P.

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