Technology-heavy new economy companies were undoubtedly a big theme in Hong Kong last year after a number of high-flying startups made their way onto the stock market. This year, healthcare companies look to be taking centre stage.
Alibaba Health Information Technology, the Chinese tech giant’s flagship healthcare unit, was certainly the centre of attention on Tuesday after it announced an all-share deal to acquire its parent’s business-to-consumer (B2C) healthcare sales platform for HK$10.6 billion ($1.35 billion).
The transaction was well-received by public investors -- so much so, that the Hong Kong-listed company's share price rose by as much as 15.8% in intraday trading to its highest level in three years.
As per the agreement, Alibaba Health will purchase Ali JK Medical Products, a holding company that owns the rights to distribute healthcare products and medical devices on Tmall, Alibaba’s B2C platform. The company will issue 1.83 billion new shares at HK$5.8 apiece to Alibaba and increase its parent’s stake to 67.5% from 61.5%.
In practice, the deal marks the consolidation of Alibaba’s healthcare B2C business into the listed company and strengthens its ability to distribute healthcare products online.
Alibaba is making the move shortly after Ping An Insurance scored a huge success by spinning off its online healthcare unit last month. The initial public offering of Ping An Healthcare Technology, which operates the Ping An Good Doctor portal, was heavily oversubscribed by retail investors, who bid 654 times the number of shares on offer in the public tranche.
The Chinese tech giant is also strengthening its healthcare unit ahead of a widely anticipated listing of WeDoctor, a privately-held online healthcare portal backed by Tencent.
WeDoctor, which raised $500 million from a private funding round earlier this month, is expected to kick off an IPO in Hong Kong to raise $800 million before the end of the year.
Through the consolidation, Alibaba is transforming Alibaba Health into a fully fledged healthcare platform offering healthcare product sales, consumer healthcare packages and online consultation services.
The transaction is also favourable to Alibaba Health from a balance sheet perspective since it is adding a profitable asset that generated Rmb146 million ($22.7 million) in net profit last year on Rmb438 million of sales.
Alibaba Health made a net loss of Rmb208 million last year.
The acquisition of Alibaba's B2C healthcare portal was struck at a historical price-to-earnings ratio of about 59 times, or a premium of 20% to Alibaba’s own US-listed share valuation of about 49.5 times.
The portal had 85.5 million active users and served over 3,000 merchants as of the end of March.
Alibaba Health is betting that it can make the most of a burgeoning sector marred by uncertainties from products to regulation. In particular, the Chinese authorities have yet to implement effective policies to regulate online sales of healthcare products, resulting in a lot of unauthorised products circulating online.
However, the situation is slowly improving after the China Food and Drug Administration issued guidelines to regulate online sales of medical devices in December.
The new rules, which came into effect in March, lay out the primary categories for over-the-counter drugs, medical devices and wellness products which can be distributed through online portals.
“The company believes that its acquisition of the target business will enable it to further develop into Alibaba Group’s healthcare flagship platform, bring in an even broader set of merchants into the online healthcare community, and obtain more stable and sustainable revenue growth,” Alibaba Health said in a statement to the Hong Kong stock exchange.
The transaction is subject to approval from Alibaba Health shareholders and is expected to close by the end of September.