Bumper dividend could trigger buyout for Ping An Health

Months after eking out its first profit, the online healthcare platform is planning to drain most of its financial reserves to pay a whopping special dividend

Key Takeaways:

• The firm will use the remaining proceeds of its IPO and rights issue to fund the dividend, having given up the search for an acquisition target
• A slim profit for the first half of 2024 was mainly enabled by cost cuts, while revenue logged a year-on-year fall

By Molly Wen

The Ping An group’s healthcare platform turned a financial corner this year after hemorrhaging money for a decade, raising hopes for a brighter future.

But the company, Ping An Healthcare and Technology Co. Ltd. (1833.HK), sprang a surprise on investors this month with plans for a huge dividend payout that could tip the shareholding balance and invite a full parental takeover.

The dividend of up to HK$10.85 billion (10.1 billion yuan) would deplete the reserves left over from an IPO and a rights issue that had been earmarked for strategic acquisitions and corporate growth.

Shares in the health services provider went on a rollercoaster ride as investors struggled to digest the implications of the dividend decision, which came just months after the company passed a long-awaited breakeven point.

Also known as Ping An Good Doctor, the company operates a platform that allows users to access medical resources, book online consultations and manage hospital appointments. In a fiercely competitive health technology industry, the firm managed to post a first-half profit of 56.65 million yuan this year after piling up losses of more than 8 billion yuan ($1.11 billion) over the decade since it was founded.

But a stash of corporate cash that could be used to drive further growth would now be largely siphoned away as shareholder dividends.

In its November 14 announcement, Ping An Healthcare said the special dividend would be funded from its reserves at HK$9.7 per share, a stunning 69% of the current market price of about HK$14. And that’s not the only eye-watering figure. The dividend would represent around 80% of the whole pool of available cash and other reserves, which stood at just 12.65 billion yuan in the middle of this year.

Companies typically use a portion of profits to pay any dividends, rarely making a big payout from reserves as in this case.

The unusual move caused a dramatic reaction on the Hong Kong stock market. Ping An Healthcare’s share price soared as much as 25% on the day after the news release but fell back sharply as the session wore on, closing with a reduced gain of 2.05%.

The price continued to head south over the next five trading sessions, ending at HK$14.12 on November 22, 3.5% below the pre-announcement level. The idea of re-directing corporate development funds to pay a super-sized, one-off dividend did not sit well with some investors.

The digital health services provider said the remaining proceeds of its 2018 IPO and a subsequent rights issue, which were originally allocated for growing the business through investments or acquisitions, would instead be used for operational and general purposes, including dividend payments. The pot in question is worth about HK$8.28 billion.

Looking more closely at the numbers, a net HK$8.56 billion was raised at HK$54.8 per share when the company went public, with HK$1.66 billion still left on the books. A further share placement in 2020 netted HK$7.86 billion at HK$98.2 per share, most of which remains on Ping An Healthcare’s balance sheet.

Explaining the reasons for the rethink, the company said it had taken a cautious approach to expansion due to economic factors, policy changes and uncertainty in the investment and M&A outlook for the healthcare sector. Against this backdrop, a suitable acquisition target could not be identified, the company said.

However, investors who bought into the equity issuance may not be convinced of the merits of a plan that could limit future growth prospects and share-price returns. Ping An Healthcare’s share price has been tumbling from a peak of HK$148.5 reached in February 2021, and even dipped below HK$9 in September this year. Once the dividend is paid out, the company’s cash on hand will shrink dramatically, putting any expansion in doubt.

Close family ties

The dividend plan, once executed, could also trigger a buyout move by the parent, the Ping An insurance giant. Shareholders can opt to take their dividend in cash or in the form of shares. If the parent’s resulting stake crosses a defined threshold under takeover rules it would be obligated to make a tender offer.

Ping An Insurance (Group) Company of China Ltd. (2318.HK; 601318.SH) already holds 441 million shares in the healthcare platform, giving it a 39.41% stake. A cash payout would hand the parent HK$4.28 billion, but a share-based dividend would be exercised at a rate yet to be determined, based on the market price.

If the healthcare firm’s stock falls sharply, Ping An Insurance could obtain a large block of shares at an appealingly low price to achieve full ownership. Even if the insurance powerhouse takes the dividend in cash, it could still use the money to buy up shares on future dips, achieving the same result.

The announcement pointed out that a mandatory tender offer for Ping An Healthcare would not be triggered if all shareholders chose a stock-based dividend, as the ratio of holdings would remain stable.

Ping An Healthcare has been steadily deepening its family ties. Last year the platform’s five biggest customers were Ping An Life Insurance, Ping An Property & Casualty Insurance, Ping An Bank, Ping An Health Insurance and Ping An Annuity Insurance, accounting for about 27% of total revenue.

The healthcare platform has also acted in turn as a group customer, buying 5.94 billion yuan worth of financial products issued by Ping An Bank, Ping An Wealth Management and other affiliates as of the middle of 2024.

Although the platform finally landed in the black in the first half of the year, the meagre profit was mainly achieved by cutting costs. Administrative expenses were slashed by 47.8% to 390 million yuan, and the spending on sales and marketing fell 18.6% to 370 million yuan from the same period a year earlier. Revenue for the period actually fell 5.8% to 2.09 billion yuan.

The price-to-book (P/B) ratio for Ping An Healthcare stands at about 1.08 times, less than the 1.53 times for its competitor JD Health (6618.HK). News of a generous dividend payout within months of a profit milestone may signal that major shareholders lack faith in the company’s business prospects. Investors would be well-advised to pay close attention to developments.

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