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Alibaba Plans to Divest Tmall Pharmacy to Alibaba Health

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In a bid to bolster presence in China’s healthcare sector, Alibaba Group Holding Limited (BABA - Free Report) is planning to sell certain pharmacy assets from its Tmall platform to Alibaba Health Information Technology, a Hong Kong listed company. Notably, Alibaba Health became a subsidiary of Alibaba in 2015.

Per the terms, the deal has been valued at $1.35 billion under which Alibaba Health will buy Ali JK Nutritional Products that manages sales of medical products and devices as well as healthcare services on Tmall platform.

Additionally, Alibaba’s economic interest as well as voting interest in Alibaba Health will increase to 56.2% from 48.1% and 67.5% from 61.5%, respectively. This bodes well for the company’s position in China’s healthcare market.

Coming to the price performance, shares of Alibaba have returned 60.7% over a year’s time, outperforming the industry’s rally of 44.8%.

Deal Rationale

Per the latest deal, the company will be selling the business unit which includes medical devices, healthcare products, adult products and medical and healthcare services to Alibaba Health. In the fiscal year 2018, this particular business unit of Alibaba had an involvement of 3,300 merchants and generated $3.2 billion of gross merchandise value.

With the recent move, the company is likely to experience an uptick in its merchant base with Alibaba Health’s complementary categories. Further, the merchants will be able to connect more efficiently with the customers, courtesy the existing services of Alibaba Health. Consequently, the customer base will also improve and drive top-line growth.

Further, this deal will fortify Alibaba’s competitive position against Tencent Holdings which has recently gained traction in China’s healthcare market by backing WeDoctor, an online healthcare solution platform.

Hence, we believe the company is well poised to reap benefits from the healthcare sector with its well diversified product portfolio and solid healthcare ecosystem of Alibaba Health.

Growing Healthcare Market in China

The healthcare sector in China holds great potential for growth in the near term as well as in the long haul.

Per the data from Research and Markets, the healthcare market in the country is expected to reach $1.11 trillion by 2020 from $710 billion in 2016. Per the data quoted by China Briefing, this particular market is projected to reach $2 trillion by 2030.

Alibaba’s increasing interest in medical and healthcare sector is beneficial for its business growth in this rapidly expanding market.

Recently, the company entered into a partnership agreement with Xi'an International Medical Investment Co. Ltd to offer internet-powered medical services by integrating its cloud computing and mobile payment platforms into the latter’s medical institutions and research centers. Further, the company intends to develop a medical lab by leveraging the power of artificial intelligence.

The company’s intensive efforts and strategical steps will continue to aid it in strengthening business in this particular sector.

Zacks Rank & Stocks to Consider

Currently, Alibaba carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Match Group (MTCH - Free Report) , Groupon (GRPN - Free Report) and Amazon (AMZN - Free Report) . While Match Group and Groupon flaunt a Zacks Rank #1 (Strong Buy), Amazon carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Match Group, Groupon and Amazon is projected at 12.5%, 6.5% and 30.2%, respectively.

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