UOB Kay Hian
Date of Report: Tuesday, 26 August 2025
Kingmed Diagnostics Faces Revenue Decline but Leverages AI for Long-Term Growth

Overview: Kingmed Diagnostics’ Challenging 1H25 Performance and Strategic Outlook

Kingmed Diagnostics, a pioneer and leader in China’s independent clinical laboratory (ICL) market, reported disappointing results for the first half of 2025. Despite short-term pressures from policy shifts and economic headwinds, the company is actively strengthening its cash flow management and accelerating adoption of artificial intelligence (AI) to boost efficiency and service capabilities. UOB Kay Hian maintains a HOLD rating with a revised target price, reflecting cautious optimism for the company’s long-term prospects.

Stock Snapshot and Shareholder Insights

• Share Price: RMB 31.78
• Target Price: RMB 32.00 (previously RMB 26.00)
• Upside: +0.7%
• Market Cap: RMB 14.7 billion (~US\$2.06 billion)
• Major Shareholder: Mr. Liang Yaoming (16.0%)
• FY25 NAV/Share: RMB 14.51
• FY25 Net Cash/Share: RMB 5.33
• 52-week High/Low: RMB 42 / RMB 24.35

Key Financial Performance: 1H25 Results Miss Estimates

Kingmed Diagnostics’ first half 2025 results fell short of both internal and consensus expectations, primarily due to weaker demand, ongoing price pressures, regulatory tightening, and strategic restructuring of lower-margin projects.

Profitability Ratios

• Gross Profit Margin (1H25): 33.9% (down 0.8 ppt YoY)
• Adjusted Net Margin (1H25): -3.3% (down 5.2 ppt YoY)
• EBT Margin (1H25): -3.7% (down 6.2 ppt YoY)

Key Financials and Forecasts

In-Depth: Business Segments and Revenue Dynamics

• 1H25 Revenue Decline: Revenue dropped 22.8% YoY, driven by:
  • Weaker-than-expected testing demand
  • Ongoing price pressure and increased regulation
  • Restructuring of less profitable and inefficient projects
• Medical Diagnostics Services: Revenue fell 24.1% YoY; specimen volume declined 5.2% YoY, indicating a sharper revenue drop than volume.

Margin Analysis and AI-Driven Efficiency Gains

• Gross Margin: Although 1H25 gross margin was 33.9% (down 0.8 ppt YoY), a quarter-on-quarter rebound was observed: 34.6% in 2Q25 vs. 33.2% in 1Q25 and 33.1% in 2024. This improvement was attributed to AI adoption and fixed cost optimization, including asset disposals at the end of 2024.
• Adjusted Net Margin: Weakened to -3.9% in 2Q25 (from -2.6% in 1Q25) due to higher impairment losses. Excluding credit and asset impairment losses, adjusted net margin reached 6.3% in 1H25 and 7.1% in 2Q25, up from 4.8% in 2024 and 5.3% in 1Q25, but still below the 8.1% mark in 2019.

Strengthened Cash Flow and Receivables Management

• Operating Cash Flow: Rose sharply to RMB 350m in 1H25 (vs. RMB 34m in 1H24), with RMB 296m in 2Q25 (vs. RMB 54m in 1Q25), primarily due to improved receivables collection.
• Accounts Receivable (A/R): Balance improved to RMB 4.1bn at end-Jun 2025 (from RMB 4.4bn at end-Dec 2024).
• Impairment Losses: Significant COVID-19-related A/R impairment of RMB 272m in 1H25 (total net COVID-19-related A/R balance of ~RMB 600m as of end-Mar 2025). These impairments are expected to continue weighing on 2025 earnings.

Strategic Initiatives: AI Adoption and Digital Transformation

Kingmed is actively embracing digital transformation, leveraging AI to fuel future growth amid a tough business climate.

• AI Agent Deployments: 55 AI agent applications, powered by the in-house Yujianyiyan large-scale model
• Lab Efficiency: 2.2 million annual AI-assisted diagnoses; over 70% increase in molecular pathology report efficiency via the KMTR tumour molecular report system
• “Xiaoyuyi” AI Agent: Serving over 60,000 monthly active doctors, 3.6 million report interpretations to date
• Data Monetization: 21 data products listed on major data exchanges in China
• Recognition: Only medical institution selected for China’s National Trusted Data Space Innovation Pilot Program

Forward Outlook: Risks, Earnings Revisions, and Valuation

• Earnings Outlook: Revenue and adjusted earnings CAGR projected at 8.7% and 62.0% respectively for 2026-28, on the back of diminishing A/R impairments (forecast: RMB 550m/200m/100m/0m in 2025-28), AI-driven efficiency, and market consolidation benefits.
• 2025 Guidance Revision: 2025 revenue growth estimate revised from +2.7% to -20.6% YoY; adjusted earnings estimate cut from RMB 255m to -RMB 194m.
• Risks: Policy uncertainties, intensifying competition, challenges in collecting COVID-19-related A/R, and a potentially weaker macroeconomic environment.
• Valuation: HOLD rating maintained with a higher target price of RMB 32.00, based on 54x 2026F P/E, reflecting confidence in long-term AI-driven recovery and growth.

Segment Revenue Breakdown and Financial Health

Profitability, Growth, and Leverage Metrics

• EBITDA Margin: 2.2% (2025F), projected to rise to 16.8% (2027F)
• Net Margin: -3.4% (2025F), forecasted to climb to 8.6% (2027F)
• ROE: -2.8% (2025F) with a recovery to 8.1% (2027F)
• Net Debt/(Cash) to Equity: (36.7)% (2025F), improving to (45.7)% (2027F)
• Dividend Yield: 2.8% (2025F), tapering to 2.3% (2027F)
• Debt to Total Capital: ~7% (2025F-2027F)

Conclusion: Near-Term Caution, Long-Term Optimism

Kingmed Diagnostics faces significant short-term uncertainties from policy shifts, economic volatility, and COVID-19-related receivables impairments. Despite these pressures, the company demonstrates resilience through robust cash flow management and bold digital transformation, particularly in AI adoption. With a focus on enhancing operational efficiency and service capabilities, Kingmed is well-positioned for long-term growth and margin recovery, making it a company to watch as China’s ICL market continues to consolidate.
Investors are advised to remain cautious in the near term while keeping an eye on Kingmed’s capacity to leverage AI and digital assets for sustainable profitability in the evolving healthcare landscape.