Highlights

• China’s internet healthcare segment is shifting from traffic-driven drug retail to high-value full-cycle disease management, supported by grassroots medical insurance reforms, innovative drug inclusion, compliance-driven marketing shifts, and generative AI commercialisation.
   
• Short-term regulatory and pricing pressures on retail are offset by profitability inflection, innovative drug momentum, and high-margin services at leading platforms.
   
• We maintain BUY on Ali Health, PAGD, and Medlive. Maintain MARKET WEIGHT on China’s healthcare sector.
   

Analysis

• Clearer regulatory framework brings short-term pressure and long-term benefits. China’s finalised Compliance Guidelines for Online Retail of Prescription Drugs in May 26 introduce stricter requirements, mandate pharmacist only prescription reviews (explicitly banning AI), enforce a strict “prescription first” model prohibiting drug information display before verification, and ban aggressive marketing practices that encourage irrational use. Third party platforms also face tougher obligations on merchant qualification checks and risk monitoring. JD Health noted that the guidelines mainly target smaller non compliant players and offline pharmacies, leaving its fully compliant operations largely unaffected. While raising compliance costs and creating short-term pressure on the sector by curbing impulsive demand, the framework will drive industry consolidation, improve patient safety, and ultimately benefit leading compliant platforms like Ali Health and JD Health over the longer term.
   
• Positive policy tailwinds are strengthening the long-term growth thesis for internet healthcare and AI. China’s graded diagnosis policies introduced in Apr 26 require Class III hospitals to redirect routine chronic disease follow-ups (eg hypertension and diabetes) to primary and community facilities, positioning internet hospitals as the core online channel and sustaining volume growth in chronic care management. Complementing this, 12 AI-assisted diagnostics were included in the national Category B reimbursement list effective Apr 26, marking the world’s first national AI reimbursement mechanism. This enables hospital adoption via reimbursable service fees and creates new monetisation opportunities for internet healthcare companies that integrate or partner on AI-assisted diagnosis, chronic disease management, and follow-up services. Meanwhile, online medical insurance settlements have accelerated their rollout across major provincial markets, reducing payment friction and boosting patient retention. Further structural support includes relaxed STAR Market listing criteria for medical AI and digital therapeutics firms, and a five-ministry roadmap targeting widespread AI-assisted diagnosis coverage in secondary and above hospitals by 2030.