The operating efficiency of 1H23 has been greatly improved, and it is expected to continue to improve in the future.
We believe that 2H23 non-epidemic-related products are still expected to achieve rapid growth.
Maintain the "buy" rating; lower the target price of DCF (WACC 10.6%) to HK $63.20.
1H23's profitability improved significantly, and gross profit margin began to pick up: according to the company's mid-2023 report, JD Health 1H23 realized operating income of 27.11 billion yuan, an increase of 34% over the same period last year, a profit of 1.561 billion yuan, an increase of 600% over the same period last year, and an adjusted net profit of 2.44 billion yuan of Non-IFRS, an increase of 101.2% over the same period last year. 1H23, due to changes in the product portfolio, the company's gross margin increased by 1.1ppts to 22.9%.
Affected by the decline in the sales growth rate of epidemic-related products, the sales revenue of 2H23's own products will slow down: from a business point of view, 1H23 commodity sales revenue is 23.17 billion yuan, an increase of 32.5% over the same period last year; and service revenue is 3.94 billion yuan, an increase of 43.7% over the same period last year. We believe that 2H22 has a high base due to the rising demand for online drug purchases, so the income scale of epidemic-related drugs and devices will decline, while non-epidemic-related products are still expected to grow rapidly. The company is expected to further improve the cross-penetration of users among categories through digital precision marketing and rich product supply. As of June 2023, JD Health had 169 million annual active users in the past 12 months, an increase of 37.3 million over the same period last year, and the average daily number of online consultations exceeded 440000. Therefore, the company's commodity sales revenue is still expected to achieve some growth. We lowered the YoY growth rate of merchandise sales revenue in 2023-25 to 15% / 19% / 16% (previously 46% / 45% / 38%).
Operational efficiency continues to improve, and profitability is expected to continue to recover in the future: 1H23, the company's performance expense rate, sales expense rate, general and administrative expense rate and R & D rate are 9.5% / 4.4% / 3.2% / 2.3% respectively, a decrease of 0.1ppts/0.2ppts/ 1.6ppts/ 0.1ppts compared with the same period last year. We believe that with the further expansion of the business scale in the future, JD Health's operational efficiency still has room for continuous improvement. As we raised our financial revenue forecast, we raised the company's net interest rate for 2023-25 to 5.0% / 5.9% / 6.7% (previously 0.6% / 1.2% / 1.3%).
Reiterate the "buy" rating; target price lowered from HK $92.61 to HK $63.20: we lowered our revenue and gross margin forecasts for 2023-25 and raised our financial revenue forecasts, so we raised our 2023-25 EPS by 551% / 249% by 213%. At the same time, we raised WACC to 10.6% from 10.0%. Therefore, we have lowered the target price from HK $92.61 to HK $63.20. Our new target price corresponds to 2.7 times the 2024 Pmax S, which is higher than the 2.0 times average for the Internet Healthcare comparable platform. Given that JD Health has more active customers, higher third-party commissions and more sales of medical products, we think the company deserves a partial valuation premium.
Risk tips: 1) changing regulatory requirements; 2) inability to attract and retain customers; 3) risk of third-party cooperation; 4) conflict of interest with the group; 5) operational risk of proprietary model.