We expect the company to return to a healthy endogenous growth path after the impact of a high base value effect. Despite being affected by the base figure caused by the high sales of epidemic products in the same period last year, the pace of JD Health's revenue growth may fluctuate somewhat. However, we are still optimistic that with more active policy support, the company will benefit from the wave of medical digitalization in China for a long time. Considering that the company's investment in low price mentality and user acquisition exceeded our previous expectations, we adjusted the 2023/2024/2025 non-IFRS net profit forecast to RMB 37/48/58 billion (previous value: RMB 45/53/72 billion). We adjusted the valuation window to 2024, and based on DCF, the target price is HK$66.50 (WACC: 9.2%, sustainable growth rate: 2.5%, previous value: HK$69.22). The new target price corresponds to 52.7/40.7/33.5 times 2023/2024/2025 non-IFRS forecast PE. “Buy.”
The steady release of revenue in 3Q23, the increase in the share of service revenue supports the improvement of operating profit margins, JD Health's total revenue of 3Q23 was 11.59 billion yuan, up 10.1% year on year. The revenue growth rate slowed from 34.0% of 1H23, mainly due to the high base effect brought about by strong demand for supplies related to the epidemic in the same period in 2022; non-IFRS operating profit was 740 million yuan, up 13.8% year on year, corresponding to the increase in the share of non-IFRS operating profit margin 6.4%, up 0.2pp year on year. We believe the main reason is the increase in the share of service businesses with relatively high profit margins Drive. Although measures such as lowering the free shipping threshold at the group level and the company's more active user marketing investment may incur certain additional operating expenses, we believe that improvements at the gross profit level have offset the increase in operating expenses and led to a steady improvement in overall operating profit, thanks to improved supply chain efficiency and a more favorable revenue structure.
Shanghai is piloting takeout medical insurance payments, or as one of the important policy signals, according to the Shanghai Government Network, since the beginning of November, Shanghai has begun a pilot Internet pharmacy medical insurance payment process. If insured citizens are hungry or place orders for products with the word “medical insurance” on the Meituan takeaway platform, they can pay for medicines through personal health insurance accounts. In our opinion, this pilot in Shanghai may indicate that policy support for the Internet medical industry is gradually being implemented and implemented. Considering the characteristics of the territorial management of China's health insurance policy, we look forward to more practices of health insurance access in the future to help accelerate the development of the Internet medical trend.
Expected to return to a healthy endogenous growth trajectory in 2024
We have noticed that during the increase in the number of cases such as influenza A in the winter of 2023, it may have had a certain driving effect on sales of some drugs and medical supplies and demand for online consultations, and may be expected to further help build the mentality of users in the Internet medical industry. Looking ahead to 2024, we expect the company to return to the path of endogenous growth and gradually show long-term growth potential after the influence of a high base gradually disappears.
Risk warning: Internet medical-related policy support fell short of expectations; the increase in the rate of online medical care fell short of expectations.