The company's profit in 2023 exceeded market expectations, and gross margin stopped falling and rebounded: According to the company's 2023 report, JD Health achieved operating income of 53.53 billion yuan (+14.5% YoY); in 2023, the company achieved profit of 2.14 billion yuan (+459% YoY); adjusted non-IFRS net profit reached 4.14 billion yuan (+58% YoY). In 2023, the company's gross margin increased 1ppt to 22.2% due to changes in the product portfolio. The company's operating profit in 2023 was 890 million yuan (+2383% year over year), and operating efficiency was further optimized. Interest income in 2023 was approximately $1.9 billion (+125.5% YoY), mainly due to an increase in interest income from deposits.
Revenue growth declined due to the slowdown in sales of products related to the 2H23 pandemic, and sales of proprietary products will return to normal in 2024: in 2023, the company achieved product sales revenue of 45.7 billion yuan (+13.1% YoY), of which 2H23 product sales revenue was 225 billion yuan (-1.7% YoY), mainly due to the high base pressure brought about by sales of pandemic-related products in the same period last year. As the company continues to expand the scope of its three-tier warehouse network and full-temperature supply chain services covering the whole country, as well as digging deeper into customer needs and improving customer repurchase rates and new user retention rates through the company's industry-leading fulfillment capabilities, we expect the company to maintain a rapid revenue growth rate throughout the year after experiencing the impact of a high base in the first quarter. We expect the 2024-2026 YoY growth rate of product sales revenue to be 15%/15%/14%.
With the help of third-party merchants, service revenue is expected to continue growing rapidly: in 2023, the company will increase traffic support for third-party merchants, collaborate with third-party merchants to provide a rich product portfolio, and strengthen the low price strategy. By the end of 2023, the company had more than 50,000 third-party merchants (+100% YoY). In addition, the company is fully developing its instant retail business and improving its omni-channel layout.
By the end of 2023, the company's instant retail business had covered more than 480 cities and cooperated with more than 120,000 offline pharmacies.
We expect the company's service revenue YoY to grow 22%/18%/17% in 2024-26.
Reiterating the “buy” rating; the target price was lowered from HK$59.84 to HK$43.57: corresponding 2.0 times P/S in 2024, which is higher than 1.4 times the average value of comparable Internet healthcare platforms. Given that JD Health has more active customers, higher third-party commissions, and more sales of medical products, we think the company should have received a partial valuation premium.
Risk warning: 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) operating risk of a self-operated model.