Core views

In the first half of 2024, the company achieved revenue of 28.344 billion yuan, a year-on-year increase of 4.55%, and achieved non-IFRS net profit of 2.644 billion yuan, an increase of 8.54% over the previous year. The profit side greatly exceeded Bloomberg's agreed expectations. The company's revenue growth rate turned positive in the first half of the year. 3P growth was faster than 1P, which led to a recovery in profit margins. It is expected that the opening of online health insurance will continue to advance in the future. As a B2C pharmaceutical e-commerce leader, the company's market share continues to increase, its cash reserves are sufficient and still growing, and it has large foreign exchange positions to enjoy higher overseas interest rates. In the future, as the Federal Reserve enters a cycle of interest rate cuts, it is not ruled out that the company will have more positive shareholder returns.

occurrences

On August 15, 2024, JD Health announced its 2024 interim results. In the first half of 2024, the company achieved revenue of 28.344 billion yuan, a year-on-year increase of 4.55%, and achieved non-IFRS net profit of 2.644 billion yuan, an increase of 8.54% over the previous year. The profit side greatly exceeded Bloomberg's agreed expectations.

Brief review

The revenue growth rate turned positive, and 3P growth continued to be faster than 1P. In the first half of 2024, the company achieved revenue of 28.344 billion yuan, up 4.55% year on year. Among them, product revenue from sales of pharmaceuticals and health products was 23.91 billion yuan, up 3.2% year on year, and revenue from online platforms, digital marketing and other services was 4.434 billion yuan, up 12.47% year on year. The 3P growth rate continued to be higher than 1P. The company's revenue growth rate turned positive in the second quarter, reaching 14.56%, but it was still lower than previous market expectations. It was mainly dragged down by non-pharmaceuticals with stronger consumer properties. Among them, the drag on devices was even more obvious. Looking ahead to the second half of the year, it is expected that the company's revenue will continue to grow steadily, the growth rate of pharmaceuticals will still be higher than that of non-pharmaceuticals, and the 3P growth rate is still expected to be higher than 1P.

Gross margin rebounded, and net profit margins significantly exceeded expectations. Driven by the increase in 3P's revenue share, the company's gross margin increased by 0.76pct to 23.64% year-on-year in the first half of 2024, and the company's gross profit reached 6.7 billion yuan, an increase of 0.497 billion yuan over the first half of 2023. As of June 30, 2024, the number of JD Health third-party partner merchants reached 0.08 million, an increase of more than 100% over the previous year. The company's gross margin is expected to continue to improve in the future as 3P sellers continue to flow in. In terms of period expenses, the company's R&D expenses rate remained flat year on year in the first half of the year, management expenses decreased by 0.82 pct year on year, and sales expenses increased by 0.55 pct year on year. Furthermore, the company's other net operating income and financial revenue continued to grow positively in the first half of 2024, further increasing profit elasticity. In the first half of the year, the company achieved adjusted net profit of 2.644 billion yuan, an increase of 8.54% over the previous year, which surpassed Bloomberg's unanimous expectations. Among them, the growth rate reached 47.76% in the second quarter, and the adjusted net interest rate reached 9.33% in the first half of the year, compared to 8.98% for the same period last year.

Since June, with the weakening beta of Hong Kong stocks and the impact of the Health Insurance Administration's launch of the pharmacy price comparison system, the company's stock price and valuation have been at record lows. We believe that the price comparison system has more influence on offline pharmacies and O2O platforms (Meituan Buys Medicine, Hungry Buys Medicine, etc.), and has limited impact on B2C pharmaceutical e-commerce (JD Health, Ali Health). Even if the prices of offline pharmacy channels decline in the future, B2C channels will still have an advantage in prices. With the opening of O2O health insurance in Shanghai and Beijing in the past two years, some investors are concerned about the impact of O2O pharmaceutical e-commerce on B2C pharmaceutical e-commerce. We believe that this impact is very limited. The O2O pharmaceutical market is far smaller than B2C, and it more satisfies immediate demand. Important categories of B2C pharmaceutical e-commerce, such as medical devices and health products, account for a very low share of the O2O channel. As a B2C pharmaceutical e-commerce leader, JD Health has sufficient cash reserves and is still growing, and has large foreign exchange positions to enjoy higher overseas interest rates. In the future, as the Federal Reserve enters a cycle of interest rate cuts, it is not ruled out that the company will have more positive shareholder returns.

Profit forecast and valuation: We forecast JD Health's 2024-2025 revenue of 58.343 billion yuan and 66.673 billion yuan, up 8.99% and 14.28% year-on-year, and non-IFRS net profit of 4.721 billion yuan and 5.184 billion yuan, respectively, with corresponding net interest rates of 8.09% and 7.78%, respectively. Continuing to maintain the “Buy” rating, the target price was HK$32.30, which is 20 times PE in 2024.

Risk warning: Low expectations for revenue growth in the second half of the year; low expectations for the company's non-drug growth due to macroeconomic and consumption pressure; low expectations for the increase in the drug line penetration rate; JD Health's self-operated category structure fell short of expectations; JD Health's self-operated gross margin did not improve significantly compared to traditional offline pharmacy companies' gross margin; low expectations for JD Health's overall gross margin increase, cost reduction and efficiency fell short of expectations; low expectations for shareholder returns; low expectations for progress in online health insurance opening; low expectations for other medical policies; Pharmaceutical e-commerce The impact of the racetrack near-field e-commerce model on the far-field e-commerce model comes from competition between Meituan and Hungry Medicine; uncertainty about the development of Sino-US relations; depreciation of the RMB exchange rate beyond expectations; and other overseas risk factors affecting the overall performance of Hong Kong stocks on the Internet.