Event: Company releases 2023 annual report

reviews

Revenue is growing steadily, and the number of third-party merchants is rapidly expanding. In 2023, the company achieved revenue of $53.5 billion (+14.5%), of which,

1. The pharmaceutical and health products sales business achieved revenue of 45.7 billion yuan (+13.1%), mainly due to a steady increase in annual active users (AAU) and product abundance. In 2023, the company's AAU reached 172 million people (+11.7%), and the user repurchase rate further increased.

2. The platform, advertising and other services business achieved revenue of 7.9 billion yuan (+23.7%), mainly due to the increase in the number of platform merchants and sales. The company had more than 50,000 third-party merchants in 2023 (+100.0%). The rapid growth in the number of merchants is mainly due to increased traffic support and the introduction of preferential entry policies.

3. Split on a quarterly and semi-annual basis, 23Q4 achieved revenue of 14.8 billion yuan (-7.2%), and 23H2 achieved revenue of 26.4 billion yuan (-0.3%). The decline was mainly due to the higher base of epidemic-related products in 22Q4, including products such as “Class 4 drugs” and oxygen concentrators.

Profits exceeded market expectations, mainly due to a sharp increase in interest income. In 2023, the company achieved net profit of 2.1 billion yuan (+463.5%) and adjusted net profit of 4.1 billion yuan (+58.1%), corresponding profit margin of 7.7% (+2.13pp). The gross margin for 2023 was 22.2% (+1.00pp), mainly due to rapid growth in the platform, advertising and other service businesses. Operating profit in 2023 was 900 million yuan (+2412.2%), operating margin was 1.7% (+1.59pp), and operating efficiency was further optimized. Interest income in 2023 was approximately $1.9 billion (+125.5%), mainly due to an increase in interest income on deposits.

The overall cost ratio was slightly optimized. The company's fulfillment fee rate in 2023 was 9.9% (+0.20pp), mainly due to the increase in the average order fulfillment cost due to a decrease in the average customer unit price.

While expanding the abundance of product supply, the company maintains competitive product prices to increase user stickiness and brand mentality; the sales expense ratio is 5.0% (+0.26pp), mainly due to an increase in promotion and advertising expenses; the R&D cost rate is 2.3% (+0.01pp), which remains stable; and the management expense ratio is 3.7% (-0.87pp), mainly due to a decrease in share payment expenses.

The total operating expenses ratio was 20.9% (-0.41pp), which was slightly optimized overall.

Actively invest in omni-channel business layout construction. In 2023, the company launched the instant retail business, improved the omni-channel layout by opening offline self-operated pharmacies, and optimized the operating model combining self-operated, online platforms, and instant retail. The company has set up a number of self-operated community pharmacies in Beijing. In addition, the company has also launched an online medical insurance payment function for nearly 700 pharmacies in Shanghai, significantly improving the user's drug purchase experience. We believe that the company's platform is rich in categories, supply chain capabilities and accurate marketing capabilities, and that its integrated online and offline service system is expected to continue to promote the growth of active users and maintain stickiness.

Profit forecast and valuation: We expect the company's revenue for 2024-2025 to be $622/72.2 billion, up 16.2%/16.1% year on year (previous value was $66.2 billion in 2024; adjustments mean we expect the company will maintain a more competitive price strategy), and adjusted net profit of $42/48 billion, up 1.0%/15.0% year on year (previous value was $4.6 billion in 2024. The adjustment is based on our full consideration of trends in average customer unit price and purchase frequency, and conservatively estimates US dollar interest rate and exchange rate fluctuations in 2024 impact). According to DCF's valuation, we predict that after 1 year, the company's equity value will be 234.1 billion yuan, and the corresponding share price will be HKD79.80 (based on WACC = 8.8%, sustainable growth rate 2.0%,), maintain the target price, and maintain the “superior to market” rating.

risks

Risk of sales falling short of expectations, risk of internet-related policies.