Incident: Recently, JD Health (06618.HK) announced its 2023 results. The company achieved revenue of 53.5 billion yuan in 2023, up 14.5% year on year over 46.7 billion yuan in the same period last year; by business, the company's own product revenue in 2023 was 45.65 billion yuan, up 13.1% year on year; service revenue was 7.88 billion yuan, up 23.7% year on year.

The company's gross margin increased by 1.0 pct to 22.2%, mainly due to changes in the product portfolio; annual profit was 2.14 billion yuan, up 459.2% year on year, and adjusted non-IFRS net profit reached 4.14 billion yuan, up 58.1% year on year from 2.62 billion yuan in the same period in '22.

Operating data: As of December 31, 2023, the number of annual active users in the past 12 months was 172 million, a net increase of 18 million compared to 154 million on December 31, 2022. The number of third-party merchants exceeded 50,000, a year-on-year increase of more than 100%, and the average number of daily online consultations exceeded 450,000 in 2023.

Comment:

Product revenue: The three categories go hand in hand, and the growth rate of performance is expected to continue. In 2023, the company's self-operated business revenue reached 45.65 billion yuan, an increase of 13.1% over the previous year. Prescription drugs, non-prescription drugs and others accounted for 41%, 29%, and 30% respectively. We believe that as the company continues to expand its diversified category matrix and accurately match user needs and product supply through digital marketing, it is expected to further increase users' cross-purchasing of different categories of products. As of December 2023, JD Health's annual active users in the past 12 months reached 172 million, a net year-on-year increase of 18 million over the same period in 2022. There is still plenty of room for penetration compared to Group users.

Service revenue: The scale effect of 3P merchants is showing, and the online platform ecosystem continues to improve. In 2023, the company's platform, advertising and other service revenue was 7.88 billion yuan, up 23.7% year over year. The main increase was due to the increase in digital marketing service fees due to the increase in the number of advertisers and the increase in commissions brought about by the increase in sales volume of third party merchants. At the same time, the company continues to deploy integrated online and offline medical services, with an average of more than 450,000 online consultations per day. We believe that as the company continues to deploy specialist service platforms, mental health consulting, and large-scale medical model applications, the continuous expansion of the superimposed third-party merchant ecosystem is expected to lead to an increase in GMV and platform commissions. As of December 31, 2023, JD Health had more than 50,000 third-party businesses, an increase of more than 100% over the previous year.

Fully develop the instant retail business and accelerate the coverage of all scenarios of offline medical services. As of December 31, 2023, JD Health has provided users with 24-hour instant retail services in more than 480 cities, cooperating with more than 120,000 offline pharmacies. At the same time, the company is committed to providing users with an integrated online and offline medical and health service experience, unleashing the development potential of medical insurance consumption scenarios. A number of self-operated community pharmacies have opened and launched “24-hour drug collection windows” in Beijing, and the Jingdong Health Examination Center and Suyu Hospital have officially been put into operation. We believe that through the synergy between the online platform business and offline self-operated medical service institutions, the company is expected to further enhance consumers' awareness of seeking medical treatment and purchasing drugs on medical platforms.

The gross margin increased steadily, and the overall cost ratio continued to be optimized. In 2023, JD Health achieved gross profit of 11.87 billion yuan, an increase of 20.0% over the previous year. The gross margin increased 1.0 pct to 22.2% from 21.2% in 2022, mainly due to changes in the product portfolio. In 2023, the company's fulfillment fee rate was 9.9%, up 0.2 pct year on year; sales expenses rate was 5.0%, up 0.3 pct year on year; general and administrative expenses rate was 3.7%, optimized by 0.9 pct year on year; R&D rate was 2.3%, unchanged year on year. We believe that in the future, with the further expansion of the business scale and the gradual expansion of large-scale medical model applications, there is still room for improvement in the company's operational efficiency.

Investment advice:

Taking into account the company's annual report performance, 24-year category and user scale expansion expectations, we adjusted the company's revenue forecast for 2024/2025 to $620/727.85.4 billion ($67.1 billion 24 years ago) and adjusted net profit of $41/48/5.3 billion, maintaining a “buy” rating. In the long run, we are optimistic about the continuous strengthening of the company's mentality as a leading e-commerce leader in self-operated pharmaceuticals, the continued penetration of active users, and the guarantee of industry-leading omni-channel supply chain capabilities.

Risk warning: 1. Macroeconomic uncertainty; 2. Internet health policy tightened; 3. Prescription drug sales fall short of expectations; 4. Competition in the industry intensifies