Net profit was better than expected; the total revenue of JD Health 1H24 continued to advance, and the total revenue of JD Health 1H24 was 28.34 billion yuan, lower than Visible Alpha (VA)'s agreed forecast of +8.5%, and the corresponding 1Q24/2Q24 revenue growth rates were -4.9%/14.6%, respectively; non-IFRS net profit of 2.64 billion yuan, corresponding to the non-IFRS net interest rate of 9.3%, an increase of 3.3 pp over the previous year, higher than VA's agreed forecast of 7.5%, mainly due to endogenous operating profit and Other earnings increased. We adjusted our 2024-2026 non-IFRS net profit forecast by +5.4/-2.2/ -5.4% to 4.43/5.02/5.71 billion yuan (previous value: 4.2/5.13/6.04 billion yuan), respectively. Against the backdrop of frequent user purchases and the improving margins of the tripartite merchant ecosystem, we expect the company's profit to grow healthily in 2024. The DCF-based valuation target price is HK$41.30 (previous value: HK$50.90; WACC: 9.2%, G: 2.5%, unchanged), corresponding 27.5/24.2/21.3 times 2024/2025/2026 non-IFRS PE, “buy”.

Commodity revenue: Revenue is still resilient under a high base. Pharmaceuticals and health products are expected to drive revenue growth in the 1H24 JD Healthcare and Health Products sales revenue also increased 3.2% to 23.91 billion yuan, mainly due to high base pressure brought about by high demand related to the 1H23 pandemic. By the end of 1H24, the number of annual active users of JD Health reached 0.18 billion, a net increase of about 12 million over the previous year. Looking ahead to 2H24, we expect the company to return to a healthy endogenous growth trajectory after reaching a relatively high base of 1H24 and achieve healthy revenue growth driven mainly by the two major categories of pharmaceuticals and health products. We expect the company to further expand the variety and richness of online product supply and promote a healthy increase in the number and frequency of purchasing users.

We expect the company's total 2H24 revenue to increase 11.7% year over year to 29.5 billion yuan.

Service revenue: The rapid expansion of the number of merchants on the three sides led to the steady release of revenue from the 1H24 JD Health Platform, advertising and other services. The year-on-year growth rate once again surpassed product revenue after 1H23 and 2H23, mainly due to continued growth in advertising revenue and the steady expansion of the commission scale supported by increased turnover. By the end of 1H24, the number of third-party merchants on the JD Health Online Platform exceeded 0.08 million (2H23:0.05 million). Management stated that it will continue to help platform merchants improve operational efficiency and digital marketing capabilities. We expect that the incremental GMV brought about by the continuous expansion of the tripartite merchant ecosystem is expected to provide some support for the growth of service revenue.

Some regions have opened up online drug insurance payments, or it is expected to open up the company's medium- to long-term development space. Management shared the implementation status and operating results of policies related to medical insurance settlement: as of the performance meeting date, the company had launched a medical insurance settlement function in the five cities of Beijing, Guangzhou, Shenzhen, Shanghai and Dongguan; after the launch of this function in Beijing, the average daily orders of the company in the region increased nearly 3 times. As of 1H24, more than 350 designated medical insurance retail pharmacies in Beijing had entered the platform; management said that after settling through medical insurance, users were more willing to try out JD Health Seconds Delivery Service and generate other categories of products. Buy it. We believe that the gradual implementation of the online medical insurance settlement function for pharmaceuticals in various regions is expected to bring the company an increase in traffic and orders, and help the company build a unique omnichannel pharmaceutical retail model in the medium to long term.

Risk warning: Medical consumption declined in the context of rational consumption habits; the increase in the online medical care rate fell short of expectations.