Long-Term Margin Forecast Remains Intact for JD Health, but Shares Fairly Valued; HKD 64 FVE Remains

We maintain our fair value estimate of HKD 64 for JD Health after the company reported second-half revenue of CNY 26.5 billion, which was better than the top range of guidance of CNY 23.9 billion, but operating margins declined by 70 basis points to a loss of 0.4% due to a combination of unfavorable product mix and greater subsidies given out for promotions during the coronavirus pandemic. Revenue was better than expected due to outperformance in sales in the fourth quarter, which accounted for one third of annual sales as lockdowns in November and December 2022 prompted consumers to order drugs and health products online. However, gross margin declined to 20.7% from 21.8% due to the decline of over-the-counter drugs as the Chinese government limited the amount, and restricted promotional sales, of OTC drugs during the pandemic. Operating expenses also increased 20% year over year as JD Health held many promotions to raise the profile of its company, and fulfilment costs rose due to more orders. However, the platform grew a healthy 25% year on year to 153 million annual users in 2022.