Company Reports

We expect narrow-moat JD Health to maintain a market leading position for healthcare e-commerce in the near and medium term. It holds about 40% market share, similar to its main rival AliHealth, which makes this niche industry dominated by mostly two competitors. Its business model is similar to AliHealth except with one key difference in that it has greater coverage and better next-day or same-day delivery efficiency than its rival. It has cold-chain capabilities for 300 cities and can meet next-day deadlines for 80% of its orders. We believe this key differentiation will allow it to maintain a leading market share due to the importance of timeliness and quality of goods when it comes to receiving pharmaceutical products.

We lower our fair value estimate for JD Health to HKD 45 per share from HKD 60 after it reported second-half 2023 revenue of CNY 26.4 billion, representing a 0.3% decline year over year, which was in line with our expectations. While we expected headwinds in the second half due to the reduced consumption of pandemic-related items, we now have new concerns over the long-term growth recovery, given the company’s soft revenue guidance in 2024 that was below our forecast. Previously, JD Health had indicated that revenue for categories unrelated to the pandemic is still positioned to grow about 30% year on year, but it now provided guidance of a high-single-digit decline in the first quarter of 2024—although recovering to a 20% year-on-year increase for the rest of 2024. This amounts to only a 13% revenue increase in 2024, due to demand recovering slower than expected. JD Health also expects the operating margin to decline 10 basis points in 2024 to about 1.2%, which is slightly disappointing, given it was 3.5% in the first half of 2023.

We recently spoke with the management teams of several healthcare companies to get an update on the progress of the anticorruption movement in China’s healthcare sector to assess how this could affect companies under our coverage for the long term. We believe that this will likely become a long-term driver for companies that provide data-driven studies to facilitate research and drug promotion, such as Medlive and Yidu, as they provide doctors a legitimate medium for them to prescribe medicines that could otherwise be perceived as taking kickbacks from pharmaceutical companies. We believe that the anticorruption movement is likely a positive for the long-term clinical development of drugs and this should provide transparency for hospital policies. As for healthcare e-commerce companies such as JD Health and Alibaba Health, we believe the initiative is likely to have less of an impact on their revenue growth in the long term, as they rely on greater healthcare retail demand. However, we think the policies could provide greater consumer confidence for online retail—and we estimate penetration of healthcare e-commerce is low at 5%-10% in China.

We lower our fair value estimate for JD Health to HKD 60 from HKD 64 after it reported first-half 2023 revenue of CNY 27.11 billion, a 34% increase year on year but 3% lower than Refinitiv consensus. The company lowered its revenue growth guidance to 15% from 30% for 2023, which implies that second-half revenue growth should be flat year on year. JD Health had indicated in a May analyst call that second-half revenue was expected to slow down as a result of a higher base and softer demand, but we believe the new guidance was lower than expectations. JD Health cited macro concerns and lower demand after the pandemic for the reduced guidance. Categories unrelated to the pandemic are still positioned to grow about 30% year on year—but pandemic-related items such as masks, cold medicine, and cleansing supplies could see a 60%-70% decline in sales year on year due to lower demand as quarantine measures are relaxed.

We expect narrow-moat JD Health to maintain a market leading position for healthcare e-commerce in the near and medium term. It holds about 40% market share, similar to its main rival AliHealth, which makes this niche industry dominated by mostly two competitors. Its business model is similar to AliHealth except with one key difference in that it has greater coverage and better next-day or same-day delivery efficiency than its rival. It has cold-chain capabilities for 300 cities and can meet next-day deadlines for 80% of its orders. We believe this key differentiation will allow it to maintain a leading market share due to the importance of timeliness and quality of goods when it comes to receiving pharmaceutical products.

We expect narrow-moat JD Health to maintain a market leading position for healthcare e-commerce in the near and medium term. It holds about 40% market share, similar to its main rival AliHealth, which makes this niche industry dominated by mostly two competitors. Its business model is similar to AliHealth except with one key difference in that it has greater coverage and better next-day or same-day delivery efficiency than its rival. It has cold-chain capabilities for 300 cities and can meet next-day deadlines for 80% of its orders. We believe this key differentiation will allow it to maintain a leading market share due to the importance of timeliness and quality of goods when it comes to receiving pharmaceutical products.

We maintain our fair value estimate of HKD 64 after JD Health provided an update on its first-half results. It reported first-quarter revenue of CNY 13.95 billion, representing a 54% year-on-year increase, which implies that it's on pace to surpass our first-half revenue estimate of CNY 26.6 billion—a 31% year-on-year increase. The outperformance was attributed to a combination of greater demand due to the significant surge in positive COVID-19 cases, as well as panic buying stemming from the outbreak in the first quarter after China unexpectedly relaxed all quarantine measures. Despite the outperformance, management kept its 2023 guidance steady at a 30% year-on-year increase for the year. While we believe the outperformance is unlikely to recur, given that China has now reopened, the first-quarter’s results are encouraging and imply that long-term brand recognition and demand for the platform should remain intact. With JD Health's share price at HKD 52 as of the May 11 close—which is a 24% upside to our fair value estimate—we believe this represents an attractive risk/reward ratio, given its dominant market positioning in the industry.

We expect narrow-moat JD Health to maintain a market leading position for healthcare e-commerce in the near and medium term. It holds about 40% market share, similar to its main rival AliHealth, which makes this niche industry dominated by mostly two competitors. Its business model is similar to AliHealth except with one key difference in that it has greater coverage and better next-day or same-day delivery efficiency than its rival. It has cold-chain capabilities for 300 cities and can meet next-day deadlines for 80% of its orders. We believe this key differentiation will allow it to maintain a leading market share due to the importance of timeliness and quality of goods when it comes to receiving pharmaceutical products.

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.

We are raising our fair value estimate for JD Health to HKD 64 from HKD 59 after the company stated that it will likely reach the top end of its 2022 full-year guidance range of 38%-43% year-on-year revenue growth due to better-than-expected reopening measures. We are also increasing our outlook for 2023 and 2024 due to expectations that pending regulations regarding online drug sales may now have a minimal impact on JD Health’s growth, which lifts our fair value estimate, but leaves our long-term operating margin forecasts unchanged at 10%. Although we are increasing our valuation, we believe the shares are fairly priced as the improved outlook is likely reflected already, and considerable macroeconomic and policy risks remain. However, attractive buying opportunities could arise should prices pull back from current levels.

We expect narrow-moat JD Health to maintain a market leading position for healthcare e-commerce in the near and medium term. It holds about 40% market share, similar to its main rival AliHealth, which makes this niche industry dominated by mostly two competitors. Its business model is similar to AliHealth except with one key difference in that it has greater coverage and better next-day or same-day delivery efficiency than its rival. It has cold-chain capabilities for 300 cities and can meet next-day deadlines for 80% of its orders. We believe this key differentiation will allow it to maintain a leading market share due to the importance of timeliness and quality of goods when it comes to receiving pharmaceutical products.

We expect narrow-moat JD Health to maintain a market leading position for healthcare e-commerce in the near and medium term. It holds about 40% market share, similar to its main rival AliHealth, which makes this niche industry dominated by mostly two competitors. Its business model is similar to AliHealth except with one key difference in that it has greater coverage and better next-day or same-day delivery efficiency than its rival. It has cold-chain capabilities for 300 cities and can meet next-day deadlines for 80% of its orders. We believe this key differentiation will allow it to maintain a leading market share due to the importance of timeliness and quality of goods when it comes to receiving pharmaceutical products.

Pending legislation was released late on Sept. 1 that relates to the sale of medical products and drugs on e-commerce platforms such as JD Health and Alibaba Health. Under this latest draft of the legislation, there will be some restrictions to the types of drugs that can be sold on China’s healthcare e-commerce platforms, but none are material to JD Health or Alibaba Health’s overall businesses. We view this legislation as a positive for the two companies as it should mitigate regulatory risk for their long-term operations.

The company reported revenue of CNY 20.2 billion, a 48% increase year on year and 14% better than our CNY 17.7 billion estimate. We also estimate gross merchandise value grew 47% year on year. Better-than-expected net margin was due to the reduction in operating expenses from mostly sales and marketing as well as administrative costs. We expect positive net margin to trend slowly upward and in the medium term we expect operating expenses to account for 20% of sales and 25%-30% gross margin. JD Health optimised costs with more effort in first-half 2022, but we are expecting more sales and marketing costs in second-half 2022 to pave the way for growth and greater market share in 2023.

We expect narrow-moat JD Health to maintain a market leading position for healthcare e-commerce in the near and medium term. It holds about 40% market share, similar to its main rival AliHealth, which makes this niche industry dominated by mostly two competitors. Its business model is similar to AliHealth except with one key difference in that it has greater coverage and better next-day or same-day delivery efficiency than its rival. It has cold-chain capabilities for 300 cities and can meet next-day deadlines for 80% of its orders. We believe this key differentiation will allow it to maintain a leading market share due to the importance of timeliness and quality of goods when it comes to receiving pharmaceutical products.

On June 22, China’s National Radio and Television Administration and Ministry of Culture and Tourism released new regulations governing livestreaming, with guidelines that amount to a code of conduct for online livestreamers covering matters such as the qualifications required to livestream certain professional topics, for example medical and livestreamers’ tax liabilities. We believe there will be more specific responsibilities for internet audiovisual platforms, which could increase compliance costs. However, the regulations do not contain specific penalties if platforms are found to be negligent by the government, and we think performers face much greater risk. Article 15 and 16 of the regulations indicate the government will strengthen supervision and inspection as well as enforcement of rules for internet audiovisual platforms, agencies, and livestreaming hosts. If content and livestreamers violate these rules, platforms will need to deal with violations properly and quickly. Article 17 stipulates that internet performance, platforms, and agencies need to strictly adhere to statutory duties and obligations, enhance training and education, daily management, and guidance of standards for livestreamers. For example, internet hosts who commit serious or repetitive misconduct should be stopped and not allowed to conduct internet performance on another platform or use another account. We think that further regulations will be created if misconduct continues. At this stage, we expect the regulations will have an immaterial impact on the Chinese internet companies under our coverage. We maintain our fair value estimate, earnings estimates, moat and uncertainty ratings for Tencent Music, NetEase Cloud Music, Bilibili, Alibaba Health, JD Health, Alibaba, JD.com, and Pinduoduo.

On June 17, China’s Food and Drug Administration held a discussion on potential revisions to the “Regulation on the Implementation of the Drug Administration Law of the People’s Republic of China,” and one change contains unspecified language restricting third-party platforms from online sales of drugs. The stock decline on June 22 for JD Health and Alibaba Health, or AliHealth, is likely related to the potential regulation reported from new source, Sina Finance. However, we believe that concerns are likely overblown given that the language is still unclear whether and how this would impact their businesses. Furthermore, even if regulations were to directly affect the third-party platforms of the two companies, the impact to valuations would be limited given the proportion of third-party revenue on their platforms and that this would not affect the two companies’ self-operating businesses. Given the recent decline in their stock prices, we believe that the entry point looks attractive compared with our fair value estimates.

On May 31, 2022, China’s State Council released a set of official measures aimed at the recovery of the economy following recent lockdowns and headwinds from COVID-19. The specific implementation of these policies is left to be determined by local and regional governments, as well as State Council’s ministries and directly affiliated agencies. While the timing is still unclear, these measures are set to become law in the near term. These measures do not cause any material changes to our fair value estimates for now, but we want to highlight which internet names are included and assess the potential benefits in the long run.

We are initiating coverage on JD Health with a fair value estimate of HKD 59 on the back of its best-in-class logistics capabilities and leading market share in healthcare e-commerce in China. We view JD Health as an attractive differentiated company with a leading market share in a defensive niche e-commerce space that is currently undersaturated. The company could see 35% year-on-year revenue growth in 2022 as it ramps up its user base through traffic acquisition from its parent, JD.com. We believe that healthcare e-commerce in China is one of the few areas that could see above-average growth relative to China GDP in the medium term as medical expenditures become a greater percentage of consumer spending.

We expect narrow-moat JD Health to maintain a market leading position for healthcare e-commerce in the near and medium term. It holds about 40% market share, similar to its main rival AliHealth, which makes this niche industry dominated by mostly two competitors. Its business model is similar to AliHealth except with one key difference in that it has greater coverage and better next-day or same-day delivery efficiency than its rival. It has cold-chain capabilities for 300 cities and can meet next-day deadlines for 80% of its orders. We believe this key differentiation will allow it to maintain a leading market share due to the importance of timeliness and quality of goods when it comes to receiving pharmaceutical products.