JD Health Earnings: Cutting Fair Value by 7% on Macro Concerns, but Margin and Growth Remain Intact

We lower our fair value estimate for JD Health 06618 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.

The lower guidance caused shares to drop by 6% as of the close of the market on Aug 17. Despite lowering our fair value estimate slightly to reflect macro concerns, we believe that the pullback represents an attractive entry point and a 27% upside to our fair value estimate for JD Health given it has a near-duopoly positioning in China and remains one of two companies in China that is capable of delivering healthcare items on a mass scale.

We believe JD Health’s margin expansion story remains intact as operating margins increased by 320 basis points year on year to 3.5%, and we believe it remains on pace to match the long-term guidance of 8%-10%. The increase was driven by the acceleration of service products, including advertisement, which has a higher gross margin profile. JD Health expects its service business to grow at a faster pace than its direct sales business in the near term, which should continue its margin expansion. While the near-term slowdown is a slight concern, we believe that its long-term profitability remains a more important metric.