JD Health (06618.HK), the leader in online pharmaceutical retailing, was listed on the Hong Kong stock market at the end of 2020, and its market value once exceeded 359.6 billion Hong Kong dollars, while its industry valuation before listing was only 200 billion Hong Kong dollars. How to look at the long-term growth logic of online pharmacies? What are the key operating data of the industry?
A detailed comparison of the two leading companies, Ali Health (00241.HK) and JD Health, can help investors clarify their thinking.
First look at the income structure: JD Health, self-operated medicine accounted for 87.60%, pharmaceutical e-commerce platform accounted for 6.80%, medical health services and others accounted for 5.60%; Alibaba Health, medicine self-operated accounted for 84.28%, pharmaceutical e-commerce Platform accounted for 12.92%, and medical and health services and others accounted for 2.8%. On the whole, the main source of income is self-operated medicine.
In terms of scale, we will focus on two dimensions of data, one is total revenue, and the other is GMV (total transaction value) data on online platforms. In terms of income volume, JD Health is greater than Ali Health. According to the GMV status of the online platform, Ali’s health is greater than that of JD.com. AliHealth’s GMV is about twice that of JD’s health, but its income is smaller. This is because of its GMV, e-commerce platforms have a higher contribution, while JD’s GMV has a higher proportion of self-operated. Here, it can be seen from the income structure that AliHealth’s e-commerce platform revenue accounts for 12.92%, which is greater than JD Health’s 6.8%.
Review the income growth of the two companies in the past three years. Due to historical acquisitions, Alibaba Health’s revenue growth data fluctuates greatly. The 2020 data is relatively meaningful for reference, and the current growth rate is 75%. In 2016 and 2017, Ali Health acquired Guangzhou Five Thousand Years Pharmaceutical Chain Company (now renamed Ali Health Pharmacy) and Blue Hat health food business to enter the field of medical e-commerce. The layout of Alibaba and JD.com in the pharmacy field has gradually penetrated from online to offline. This trend can be compared with the situation of retailers. Once the cost, quality, and supply chain reach a certain node, the industry logic may be subverted. The growth rate of JD Health in the past three years has also returned from high growth to the current level of 75.95%. Its pharmaceutical e-commerce path is similar to that of Ali Health. It also first acquired Qingdao Anjitang Pharmacy (now renamed Jingdong Pharmacy), followed by In 2017, the B2B pharmaceutical platform (Yaojingcai) business was launched. Since the 2018 interim report, it can be found that JD Health and Ali Health have gradually approached their income growth rates (about 75%).
Let’s look at the net profit situation again. Ali Health has just made a profit in the first half of 2020, while JD Health is still losing money. So, what is the profitability of the pharmaceutical e-commerce industry?
First of all, compared with offline pharmacies, the gross profit margin of the two online pharmacies is 10% lower than that of the offline pharmacies. The gross profit margin of online pharmacies is around 25%, while that of offline pharmacies is around 35%. This may have something to do with the promotion behavior of online pharmacies and the cheaper selling of medicines. Compared with the specific products, the price of Weikangling capsules from Sunflower Pharmaceutical is 37.4 per serving in offline pharmacies, and the price of Ali Health Double 12 is 28.40 yuan / copy. This price difference, combined with the impact of health incidents, may also be a major reason why the growth rate of the two leading online pharmacies was significantly higher than that of the offline pharmacy leading in the first half of 2020.
However, low gross profit is not the reason for the loss of online pharmacies. The profitability of JD Health and Ali Health is actually not bad, but their net profit is greatly affected by equity incentive expenses and changes in the fair value of financial assets.
It can be seen that in the 2020 mid-year report, the net profits of JD Health and Ali Health are respectively -5.359 billion yuan and 283 million yuan, but if the equity incentive expenses and changes in the fair value of financial assets are excluded, the adjusted net profits are 371 million yuan respectively. Yuan, 436 million yuan. On the surface, it looks like a loss, but in fact, they have already achieved profits.
Breaking down the turnover rate data in shareholder returns, it can be found that in online pharmacies, the turnover of the two giants, Ali Health and JD Health, is faster than that of offline pharmacies.
In addition, through the indicator of accounts payable, it can be found that Alibaba Health’s right to speak upstream is at a relatively leading level in the industry, while JD Health is relatively weak.
So, what should be the reasonable net profit level of the pharmaceutical e-commerce business? In addition, take a look at JD Health, which has relatively stable profits. What are the places that burn money in the business of medical e-commerce?
The first step, self-operated business purchases, the purchase of drugs burned 74.7%; the second step, warehousing, distribution, burned 10.4% (the Hong Kong stock statement is listed as the performance cost); the third step, marketing promotion, burned 6.2%; fourth Steps, R&D and administrative expenses, burned 4.2%. The remaining 4% is the net profit.
Compare the profit statement structure of online pharmacies and offline pharmacies. It can be found that although the gross profit margin of online pharmacies is 10% lower, the sales expense ratio has also been compressed by about 8%. On the one hand, its warehousing and logistics costs are lower, and on the other hand, it does not need to pay offline store rent. Therefore, the difference in net interest rate between online and offline business models is actually not big after one trades.
Those who get prescription drugs get the world
The medicines peddled on the pharmaceutical e-commerce platform include two aspects, one is medicines, and the other is health care products. For example, in the self-operated business, Alibaba Health’s pharmaceuticals accounted for 61.7%, health care products, medical equipment, etc. accounted for 38.30%, while JD Health’s pharmaceuticals accounted for 27%, and health care products and other products accounted for 73%. . It can be seen that although the growth rate is similar, there is a big difference between the two companies in terms of product structure. Ali Health focuses on drug sales, while JD Health focuses on health products.
Therefore, when analyzing the growth rate of the industry, we will separate the two categories of medicines and health products to look at the scale and growth of their respective industries.
Let’s look at the pharmaceutical industry first. Regarding the growth logic of this industry, the formula is: pharmaceutical e-commerce industry growth rate = total drug sales growth rate * e-commerce penetration rate growth rate, and drug sales growth rate = (1 + aging Chemical contribution)*(1+CPI contribution). Among them, the center of the growth rate of pharmaceutical sales is 3.56%, which is relatively slow; the growth rate of the pharmaceutical e-commerce industry is at the core of the factor of penetration. The driving force for the increase in penetration rate is the channel opportunities for the out-of-hospital market brought about by the outflow of prescription drugs (currently in progress), and the second is the opening of medical insurance payment on the online e-commerce platform (currently not released).
With reference to previously calculated data, the market size of China’s pharmaceutical e-commerce in 2018 was 97.8 billion yuan, the market size of the entire pharmaceutical circulation industry was 2,158.6 billion yuan, and the penetration rate of pharmaceutical e-commerce channels was 4.53%.
Under optimistic assumptions, with the subsequent outflow of electronic prescriptions and the liberalization of online medical insurance payments, the penetration rate of pharmaceutical e-commerce can reach 40% of the online penetration rate of mature categories in the e-commerce industry (such as home appliances). In this scenario, the long-term growth center of the pharmaceutical e-commerce industry is roughly 25%. Taking into account the special circumstances of the pharmaceutical industry, this process, if it goes smoothly, will take at least 10 years.
Looking at the health care product e-commerce industry again, the growth formula can be expressed as follows: growth rate of the health care product industry = (1 + growth rate of per capita health care product consumption) * (1 + growth rate of online penetration rate).
Let’s look at the factor of per capita consumption of health products. According to NBJ magazine, as of 2017, the total retail sales of the global nutraceutical industry was 128 billion U.S. dollars, of which the main market is in the United States, followed by China. In 2017, the total retail sales of China’s health care products industry was US$18.8 billion, or approximately RMB 131.5 billion. The compound growth rate of the healthcare products industry in the Chinese market from 2014 to 2017 was roughly 11.5%. From the perspective of per capita consumption of health products, China is at the level of 14.8 US dollars per person, while the US and Japan are respectively 81.8 US dollars per person and 123.4 US dollars per person. According to China’s per capita income level, it is now 25% of Japan’s and 17% of the United States. In terms of benchmarking, China’s reasonable per capita consumption level of health care products should roughly be between US$20 and US$21. If this level can be reached in the next five years, the growth center of the health care product industry will be 7.25%.
Let’s look at the factor of online penetration. From the perspective of the channel, the number one channel in the health care product industry is direct sales, accounting for 44%, and the second largest channel is online, accounting for 22%. Taking into account that health care products are more standardized and brand-driven. Therefore, for the future online penetration rate of health products, refer to the 40% online penetration rate of mature categories in the e-commerce field (such as home appliances) as a long-term goal.
Table: Comparison of gross profit margin and sales expense ratio between Ali Health and JD Health
Data source: Tajian Research
Under the superposition of the above two driving factors, the long-term growth center of the online channels of health products is about 13.86%.
If you look at medicines and health products together, you can find that the main driving force for the growth of both comes from the increase in online penetration, but the growth rate of pharmaceutical e-commerce will be faster than that of health product e-commerce.
It should be noted that the annual sales of the health care products industry is about 150 billion yuan, while the pharmaceutical retail industry is about 2.1 trillion yuan, which is completely different. Moreover, the online penetration rate of health care product retail is currently high, at 22%, while the online penetration rate of pharmaceutical retail is still low, less than 5%. This shows that from a long-term perspective, for pharmaceutical e-commerce platforms, the business focus should still be on pharmaceutical retail, and this market has a higher ceiling. In pharmaceutical retail, prescription drugs account for more than 60%.
In terms of industry high-frequency data, we focus on tracking three-month-frequency indicators, namely: the monthly sales of Chinese and Western medicines, the sales of online prescription drugs, and the sales of online OTC drugs and medical devices. From this, we can observe the penetration rate of online prescription drugs and the current prosperity of the industry. Currently, the industry is booming, and online prescription drug sales are growing very fast, with a monthly growth rate as high as 400% year-on-year, but the penetration rate is still very low. In terms of total volume, prescription drugs accounted for approximately 60% of the total retail sales of pharmaceuticals. In October 2020, prescription drugs sold online accounted for only 1.62% of the total retail sales of pharmaceuticals.
Note that in December 2019, online sales of prescription drugs soared because of some changes in policies. The newly revised “Drug Administration Law” began to be implemented on December 1, 2019, and the requirement that “drug marketing license holders and drug dealers are not allowed to directly sell prescription drugs through third-party platforms for drug online sales” has been deleted. In the future, policy changes will become a key variable for follow-up industry tracking.
Comparing the layout of online pharmacies in the field of prescription drugs, we can have a clearer understanding of their respective competitive advantages. The key business data is divided into two parts: one is the proportion of drug revenue, the number of contracted doctors, and the number of contracted hospitals; the second is the number of active users, GMV, single-user GMV, and conversion rate.
In terms of product structure, each company has not disclosed in detail the proportion of prescription and non-prescription drugs in drug retail, but companies with relatively small proportions of health care products will obviously be relatively advanced in this field. From the perspective of the proportion of drugs, 61.7% of Ali Health’s self-operated income comes from drug sales, while JD Health only has 27% (more health products)
Different from ordinary retail products, medicines are more dependent on doctors and consultations. The more doctors on the platform, the more e-prescriptions that can be issued in the future, and the more e-prescription drugs that the platform can convert. Judging from the data in the interim report, in terms of the amount of doctors on the platform, Ali Health is greater than JD Health, and in terms of the growth rate of doctor reserves, JD Health is greater than Ali Health. This means that JD Health is making great efforts here. It should be noted that JD Health disclosed that on September 30, 2020, the platform had 171 own doctors, 68,549 external doctors, and a total of 68,720 doctors. It can be seen that from June 30 to September 30, in just three months, the number of external doctors on the JD platform nearly doubled.
The more contracted hospitals, the greater the probability of diversion through hospitals in the future. If diversion can be directly from hospital channels to online platforms, the advantage is obviously greater. JD Health did not disclose the number of contracted hospitals. However, some time ago, its large-scale investment in Weining Health and the layout of the hospital information system should be for the long-term layout considerations here. The advantage of Ali Health lies in the payment level. As of September 30, 2020, Alipay has signed more than 35,000 medical institutions, of which the number of secondary and tertiary hospitals exceeds 4,000, and more than 700 tertiary hospitals are connected to medical insurance payment. At present, according to the disclosure of the National Medical Information Alliance, there are 773 tertiary hospitals across the country, that is to say, Ali has basically covered the tertiary hospitals across the country. In the long run, this is an important advantage.
From a long-term perspective, for the pharmaceutical e-commerce platform, the focus should still be on pharmaceutical retailing, and this market has a higher ceiling.
In summary, in the field of prescription drugs, Ali Health has a certain first-mover advantage in online medical insurance payments and contracted hospitals; while JD Health has made breakthroughs in the field of electronic prescriptions by vigorously deploying the number of doctors, and also through hospital informatization Come to the layout of the hospital level.
So, what is the overall operating situation of the two companies? Focus on comparing the four basic data of e-commerce companies: the number of active consumers, GMV, conversion rate, and GMV per capita.
In terms of the number of active users, the number of active users of Alibaba Health is 3.4 times that of JD Health, and the same is true in terms of the growth rate of active users. From the point of view of the absolute value of GMV, Ali’s health is greater than JD’s health, and from the perspective of GMV growth rate, JD’s health is relatively fast, followed by Ali’s health. From the perspective of single-user creation of GMV, JD Health is greater than Ali Health, which may be due to the higher proportion of JD Health’s sales of health care products. In terms of the price of a single product, health care products are generally higher than medicines.
From the perspective of conversion rate, JD Health’s conversion rate is significantly higher than Ali Health, which is related to its greater focus on self-operated business. However, although the conversion rate of Alibaba Health is not high, it has a trend of increasing year by year. Due to the missing data of the historical self-employment income of Alibaba Health, follow-up research is needed to solve it.
From the perspective of single user contribution income, JD Health is better than Ali Health. Alibaba Health’s latest interim report shows that the decline in single user contribution income may be due to the excessive growth of the number of users (Ali users growth rate 56.25%, Jingdong users growth rate 35.51%) relevant.
In summary, Alibaba Health, due to its self-operated + platform development, is far ahead in the number of users and GMV volume. At present, its conversion rate is slightly lower, but it has been increasing year by year, and the revenue contributed by a single user is at a low level in the industry. This is due to the fact that its user growth rate and user volume are in a leading position in the industry. In the future, we need to pay attention to the changes in its user income, whether it can continue to increase the conversion rate and single user value. JD Health, which is mainly self-operated, is more dominant in conversion rate. Starting from 2019, JD Health has performed better in terms of GMV growth rate and single-user GMV, and its strength cannot be underestimated.