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Nearly 90% of its revenue depends on “selling drugs”. The valuation increase has brought “huge losses”. How does Big Health help Liu Qiangdong to rebuild JD?



Liu Qiangdong has recently become a well-deserved IPO harvester. In just half a month, two “unicorns” under JD.com, JD Digital and JD Health, have successively submitted prospectuses. On the evening of September 27th, JD.com Health, which is also known as a four-carriage with retail, logistics, and mathematics, delivered the form to Hong Kong. For a time, JD.com’s unlisted core assets were only the logistics business, and this business also reported IPO news at the beginning of the year.

According to the prospectus, JD Health is the first Internet healthcare company with annual revenue of 10 billion yuan. Compared with the “old rival” Ali 3.5 times the consecutive losses of JD.com’s GMV and Ali Health, it seems that JD.com has achieved a “turnover” in the field of health, not only has a larger business volume, but also continued to make profits during the reporting period.

The successive listings of JD.com and JD.com Health will also bring Liu Qiangdong’s worth two consecutive surges, and the listing of JD.com alone can increase his net worth by hundreds of billions. In the health field, he may not have the most value growth, but it is most likely the fastest. From the spin-off and independence in May 2019 to the submission of the prospectus, JD Health’s valuation has soared four times, and the growth rate is much higher than that of other JD subsidiaries.

However, the skyrocketing cannot cover up the problem, and the difficult to get rid of the “medical e-commerce” label has made Liu Qiangdong’s wish to “rebuild JD.com” with health is still in its infancy.

Earnings for three consecutive years, rising valuations brought “huge losses”?

The prospectus shows that from 2017 to the first half of 2020, JD Health’s total revenue was 5.6 billion yuan, 8.2 billion yuan, 10.8 billion yuan and 8.8 billion yuan, respectively. At the same time, net adjusted net profits were 210 million yuan, 250 million yuan, 340 million yuan and 370 million yuan respectively. Although the profit is not much, it is obviously a good result when the main competitors are losing money.

Nearly 90% of its revenue depends on "selling drugs". The valuation increase has brought "huge losses". How does Big Health help Liu Qiangdong to rebuild JD? 1JD Health Income Statement

Under the boom, an unusual data is worth noting. In the financial data for 2019, JD Health has a change in the fair value of convertible preferred stocks, which directly led to a decrease in net profit of 1.26 billion yuan. Similarly, in the financial data for the first half of 2020, there was also a convertible value of 5.7 billion. Changes in the fair value of preferred shares.

From a financial point of view, changes in the fair value of convertible preferred stocks are actually non-cash items, that is, this kind of income has only accounting significance and cannot bring actual cash into the account.

Before the company goes public, most VC (venture capital) investments are made in the form of preferred stocks or warrants, that is, a sum of money is first invested in the company, and it is agreed that preferred stocks or warrants can be converted into the company at a certain price in the future Because of the right to subscribe for stocks, these preferred stocks or warrants also have a certain value in themselves, and their value changes with the company’s valuation. Therefore, from the perspective of VC, the higher the company’s valuation, the higher the value of preferred stocks and warrants, and vice versa.

From the perspective of the company, according to accounting standards, such changes in value will be included in liabilities. In other words, when the fair value increases, it will cause a loss in the accounting period, but when the fair value decreases, it will be counted as a gain.

Similar situations have also appeared in the financial statements of many Internet companies, such as Tudou before the merger with Youku. Online video sites are still burning money and losing money, but Tudou.com has already announced “profit” as early as the third quarter of 2011, precisely because the fair value changes of about 75 million yuan were included in the current period.

Returning to JD Health itself, the fair value changes of convertible preferred shares in 2019 and the first half of 2020 have brought about 1.26 billion and 5.7 billion “losses” respectively, which is the result of rising valuations.

From the perspective of capital operation, JD Health received more than US$1 billion in Series A financing in May 2019, and was then split and independent. In just one year and three months later, in August 2020, JD Health announced that it had obtained Hillhouse Capital raised US$830 million in Series B financing, with a post-investment valuation of US$30 billion, which is even slightly higher than that of JD Digital.

“Supplying medicine with medicine”, nearly 90% of income depends on self-operated “selling medicine”

“Taking medicine to support doctors” has always been a common problem in the medical system for a long time, and this situation can also be copied to the Internet medical model. Most of the existing Internet medical platforms prefer pharmaceutical retail as an entry point, and it is difficult for JD Health to get rid of the label of “medical e-commerce”.

The prospectus shows that the majority of JD Health’s revenue comes from the sale of medicines and health products to users. From 2017 to the first half of 2020, product sales have accounted for nearly 90% of total revenue, reaching 88.4%, 88.8%, 87.0% and 87.6% respectively. Among them, the overall business gross profit margin has been maintained at about 25%.

JD Health is mainly divided into two parts in its business model. One is retail pharmacies (including self-operated and third-party), and the other is online medical services. In addition, the provision of smart medical and health solutions such as order management and customer management for offline stores is also one of the sources of income, but only a very small proportion.

Nearly 90% of its revenue depends on "selling drugs". The valuation increase has brought "huge losses". How does Big Health help Liu Qiangdong to rebuild JD? 2JD’s revenue composition

In the retail pharmacy business, JD mainly adopts a combination of three modes: self-operated, online platform and omni-channel layout. Among them, JD Pharmacy carries the self-operated business, which can mobilize 11 drug warehouses and 230 other warehouses across the country. Self-operated business is the core business of JD Digits. This can be seen from the proportion of employees: Among the 1,411 employees of JD Health, only purchase has reached 951, accounting for about 2/3. It is worth noting that JD Health also operates offline pharmacies, but specific details were not disclosed in the prospectus.

At the same time, compared with JD.com’s retail business performance rate has entered the “6” era, JD Health’s performance expenditure is still high. From 2017 to the first half of 2020, JD Health’s compliance expenditure accounted for 11.5%, 11.4%, 10.8% and 10.4% of total revenue respectively.

Nearly 90% of its revenue depends on "selling drugs". The valuation increase has brought "huge losses". How does Big Health help Liu Qiangdong to rebuild JD? 3JD Health’s performance expenses

At the same time, under the self-operated model, inventory turnover also needs to be considered an important indicator. The prospectus shows that JD Health’s inventory has increased significantly recently, from 884 million yuan at the end of 2017 to approximately 2 billion yuan at the end of June 2020. However, the inventory turnover days have also dropped from 61.8 days in 2017 to 45.0 days in the first half of 2020. However, there is still a big gap compared to the 34.8 days of JD’s retail business.

For the other two models, under the online platform model, there are more than 9,000 third-party merchants stationed across the country, mainly to supplement long-tail products that cannot be provided under the self-operated model, and the merchants are also responsible for the distribution. The omni-channel layout is mainly to meet the urgent needs of users for medication. Offline pharmacies provide inventory, and fulfillment and delivery are completed by JD.com. This model currently covers more than 200 cities. Including same day delivery, next day delivery, 30 minutes up to 7*24 fast delivery, etc.

Under the three models, the user scale of the platform is also expanding. In the first half of 2017-2020, the annual active users increased from 43.9 million to 72.5 million.

In addition to drug retailing, JD Health is also working hard on online consultation. In fact, as early as 2017, JD Health launched an online consultation service. In 2018, Yinchuan Jingdong Internet Hospital obtained a medical institution practice license and can write prescriptions to users of online consultation and prescription renewal services. In the first half of 2020, JD Health’s average daily online consultation volume reached about 90,000, which is nearly 6 times that of the same period in 2019. As of September 20, 2020, there are more than 65,000 self-owned and external doctors on the entire platform, and 16 specialist centers have been established in cooperation with well-known experts. A month ago, JD Health also launched a family doctor service called “Jingdong Family Doctor”.

Benchmarking Ali’s health, difficult to get rid of the e-commerce label

Just two months after JD Health Hillhouse Capital’s $1 billion Series A financing, Xin Lijun, then general manager of JD’s open platform and head of the life service business group, was appointed as JD’s CEO.

A well-known process story is that before officially becoming the CEO of JD Health, Xin Lijun was dragged to the suburbs of Beijing by his boss Liu Qiangdong to chat once. Liu Qiangdong made two requirements: one is to accumulate a blessing for JD’s 180,000 brothers and take care of their health; the other is to ignore investment in the initial stage.

However, judging from the financial data of JD Health, Xin Lijun has not taken the path of playing high and ignoring investment regardless of whether it was in the early stage of the project or is now on the verge of going public.

“Although JD.com started late, it doesn’t mean it’s slow to do it. If it’s done late, it’s better to see the pattern and pain points of the market.” In Xin Lijun’s view, JD.com Health’s future development direction will focus on health management, while China has so far There has not yet been a health management company with a market capitalization of hundreds of billions in the United States and Europe.

With the listing of JD Health in Hong Kong, the big health track has gradually become crowded.

Since the beginning of this year, with the outbreak of the new crown pneumonia epidemic, the health industry has received unprecedented attention, and the model of Internet medical treatment has also been re-examined. The stock price of Ali Health, which has been sluggish for a long time, rose one after another, from 9 Hong Kong dollars at the beginning of the year to 23.3 Hong Kong dollars, and its market value exceeded 40 billion US dollars. As of the closing of Hong Kong stocks on the last trading day, Ali Health’s stock price reached 18.4 Hong Kong dollars per share, with a total market value of around 250 billion Hong Kong dollars.

In August this year, Alibaba Health raised HK$10 billion in public funds for the first time. After “preparing enough food and grass”, the AliHealth APP officially changed its name to Yilu, focusing on online diagnosis and treatment in the next step. Since it acquired CITIC 21st Century and changed its name to Ali Health 6 years ago, it has begun to undertake the implementation of Health in the “Double H (Happiness & Health) strategy” proposed by Jack Ma. But for a long time, Happiness & Health’s performance of the “twins” has not been satisfactory. It has even become the edge of the entire Ali economy, and it has only recently improved slightly.

But similar to JD Health, Ali Health cannot get rid of the brand of e-commerce. The financial report shows that in the 2020 fiscal year, Ali Health’s revenue from the pharmaceutical e-commerce platform and pharmaceutical self-operated business were 1.17 billion yuan and 8.134 billion yuan, an increase of 69.6% and 92.4% year-on-year, accounting for 97% of the total revenue.

Specifically, the Tmall medical e-commerce platform operated by Alibaba Health has generated more than 83.5 billion GMV, and annual active consumers have exceeded 190 million, a year-on-year increase of 46.2%; online self-operated stores (Ali Health Pharmacy and Ali Health’s overseas flagship Store) annual active consumers exceeded 48 million, a year-on-year increase of 77.8%. If the e-commerce business is merged, it is not difficult for us to find that e-commerce is almost the entire source of Ali Health’s revenue, accounting for 99%, and there are few changes over the years.

At the same time, there are not only Ali and JD.com in the pharmaceutical retail field, but also Meituan and Dingdang Kuaiyao are growing rapidly. In the field of online diagnosis and treatment that the giants are watching closely, many vertical start-ups have already appeared, either stepping up financing or relying on “big trees.” For example, Sogou led the investment of Doctor Chunyu, and WeDoctor announced the completion of US$500 million Pre-IPO financing. Similarly, there is Ping An Technology in the entire field of the medical track. In addition to its flagship product, Ping An Good Doctor, it also cuts from multiple angles such as insurance and payment.

According to Frost Sullivan’s report, China’s expenditure on medicine and health reached 6.5 trillion yuan in 2019, and is expected to reach 7.2 trillion yuan in 2020. Xin Lijun also said that the entire health industry market will exceed 10 trillion.

Liu Qiangdong once said: “If the field of health is done well, we can create another JD.” Ma Yun also stated that “only the big health industry can surpass Ali in the next ten years.” It is not difficult to see from the words of the two business leaders. Their expectations for the health industry. But at this stage, the listing of JD Health is only the first step.