JD Health International Inc. (6618) Earnings Call Transcript

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the JD Health International 2026 Interim Results Conference Call. [Operator Instructions] Please note that both management's presentation and the Q&A session will be conducted in Mandrin simultaneous English interpretation will be provided by a third-party interpreter throughout the call via the English channel, which will remain in listen-only mode for the duration of the call. I will now turn the call over to today's host. Please go ahead.

Thank you, operator. Good day, ladies and gentlemen. Welcome to our 2026 interim conference call. Joining us today are JD Health's Executive Director and CEO; Mr. Cao Dong; and CFO, Ms. Deng Hui. Ms. Deng will first walk us through the financial performance for the period, followed by a Q&A session. Mr. Dong will then deliver closing remarks. Before we start, we would like to remind you that today's discussion may contain forward-looking statements, which involve a number of risks and uncertainties. Actual results may differ materially from those mentioned today. The company does not undertake any obligation to update any forward-looking information, except as required by law. During today's call, management will also refer to certain non-IFRS financial measures for comparison purposes only. For the reconciliation between IFRS and non-IFRS financial results, please refer to the interim results announcement for the 6 months ended June 30, 2026 is issued today. Now I'd like to turn the call over to Ms. Deng Hui. Please go ahead.

Hello, everyone. This is Deng Hui, CFO of JD Health. Thank you for joining our earnings call today. In the first half of 2026, China continuing to advance the quality development of the health care industry. Our total revenue reached RMB 40.9 billion. Our non-IFRS operating profit was -- income was [ RMB 3.5 billion ] up 40.3% year-over-year. Notably, non-IFRS operating margin expanded by 1.5 percentage points to 8.5%, marking 9 consecutive quarters of the year-over-year. Product revenue increased 15.6% year-over-year, reaching RMB 33.9 billion in the first half of the year with the core [ molecule ] categories maintaining industry-leading growth in pharmacy on top of the faster Q1 growth, we also maintained faster growth in dermatology, oncology, endocrinology, cardiovascular health and [ metabolical ] health. We have leveraged our omnichannel networks and professional forms of operations. We have launched the 65 new drugs on our platform in the period. So as the first go-to option has deeply been embedded in people's mind share. In supplements, we have been focused on branding coupled with our compliant promotional efforts also competitive advantages. We have created a certain growth runway in medical devices based on our user insights and also direct supply chain, we have customized a few new customer devices and also AI-powered services in at home health management. Our service revenue in this first half of the year was RMB 7 billion with the share of the total revenue continues to rise, all user needs continue to evolve. We haven't provided a highly efficient digital marketing tool the number of advertising merchants grow over 20% year-over-year. We also deepened partnerships with Novo Nordisk, Innovent Biologics, CR and Organon. Innovative collaborations in areas as new drug launches, academic and marketing, intelligent, patient management services. We'll also continue to expand a new health care service offerings and deepen the integration of online and offline operations as of the end of June, JD Pharmacy had expanded suppressant to more than 450 stores across 10 cities nationwide, working in tandem with the JD Instant Delivery services. We also diversify our payment channels. We have extended that medical insurance payment services to 11 additional cities bring the total to 40 cities. In offline scenarios, we continue to broaden our health care offerings, in Beijing, we actually opened our first integrated health care center, integrating fiscal examination, dental care and medical services also expanded home care and at home rapidly testing. This is further strengthening our end-to-end consultation examination guidances and pharmacal services ecosystem. We also focus on enhancing operational efficiency through a more refining management practices. Our gross profit was RMB 10.6 billion for the period. Gross margin improved 0.9% year-over-year to 26.1%, marking 9 consecutive quarters of the year-over-year. Procurement cost optimization was constantly increasing. Non-IFS our fulfillment expense ratio was 10%, flat with the same period last year. We have been fulfilling -- making user experience. So we increased the fulfillment costs. However, the economies of scale has been increasing, has been largely offset the social incremental costs and fulfillment. In first half of 2026, the non-IFRS marketing expense ratio improved by 0.5 percentage points year-over-year to 4.6%, mainly attributed to more targeted marketing strategies and enhanced spending efficiency. Non-IFRS R&D expense ratio was up 0.2%, now at 2.3%, was reflecting our average investment in AI. We are iterating our Qianxun functionality. Also, we are introducing its application across different scenarios and focusing on user experience. The AI agent, Dr. Da Wei continued to gain traction. Its user base has increased by 4x, driving the higher product purchase conversion. Also the JINGDONG Jingyi for doctors has been fully integrated in the JD Health online hospital and embedded in doctors' online clinical workflow supporting decision-making and improving efficiency. Non-IFRS management improved -- is around 0.7%. Operating efficiency also is leading in the industry. In the first half of non-authorized operating income grew 40.3% in the year to RMB 3.5 billion in the first half of 2026. So the interest or finance income was around [ RMB 840 million ]. That was mainly due to the fluctuations in the fair value changes in the wealth management products. Non-IFRS net margin was up 8.5% at around RMB 3.9 billion. The net cash generated from operating activities was RMB 4.46 billion. As of June 30, cash and cash equivalents, restricted cash term deposits with management products totaled RMB 71.5 billion, an increase of RMB 2 billion from the end of 2025. We have repurchased shares worth HKD 840 million. We have canceled all of them. thanks to the continuous rise in profit and also robust cash position will continue executing our share repurchase program. In summary, JD Health deliver high-quality growth with the study enhancements in operating efficiency and profitability. Looking ahead to the next year second half, we are able to maintain and confident to maintain better than industry growth further solidify our position as the largest online pharmacy retail platform. And also, we'll continue to strengthen our AI power supply capabilities and maintain disclaim the investments in AI. And we -- we look forward to return the benefits for our shareholders. And that concludes my operating remarks. We are now open for questions.

[Operator Instructions] The first question comes from BofA, Miranda.

I was wondering the growth trends for the 3 key categories, some short-term and near-term factors affecting the growth? And also in Q2, we maintained an accelerated growth in pharmaceutical product revenue, I was wondering what are the key drivers behind the rapid growth? And also, what will be the outlook for the second half of the year. For non-pharmaceutical product revenue, the growth has slowed down slightly in the first half of the year. What are the reasons behind that? And also what's the outlook for that? Last but not least, on the policy front the regulation on nutrition and deployments, what kind of trends are we seeing?

Thank you, Miranda. I am Cao Dong. To answer your questions, which are your key concerns. First, let's talk about pharmaceutical product revenue. Indeed, the growth is aligned with our expectations. And let me break you down in terms of the logic behind that. So I think there is a prerequisite, selling pharmaceutical product or medication is not an easy feat, far more challenging. I mean, to do it well, there are few things that we need to do well. Number one, we need to have the strong supply chain capabilities. That means your category covering has to be most up-to-date and comprehensive and they have to be tenured and with better prices. I mean to achieve that, it takes years of efforts. So that's -- it's reflected in the supply chain abilities. So you have to be able to offer the most up-to-date product offerings with the most reasonable prices, that can only be achieved through robust supply chain capabilities. Secondly, you have to prove a strong fulfillment capability. So that means you're nationwide network has to be complete I mean, covering a majority of the regions in China, particularly in those remote and also less developed regions. So we make -- so there are still excess issues that we need to address, I mean, in terms of this market. Thirdly, the company has to have a great mind share. It's -- I mean, I've been talking about both on the C side and B side. We can sell our medications to remote areas. For example, like I said, we are even making our medicine accessible, available to prisoners. I mean they need medications, and we are able to make it happen. So that is an example that shows you that JD Health is mind share. We are having a very good performance in both the 2B and 2C front. And number four, we have to have a well-established medical or health care service capabilities, leveraging AI, we can better educate our patients. I mean, we have to equip that with the medicine retail. We need to have a matching service so as to reduce the barriers to sell the drugs. Number five, we need to be regulatory [ compliant ]. We have to be disciplined looking over the long term. You need to be compliant to the regulations, understanding the logic, making contributions to the relators pushing the industry to grow healthily. This takes a lot of effort. So these 5 factors that I've mentioned -- I mean, are areas where we are trying to do the best. Like I said, I mean, traffic alone won't come the deal. I mean it takes decades of efforts to invest to accumulate. However, once you are able to possess or build those advantages, they can form a very competitive moat for a company. So that's why we are able to lead the market in our pharmaceutical or medication sales. And we have been continuing to solidify our efforts in these -- from these regards. And from the regulations perspective, there will be some short-term fluctuations headwind. But over the long run, we are very bullish. So for us, who has a robust supply chain and a strong reputation, it positions us in a very good position to go the long run. I mean if you look at the regulation landscape, I mean, for JD Health -- I mean this has been an industry that has been regulated heavily by the policies or regulators. There have been constant corrections. And we have been a compliant player throughout. So it's -- regulation is here to stay for the long run. So medium to long run, I mean it's going to benefit us as a company. So that's my answer on the medications sales. Now moving on to nutrition and supplements. Yes, short-term wise, we are seeing some headwinds it's performing less than we have expected. But again, we have to look at the long run, we are gaining this share in nutrition and supplement market. So some of the impacts that we see, first is a fake overseas brands, which has been reported by CCTV and some other programs. And second, the clear defined categories, and there has been some regulatory efforts going on, but it favors us. Over the past few decades, I mean, looking at how the market grow, we are seeing that the marketing getting more increasingly regulated. I mean, this is a process where the true, genuine competitive companies will stand out. So there is going to be an increasingly more domestic substitution. So some of the domestic players would like to leverage the reputation of an overseas brand, and they are conducting fraudulent sales, I mean, towards the senior cities. And this is necessary for the regulators to come in and crack down on such practices. And for us, I mean, we should have a healthy market where the market favors the healthy and competitive players. So we are seeing the same landscape or same situation for nutrition and supplement. And we have to build our fulfillment capabilities, supply chain capabilities for JD Health and we have a strong reputation and we got the medical and health care service capabilities as well as the compliance. So with a better user experience, we can gain further market share in over the long run we're going to benefit from that regulation. And also, like I said, regulation is here to stay for the long run. If you look at the past few decades, it has been a consistent regulation, pushing the industry towards a more healthier trajectory. So this is an opportunity to have all the players to pursue a more compliant growth. And we welcome such kind of policies which will lead in the industry towards more healthy trajectory. And we definitely expect the performance to improve from the first half of the year. We also expect more visibility into the regulations so that everyone is aware or clear what are those that's going to be put on the black list? And what are the list of products that can be developed from the domestic substitution perspective. Outlook wise, we are definitely expecting slower growth in the second half of the year. I will definitely talk about AI, where we would like to elaborate more. We definitely have a lot of expectations. For now, it's performing relatively weak. Medical equipment has contributed the most. I mean in the past, if you followed us long enough. However, we are seeing that the other segments are growing faster slightly than medical equipment. But nevertheless, medical equipment is still a very promising sector. Even the aging society and also the nursing requirements, this is definitely a segment where we can onboard more merchants introduce more product offerings and also they are getting increasingly more home-oriented smaller size oriented. But over the long run, we have confidence in the outlook for medical equipment. So that's an overall -- that's an overview for these 3 categories. Also I touched briefly on regulations. Hopefully, that answers your question.

Your next question comes from Henry from UBS.

I am Henry from UBS. I got 2 questions. Number one, in the first half, the adjusted operating profit -- we're seeing better growth. What are the key drivers behind that? And what's the profitability outlook for the second half and over the longer term? Second question is on the repurchase. And also an update on the company's repurchase program.

Thank you, Henry. We have been maintaining high-quality growth our revenue has been leading the industry. Also our gross profit and also operating expense ratio has been coming down. Overall revenue is growing faster in profit over the past 3 years. It's actually maintained a 30% CAGR growth. And looking ahead, we are confident in sustaining the growth momentum. At the moment, there's a still great potential for us to improve the gross margin for high frequent products, there's -- it comes with -- it's a low-margin product. And for low frequent purchases, it's a high-margin business. So we have to balance that. So logic-wise, it's -- I mean, it makes sense. For the health care sector, which needs a lot of efforts and care, I think there has been a significant demand for this sector. And we have been exploring how we can scale up the services in medical care, which will increase the gross margin. And also the economies of scale is certain, as you can see that the society is aging. For us, if we were able to provide patients and partners with a certain value, that's going to solidify our leading position and also translated into our economies. You can see that the gross profit of various segments have been improving. So overall, we are confident in maintaining the momentum and achieving a high single-digit operating margin for the long run. Your next question is on the share repurchase. So earlier in May, we announced our first ever 4-year share repurchase program of up to USD 1 billion. Over the past quarter, we have repurchased a over [ RMB 840 million ] or USD 110 million, and we have canceled all of these shares repurchased. So with the continued improvements in profitability and a robust cash position, we are well positioned to execute the share repurchase program while continuing to make disciplined investments in our business. We will remain focused on building a healthy and resilient business, actively pursuing opportunities and driving steady and sustained growth in both revenue and profitability. Creating long-term value and delivering returns to our shareholders.