A clean bill of health

Not done yet: Richard Liu may also spin off JD.com’s fintech unit

“If we get it right in the healthcare sector, we could create another JD.com,” Richard Liu once told his right-hand man Xin Lijun before spinning off the e-commerce firm’s telemedicine division in 2018. Two years after that exercise, JD Health is not yet as big as its parent firm, but large enough nevertheless to pull off an initial public offering in Hong Kong almost as big as its parent’s.

Selling 12% of its enlarged capital at the top end of the indicative price range on December 1, JD Health raised nearly HK$27 billion ($3.5 billion). This is the second biggest IPO in Hong Kong this year, trailing only JD.com’s $4 billion secondary listing in June.

The duo is topping the chart only because Ant Group’s mega offering was pulled at the last minute. Yet that has not dampened investor interest in Chinese internet firms. JD Health’s international tranche was closed a day early after a warm reception; while the retail tranche was oversubscribed 107 times.

The share sale looks set to give JD Health an initial market value of HK$221 billion, or a little over a fifth of its parent’s, based on its Hong Kong-listed stock.

The bullish sentiment surrounding JD Health was spurred by the stellar performance of its biggest rival Ali Health, which was spun off from Alibaba in a backdoor listing in Hong Kong in 2014. Its shares have climbed 149% year-to-date, pushing the firm’s market capitalisation to HK$297 billion. Thanks to the Covid-19 pandemic, which has fuelled demand for online healthcare services, Ali Health’s active user base grew 56% on the year to 250 million in the six months to September. That has helped it finally turn its loss-making business around, booking Rmb279 million in net profit for the period after a 74% spike in revenue to Rmb7.2 billion. It is a vindication of the internet-based ‘Big Health’ concept we first wrote about in WiC397.

For investors in JD Health, the thesis is that the two-year-old company stands a high chance of matching Ali Health in terms of valuation. Already China’s largest online retail pharmacy by revenue with a 30% market share, JD Health is also China’s biggest online healthcare platform by sales. It has been more profitable than Ali Health too, despite having a much smaller active user base. With 72.5 million active users, the Beijing-based company reported Rmb370.8 million in net profit, thanks to a 76% growth in revenue to Rmb8.8 billion for the first six months of this year

JD Health’s success has much to do with its access to its parent’s comprehensive logistics infrastructure, comprising 11 pharmaceutical warehouses, 230 other fulfilment centres and temperature-controlled facilities across China. All of these allow the platform to offer on-demand delivery services as rapidly as within 30 minutes and around the clock (this same infrastructure was also an asset that enabled JD.com to thrive at the onset of the pandemic, see WiC488).

The build-out of such a network was accelerated after the implementation of the “two invoices” system in 2018, which sets a maximum of two invoices that can be issued along the procurement chain for pharmaceutical products – one by the drug manufacturer and the other by the distributor, cutting out layers of middlemen that added to costs (see WiC410).

Alongside other stricter regulations on warehousing and delivery of drugs, the rule has incentivised drug manufacturers to integrate themselves into end-to-end supply chains, such as the ones built by JD Health.

As of the first half of this year JD Health derived over 88% of its revenue from direct sales of pharmaceutical and healthcare products, 7% from operating a marketplace for third-party merchants, and 6% from providing digital marketing services.

The company emphasised that online healthcare services such as consultation, testing, chronic disease management and prescription renewal have shown great potential, though these activities are still not a major percentage of revenues. That said, JD Health facilitated about 90,000 daily online consultations in the first half of 2020, and had established an online hospital staffed with 68,720 in-house and external doctors.

As that latter figure suggests, online healthcare services will play a more important role in JD Health’s bottom line in the future. It also serves to complement its retail pharmacy business, creating a closed-loop ecosystem that keep users on its platform.

Ping An Good Doctor, the health tech unit of China’s largest insurer by market capitalisation, drew 41% of its first half revenue from selling online medical services as well standardised wellness packages covering health check-ups, dental check-ups and genetic testing services. More significantly, they yielded a much higher gross margin – above 50% – compared to the 9% derived at its unit selling pharmaceutical products. Of the three internet healthcare platforms, Ping An Good Doctor’s market capitalisation, at HK$106 million, is the smallest.

With strong policy support, the ‘Big Health’ sector attracted around Rmb333 billion in investment between 2015 and 2019, spawning hundreds of so-called internet hospitals and health platforms, according to iResearch, a Shanghai-based market researcher. (The policy tailwinds include permission for online prescriptions and the sale of prescription drugs; and allowing medical insurance reimbursement for online consultations.)

However, the growth potential is enormous: online services represented just 3.3% of the country’s total healthcare expenditure in 2019 as only 2.4% of all drugs were distributed through online retail pharmacies. Just 6% of consultations were completed online.

This is expected to increase to 10.6% by 2024, representing a market of Rmb1.1 trillion, according to Frost & Sullivan, another research consultancy.

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