Removed from the Hang Seng Composite Index, what new story does DINGDANG HEALTH have?

Following JD Health (6618.HK), Dingdang Health (9886.HK) has also disclosed its semi-annual report.

In the first half of 2024, Dingdang Health's revenue was 2.271 billion yuan, an increase of 0.92% year-on-year, slowing down by 12.03 percentage points compared to the same period in 2023; while the net loss for the same period was 84 million yuan, a decrease in losses by 24.95% year-on-year.

As residents' lives return to normal pace, the slowdown in revenue for pharmaceutical e-commerce is an inevitable outcome.

How Dingdang Health will face the new situation of slowed growth is a test for the management.

Currently, Dingdang Health is focusing on both cost control and revenue expansion.

On one hand, Dingdang Health is still working on cost control. The cost in the first half of 2024 decreased by 3.1% year-on-year;

On the other hand, Dingdang Health continues to invest in offline smart pharmacies and expand distribution business to broaden the scale of revenue.

The actual effects are yet to be verified.

Removed from the Hang Seng Composite Index

In the pharmaceutical e-commerce industry crowded with giants like Alibaba, JD, and Ping An, Dingdang Health is indeed "struggling to survive".

Although not holding onto the thighs of giants, Dingdang Health has managed to break through by becoming a partner merchant on platforms like Ele.me and Meituan.

Now, Dingdang Health's revenue growth is gradually slowing down.

In the first half of 2024, Dingdang Health's revenue was 2.271 billion yuan, an increase of 0.92% year-on-year, slowing down by 12.03 percentage points compared to the same period in 2023.

The revenue growth of the fast medicine business, which accounts for a large part of Dingdang Health's revenue, has cooled down. In the first half of 2024, it generated revenue of 2.21 billion yuan, an increase of 1.2% year-on-year, slowing down by 12.2 percentage points compared to the same period in 2023.

Although the epidemic gradually receded in 2023, strong demand for medication from patients due to factors like the flu has provided growth space for Dingdang Health and other pharmaceutical e-commerce companies.

However, as the impact of the flu weakens, online demand is showing a downward trend.

The slowdown may be becoming the norm in the industry.

In the first half of 2024, JD Health's revenue was 28.804 billion yuan, an increase of 6.04% year-on-year, a decline of 27.2 percentage points compared to the same period in 2023. This is the first time since JD Health went public that its revenue growth has dropped to single digits in a semi-annual report.

Given the overall environment, revenue pressure is an inevitable result.

Some internet pharmaceutical e-commerce companies are improving profitability by optimizing product mix. For example, JD Health has increased its profit margin by seizing the first launch rights of innovative drugs with higher unit prices.

In the first half of 2024, JD Health's non-IFRS profit was 2.644 billion yuan, an increase of 8.54% year-on-year; the profit margin for the same period was 9.18%, an increase of 0.21 percentage points year-on-year.

In comparison, Dingdang Health, which is still in a loss-making position, faces greater pressure in introducing new drugs.

In the first half of 2024, Dingdang Health's non-IFRS net loss was still around 39 million yuan, a decrease in losses by about 10% year-on-year.

In April of this year, Dingdang Health launched Sanofi's new drug "Zhilida", but as early as March, JD Health had already secured the online first launch rights for the drug Currently, DINGDANG HEALTH has relatively strict cost control measures in place.

In the first half of 2024, DINGDANG HEALTH's costs amounted to 1.516 billion yuan, a 3.1% decrease year-on-year. During the same period, the gross profit margin was 33.1%, which was 9.5 percentage points higher than JD Health.

"The decrease in cost is mainly due to the increased efficiency of the procurement system and changes in the product sales mix," DINGDANG HEALTH pointed out.

In order to expand the network of offline smart pharmacies, DINGDANG HEALTH continues to be generous in its sales expenses.

In the first half of 2024, sales expenses reached 486 million yuan, accounting for 21.4% of revenue, which was 16.4 percentage points higher than JD Health.

"This growth is mainly due to the expansion of the smart pharmacy network and increased sales and marketing activities," DINGDANG HEALTH stated.

With the lackluster performance in the fundamentals, DINGDANG HEALTH is facing increased pressure in the secondary market.

By the close of August 19th, DINGDANG HEALTH's stock price had fallen by 19.09%.

The main reason is related to the expectation of being removed from the Hang Seng Index. The quarterly review results indicate that DINGDANG HEALTH will be removed from the Hang Seng Composite Index on September 9th.

CICC believes that DINGDANG HEALTH may be removed from the Stock Connect due to a decrease in market value and insufficient liquidity.

Other medical and health companies that will be removed from the Hang Seng Composite Index along with DINGDANG HEALTH include Junshi Biosciences (1877.HK), Mindray Medical (2160.HK), Sino Biopharmaceutical (2257.HK), and Kangji Medical (6185.HK).

In the afternoon of August 19th, Junshi Biosciences responded that its H shares as a Stock Connect stock will not be affected by the adjustment of the Hang Seng Composite Index.

2B Suppliers

Whether DINGDANG HEALTH can continue to expand its revenue scale may be the key to whether it can break free from losses in the future.

The anticipated incremental space currently comes from the policy side. Since July this year, Beijing and other places have relaxed online drug purchases for medical insurance payments.

Currently, DINGDANG HEALTH has been selected as one of the first batch of online medical insurance payment merchants in Beijing, Shanghai, Shenzhen, and Foshan.

How much incremental space the online medical insurance payment can bring to DINGDANG HEALTH is eagerly awaited by the market.

DINGDANG HEALTH is not satisfied with just selling drugs directly to consumers, but is also continuously advancing its B-side business.

In terms of channels, DINGDANG HEALTH's fast drug business can be divided into three parts: online direct sales, distribution for merchants, and offline retail.

Online direct sales are the main source of revenue, generating 1.613 billion yuan in the first half of 2024, accounting for 71.03%, but growth has stagnated, with a year-on-year increase of only 0.44% in the first half of this year.

Compared to the online direct sales business, DINGDANG HEALTH's distribution business for merchants has shown significant revenue growth. In the first half of 2024, it generated 274 million yuan, an 11.5% year-on-year increase.

The distribution business involves selling drugs to merchants, who then sell them externally.

To some extent, this may potentially compete with DINGDANG HEALTH's online direct sales business.

For example, if DINGDANG HEALTH sells similar drugs to other merchants, and the latter sets a lower retail price, it may lead to "internal competition" with DINGDANG HEALTH's direct sales business "DINGDANG HEALTH pointed out that by distributing our products through independent distributors over whom we have limited control, and sales under our direct sales channels may compete with the business of such distributors, there may be a risk of cannibalization."

However, once the distribution business scales up, it may bring scalable revenue to DINGDANG HEALTH.

Taking Yao Pharm (9885.HK) as an example, the platform aggregates drugs of different categories, addressing the pain point of upstream distributors lacking sufficient bargaining power when purchasing small quantities of drugs for individual pharmacies and grassroots medical institutions, thereby reducing the procurement costs for these groups. By 2023, the revenue has reached 16.974 billion yuan.

Whether DINGDANG HEALTH can achieve a dual focus on the B-end and C-end is still a topic of ongoing market attention