JD Health International Inc. (JDHIF) CEO Enlin Jin on Q2 2022 Results – Earnings Call Transcript

JD Health International Inc. (OTCPK:JDHIF) Q2 2022 Earnings Conference Call August 23, 2022 9:30 PM ET

Corporate Participants

Enlin Jin – Chief Executive Officer

Cao Dong – Chief Financial Officer

Conference Call Participants

Justin Kwok – Goldman Sachs

Unidentified Company Representative

Good day ladies and gentlemen, thank you for standing by. Welcome to the JD Health International 2022 Interim Results Conference Call. This is [indiscernible] from investor relations team at JD Health. Joining us today are JD Health Executive Director and CEO, Mr. Jin Enlin and CFO Mr. Cao Dong. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a Q&A session. Please note that this English simultaneous translation line will be in listen-only mode for the duration of the call, including the Q&A session. If you wish to listen to the management’s original statement or ask questions during the Q&A session, you need to be dialed in to the Chinese language line.

Before we start, we will have to remind you that today’s discussion may contain forward-looking statements which involve a number of risks and uncertainties, actual results and outcomes may differ materially from those mentioned in today’s announcement and this discussion. The company does not undertake any obligation to update this forward-looking information except as required by law.

During today’s call, management will also discuss certain non-IFRS financial measures for comparison purposes only. For a definition of non-IFRS financial measures and a reconciliation of IFRS to non-IFRS financial results please refer to the announcement of the results for the six months ended June 30, 2022 issued earlier today.

For today’s call, management will read the prepared remarks in Chinese will only be accepting questions in Chinese during the Q&A session. The third-party interpreter will provide simultaneous interpretation to English on a separate line for the duration of the call. Please note that English translation is for convenience purposes only in the case of any discrepancy management statements in their original language will prevail.

I will like now to turn the call over to Mr. Jin Enlin. Please go ahead sir.

Enlin Jin

Hello, everyone. I’m Jin Enlin CEO of JD Health. It’s a pleasure to share our interim performance in 2022 along with our reflections on the events of the past six months. Overall, 2022 is a crucial year for China as we implement the 14th five-year plan. With respect to our industry, the new health care services system based on digital, medical and healthcare services, is playing a more prominent role in promoting national health as well as the development of the health industry.

In the first half of 2022, various medical and health policies and regulations were issued by the relevant authorities of China to support the innovative development of digital healthcare services. In terms of macro policies, the 14th five-year plan for the development of the digital economy recognizes the importance of internet plus healthcare to the digital economy and prioritizes it as a key new business model to encourage digital economic development. The 14th five-year plan for national health calls for greater efforts to enhance the digitalization and interconnectivity of national health information and to promote the development of internet hospitals and online chronic disease management solutions among other directives.

As for industry regulations, there has been significant progress in the regulatory measures on internet diagnosis and treatments and measures for the supervision and administration of AI pharmaceutical sales, notably to underpin the sound development of the Internet diagnosis and treatment system, the regulatory measures of internet diagnosis and treatment services trial outlines footer regulations and serves as a guide to support the high-quality development of the Internet health care industry.

And then in addition, the feedback collection process has been completed for the implementation regulations for the drug administration law revised draft for comments, fully manifesting the principle of integrated supervision for online and offline participants and securing a more regulated and orderly industry environment for online sales of prescription drugs.

We are deeply aware that guided by industry policies and regulations, the innovative application of digital healthcare services is gaining a foothold at a faster pace and evolving in a more regulated manner. Under these directive, digital health care services will be able to make greater contributions to improving the overall health care system and fulfilling people’s growing need for better health care and wellbeing. Now let’s review the progress of our business over the past six months.

I’d like to start with the progress in our healthcare supply chain. In the first half of 2022, we continue to develop our omni-channel supply chain capabilities to maximize the synergies between direct sales and our online marketplace and omni-channel business. Furthermore, we optimized our one stop experience medication plus healthcare services by expanding product offerings and enhancing professional service capabilities through user education, disease management and pharmaceutical services. We have also formed in depth cooperation with multiple domestic and global leading pharmaceutical companies, through which we have become an important platform for many pharmaceutical brands to accelerate their digital operation and carry out digital innovation.

Next, with regard to health care services, we have built an innovative healthcare service ecosystem that integrates online medical consultations and services, family health management and consumer health care services, while continuously iterating our online and offline service capabilities to meet users medical and consultation needs in different scenarios.

Specifically, our three new consultation services namely expert consulting, instant consultation with JD doctors and nighttime consultation, received positive user feedback. We also upgraded JD family doctor service model by introducing more professional roles to provide a more diverse range of one-on-one health management services. In addition, we made considerable breakthroughs in consumer health care services. For example, we teamed up with our ecosystem partners to launch early cancer screening insurance services, further improving our full cycle service capability of early screening for critical illnesses.

Also of note, we entered into an acquisition agreement with JD Group primarily for their pet health related assets, creating an online closed loop medical care plus health care products business model. Third, with our accumulated user service experience and operational capabilities. We did not passively wait for opportunities to come by newly capitalize on favorable industry developments to proactively create opportunities in the key stage of the industries in digital transformation driven by both government policies and user demands. We continued to ramp up investments in technology R&D and continued to enhance and integrate customized digital smart solutions based on the extensive experience and operational capabilities. We have accumulated and participating in ongoing difficult transformations and operation upgrades for many clients including medical institutions, governments and enterprises.

For example, we entered into a strategic partnership with Beijing Ditan Hospital, Capital Medical University, to facilitate the establishment of an internet hospital. Furthermore, in the first half of this year, we assisted the internet arm of Cangzhou Central Hospital in enabling online social insurance payments, making it one of the first internet hospitals in Hebei province to be officially connected with the social health insurance system.

It’s also worth noting that during this year’s June the 18th grand promotion, we released an enterprise health strategy for corporate customers integrating five key capabilities including physical exams and testing services, medical services, pharmaceuticals and wellness products, health management services and insurance. This innovative approach offers corporate clients a full range of customized online and offline employee health management and medical services.

Lastly, in the first half of 2022, JD Health actively fulfills its corporate social responsibility through its steadfast commitment to achieving unified value across users, industry and society at large. For instance, to facilitate normalized pandemic prevention and control, we continue to improve our emergency response mechanism and build a localized flexible supply chain. As a new type of real economy based enterprise committed to the integration of the digital and real economies JD Group continually promotes the integration of supply chains and logistics network. The harnessing the power of a responsible supply chain, we can fully safeguard the stability and reliability of our own supply chain. To ensure the delivery of essential supplies for those in need during the fight against the pandemic, we fully leveraged our matching capabilities efficiently and accurately connecting supply and demand on various fronts with personalized services, which transformed and optimized the emergency medicine supply model.

Take our medication health registration platform as an example, in response to urgent need. We quickly launched this service at the end of March and received more than 100,000 requests cumulatively. Within the first few months of this introduction in Shanghai, we’re able to fulfill over 90% of our unmet medication needs and request addressing drug shortages and distribution issues to maximum extent possible. Moreover, we partnered with several medical assistance enterprises to donate medicine, medical protection materials and COVID-19 antigen self-tests, helping many locations by ensuring the delivery of essentials applies.

With respect to rare disease assistance, we further enhanced the service capabilities to our JD Health Rare Disease Care Center and expanded the assistance scale and scope of the JD Health Rare Disease Charity Fund. We’re also recently unveiling the rare disease full ecosystem services strategy in cooperation with several partners. That’s enhancing our ecosystem service capabilities across patient services, new drug launches, disease diagnose confirmation, doctor training and charity fund.

Looking back on the first half of this year as an industry leading healthcare service enterprise, we’re committed to our business philosophy of trust-based value creation centered on customers health, and we’ll continue to strengthen our professional competencies within the realms of healthcare supply chain and online healthcare services. Moreover, we’ll photo promote open ecosystem strategy and deepen our collaborations with upstream and downstream value chain partners in an effort to step up the integration of digital and real economies and build a digital intelligent healthcare services system with our ecosystem partners who are providing the public with easily accessible, convenient and affordable health care products and services.

Looking forward to the second half of 2022, we’re committed to achieving unified value across users, industry and society at large. Guided by the 14th five-year plan for national health, we’ll continue to promote the innovation of medical and healthcare services with the applications across diverse scenarios, satisfying users needs at every stage in their lives and bringing a more professional, more efficient, integrated online offline experience for every user. Meanwhile, we will broaden our supply chain and our digital intelligence technology services, ultimately propelling accelerated implementation of the Healthy China 2030 Vision.

I like to conclude by saying that although the evolving environment brought many new challenges is also full of valuable opportunities, including the prospect of transforming industry. We believe that amidst uncertainties in the macro industry environment, JD Health has cultivated many strategic advantages with long-term value, including our products and services, our technology expertise and marketing tools in a digital world and our physical and the medical resources in the real world. With our complete ecosystem and end-to-end value chain, we are strong enough to transcend the cycles.

Thank you. I’ll now turn the call over to CFO, Mr. Cao Dong to discuss the details of our financial performance.

Cao Dong

Thank you, Mr. Jin. Hello, everyone. Thank you for joining JD Health earnings conference call.

It’s my pleasure to provide an update on our performance in the first half of 2022. 2022 is a crucial year for China implementing its 14th Five Year Plan and digital medical and healthcare services epitomized by Internet plus healthcare are playing an increasingly important role in promoting health for all as well as the development of the healthcare industry. As a industry leading health care service enterprise, JD Health has catered to consumers holistic personalized health services needs by accelerating our overall development and investment in real economy related businesses in the health and wellness market as well as our cooperation with upstream and downstream enterprises in the industry chain to build a complete health and wellness system aiming to deepen the integration of the digital and real economies in the health and wellness industry.

For the past year, we continued to adhere to our strategic positioning, which centers on the supply chain of pharmaceutical and health care products, strengthened by health care services, and encompassing all the users for lifespan for all healthcare needs. Guided by the business philosophy of trust-based value creation centered on customers health, we focused on retail pharmacy, health care services, smart healthcare solutions, and digital health to offer our users more comprehensive, better quality, affordable health care services, while creating value with our partners.

In the first half of 2022, we sustained strong growth momentum and recorded total revenue of RMB20.23 billion representing year-over-year growth of 48.3%. We also maintained quality growth of active users by optimizing our product offering and user experiences through refined management. As of June 30, 2022, our annual active user accounts reached 131 million representing a net addition of over 22.7 million from June 30, 2021. Our share of JD Group’s annual active users has increased to 22.6% from 20.4% in the same period of 2021. At the same time, the consumption frequency and total consumption of annual active users continued to grow year-over-year and quarter-over-quarter demonstrating users willingness and habits with respect to consuming pharmaceutical products and medical and health services online are gradually solidifying.

In terms of supply chain, we continue to strengthen our cooperation with upstream pharmaceutical companies and healthcare product suppliers by leveraging JD Group’s digital and intelligent logistics network with social value, thereby comprehensively improving our pharmaceutical and healthcare supply chain capabilities. Meanwhile, we employed digital tools to further streamline supply chain management. As of June 30, we have utilized JD logistics 20 drug warehouses and over 450 non-drug warehouses across China.

Furthermore, our directly operated cold chain networks covered nearly 240 cities across China, enabling us to enrich the variety of drugs available on our platform and solidify our fulfillment capabilities. Leveraging our advanced supply chain capabilities, we continue to extend our lead in the industry with a focus on expanding our online sales network and service capabilities with newer specialty drugs.

During the reporting period, a number of domestic and global pharmaceutical companies debuted new and special drugs on our platform. We hastened the process of introducing cutting edge innovative drug treatment solutions for patients in China and continue to enhance the accessibility of new and specialty drugs. We have formed in depth cooperation with a multitude of domestic and global leading pharmaceutical companies, thereby becoming an important platform for many pharmaceutical brands to accelerate their digital operations and carry out digital innovation. Our comprehensive services reached beyond drugs to medical devices nutrition and health supplements, as well as tonic brand partners.

In the meantime, we continue to focus on consumers refine a specialized needs for health supplements and tonic products by introducing diversified health consumption scenarios. Our efforts and deployments and supply chain have driven the steady growth of our direct sales business. In the first half of 2022, direct sales revenue increased by 48.6% year-over-year to RMB17.48 billion, accounting for 86.4% of total revenue. Most categories maintained rapid growth.

At the same time as we continue to leverage our supply chain and technology capabilities to provide better operational marketing tools to our business partners, service revenue reached RMB2.74 billion in the first half of the year growing 46.2% year-over-year, accounting for 13.6% of total revenue basically flat compared with the same period of last year, the proportion of digital marketing and medical service revenue to total revenue continued to increase.

With respect to healthcare services, we’ve built an innovative healthcare service ecosystem that integrates online medical consultations and services, family health management and consumer health care services, while continuously iterating our online and offline service capabilities. By upgrading our existing services and introducing innovative offerings, we provide users with a more convenient experience focused on meeting their diverse demands across a variety of scenarios. During the reporting period, we officially launched three consultation services, namely expert consulting, instant consultation and nighttime consultation.

To further address users diverse needs in different scenarios, we offer professional, user oriented and convenient online medical services to a growing user base while optimizing the service process and the user experience. During the reporting period, our average daily online consultation volume exceeded 250,000. We have found that users of our healthcare services generate above average GMV with an elevated shopping frequency, and indication that high quality healthcare services can boost user stickiness and become a key component of JD Health ecosystem.

In addition, we are convinced that as long as our products and services can bring value to the industry and our users on a sustained basis, our business model will generate returns to our shareholders in the long run.

Turning now to JD Health pet hospital, which has garnered the attention and recognition of our users and business partners since its launch in 2021. As we develop our pet health business, we continued to explore diverse services in the fields of pet diets, disease prevention and treatment, health advice and pet behavior training. During the reporting period, we entered into the equity and acquisition agreement with JD group primarily for the operating rights of pet health related categories.

Building on our existing online pet medical services, JD health has created an online closed loop of medical care plus health care products business model, offering users a comprehensive one-stop health care solutions for pets.

Next, due to the changes in our business composition, product mix and the promotion season, our gross profit margin in the first half of this year declined 250 basis points year-over-year to 21.8%. Our pharmaceutical products maintained high growth in the first half of the year and pharmaceutical products, especially prescription drugs, currently having lower gross profit margin than non-pharmaceutical products. Regarding non-pharmaceutical products, the decrease in the gross profit margin of medical devices and health supplements is primarily because we hope to offer a large share of the benefits from our highly efficient supply chain operations to our users and partners in the short to medium term, so our users can enjoy extremely cost-effective products and services, while expand your market sharing in each product category by gaining users mindshare.

At the same time, we will continue to increase investments in online health care services, and provide convenient remote services to users, including free clinics and consultation services to cultivate their habit of conducting online health care consultations. In this way, we can assist the government’s promotion of hierarchical diagnosis system to alleviate the pressure on offline medical services.

Going forward, we’ll persist in exploring new territories to boost our supply chain capabilities and our presence in online healthcare services. In terms of non-IFRS measures, our fulfillment expense ratio in first half of the year improved 30 basis points to reach 9.2% principally due to optimize inventory turnover as well as enhanced efficiency and improve unit costs from economies of scale.

In the first half of the year, our selling and marketing expense ratio was 4.5%, slightly lower than 7.1% in the same period of last year, mainly thanks to our more refined marketing and advertising strategy. As we’ve previously disclosed or investors, we will continue to promote our brands and core products to enhance user awareness and industry influence, as well as to reach and conversion of new users. Meanwhile, we will invest in marketing activities through diverse channels and improve our popular health content. We will also pay close attention to the ROI of our marketing investments.

In the first half of 2022 our R&D expense ratio was 2.2% down 50 basis points compared with the same period of last year. At the end of June, we had a total of 497 R&D personnel slightly lower than the same period of last year. Our R&D personnel’s efficiency as further improved with ongoing optimization of middle and infrastructure. In addition, owing to the fast growth of our business, we had a higher utilization efficiency of six R&D expenses, such as the servers, which will lower the R&D expense ratio, excluding the remuneration of R&D personnel. In the short to medium term, we still expect the R&D expense ratio to remain steady or increase slightly due to our plan to acquire more talent in data and AI.

Our G&A expense ratio was 0.7% equal to the same period of last year. Other net income in the first half of the year was about RMB161 million, growing significantly year-over-year as a result of higher government subsidies. To reward our core management team members we incurred RMB980 million of share incentive expenses in the first half of the year. Excluding the share incentive, non-IFRS net profit in the first half of the year amounted to RMB1.21 billion up 82% compared to the same period of last year. Non-IFRS net profit margin was 6%, raising 110 basis points year-over-year.

Our cash flow from operating activities reached RMB2.26 billion in the first half of the year. As of the end of June, the combined amount of cash and cash equivalents restricted cash and term deposits plus short-term financial assets measured at fair value with changes in fair value recognized in profit and loss was RMB45.7 million.

To sum up JD Health’s robust financial performance in the first half of the year as evidenced by accelerated revenue increase, higher profit, ample cash flow and faster user growth through the advantages of our dual engine closed loop business model. It also stemmed from our pursuit of a compelling customer experience or empowerment of upstream and downstream partners and our efforts to motivate our teams continuous innovation. As always, we believe that firm commitment to value creation is driver of enterprise with long-term sustainable development.

In closing, in the first half of the year to underpin the sound development of the Internet diagnosis and treatment system. The regulatory measures of internet diagnosis and treatment services outlined further regulations to support and guide the high-quality development of the Internet health care industry. The feedback faced and completed for implementation regulations for the drug and administrative law for demonstrating the principle of integrated supervision.

We have always embraced and supported government regulations and we will strive to ensure legal and regulatory compliance in our operations going forward. That concludes our prepared remarks. We’re now open for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Bank of America.

Unidentified Analyst

Thank you, Mr. Jin and Mr. Cao for taking my question. And the company had really great performance in the second quarter with COVID-19 resurgences and the current macroeconomic headwinds. I was wondering what changes will the company have in its strategic positioning? And what will be your priorities and your outlook for the company’s performance in the second half of the year? And I have a follow up question.

In the first half of the year, user number growth slowed down, but ARPU increased significantly, so I would like to know the reason? And also how to increase repeat purchase among users. And what’s the company’s strategy on user growth and increasing ARPC? The next question is regarding regulation. Could you please update or provide updates on latest regulatory changes, including the impact on the company? Thank you.

Enlin Jin

Thank you for your question. First, you mentioned the company’s strategy. Well, for us, our strategy is for the long-term. So we’ll keep consistency in our strategy. And you mentioned COVID-19 resurgence, and macroeconomic challenges. The impacts will be for the short-term. The pandemic had some positive effect on us, including help cultivating consumer mindset and habits consuming online health care products and services. So to us, this has long-term value for our business development.

And secondly, the fulfillment capabilities of our direct sales have a great advantage. And recently, the Ministry of Industry and Information Technology, they have released a notification. And the JD Health has been listed as one of the companies providing drugs in short supply to the government. And it is thanks to our capabilities in both drug supply and our supply chain capabilities.

And it is true that we’ve had resurgences in COVID-19. And that resulted in the slower growth in medical devices compared with drugs because of a high base number. But together with our cooperation partner, we can adapt to the changes and JD Group’s flexible supply chain capabilities also supported and empowered us. So I believe all the impacts from COVID-19 will be for the short-term only.

And moving on to the macro economy. The country has released its 14th Five Year Plan by providing support to healthcare services, especially given accelerated aging of the population and higher incidence of chronic diseases. So in the future, consumers will have increasing demands for our health care products and services.

And the National Health Insurance Program is also facing a lot of pressure with all the medical bills and JD Health has always been committed to addressing industry pinpoints. And although there are many uncertainties in our macroeconomic environments this year, JD house had strong confidence in our business development in the second half of the year.

As to your other question regarding user growth, we will answer that later. And to your question on regulation. Over the past year, we have maintained close communication with the regulatory authorities. And during the revision process of the various policies draft for comments, we felt deeply that the regulatory authorities have developed an increasing understanding of internet health care services. And they have affirmed the value of internet healthcare with an open and supportive attitude to the entire industry.

And as to the regulatory measures of online diagnosis and treatment, actually, in the beginning of the year, we already acquired finalized draft of the regulation and kicked off our internal mechanism to respond to regulatory changes, to make adjustments in our products. And basically, we have completed our deployments and passed our tests. We are also seeing good progress in our conversion rate and consultation efficiency and other key metrics.

And so far, as far as we know, we are ahead of our peers in the industry in terms of compliance progress, and we are confident that with compliance operations will continue to achieve growth.

As to the administrative measures for online sales of prescription drugs is expected to be released at the end of the month. And there will usually be a three months of rectification period for compliance. And during that time, we’ll continue to maintain communication with the regulatory authorities to ensure that our processes are 100% compliant. Next, I’ll give the floor to Mr. Cao to answer the question regarding user growth.

Cao Dong

Thank you. This is a very important question. As we mentioned, previously, our users have been increasing, and our share of JD Group’s active users, it’s also growing. But the growth of new users is actually slowing down. And we purchased in frequency of existing users and their stickiness are both growing which is within our expectations. And here I will add to explain reasons.

First of all, the first half of the year, as you could see, we were pretty disciplined in our marketing expenses, a reduction of 2%, which was significant. And we did that on purpose, because when the macroeconomic situation was unclear, it’s better to be disciplined in our spending in search of better channels. And we saw the value of new users which may not necessarily be significant. And in the first half of the year, it is true among our users, new user growth was slower and as I said, we actually expected that it was intentional.

And for several consecutive quarters we saw our numbers of user stickiness and repeat purchase rates and there has been a quarter-by-quarter growth. That’s why we’ve had pretty good revenue growth they were brought by our high-quality users. And as we have always said, JD Group has 580 million users which are very high-quality and have high value and we are very interested in them. That’s why we have been trying to identify and convert users for JDH. And by the time of our IPO, we had 19% of JD Group’s active users, but now it’s 23%. And this is pretty significant growth.

Yesterday, JD Group released its result. And they are even higher quality users such as the users of their of JD Gold Platinum membership that reached a 13 million and will pay more attention to the conversion and growth of these users.

It is true, we can see that users mindsets are growing more mature. And they are more open about using online health care services including online consultations, which has been growing over the past few years, especially given COVID-19 outbreaks.

COVID-19 resurgences have made people more open to the idea of online consultations. And we have made that easier and more convenient even though we still have a long road ahead of us. It’s much better than two years ago. So even though the growth of our user number is not that fast, we could see a consistent increase in user quality. I hope I’ve answered your questions. Now let’s continue.

Operator

Next comes from Justin from Goldman Sachs. Justin, please.

Justin Kwok

Hi, good morning, everyone. Thank you for taking my questions. I have two questions. First is regarding gross margin, the difference between the growth rate of gross margin and revenue? I was wondering if management could elaborate on the changes in products, categories and business compositions that affected gross margin and how big is that effect and your outlook for the second half of the year and next year?

And secondly, about the growth in drugs. So drug growth is leading, is ahead of other product categories in growth. Now, what’s your expectations for a drug growth over the next two to three years? And how will you improve your competitiveness in this area?

Enlin Jin

Thank you, Justin, for asking two very important questions. It’s true that we have experienced growth faster than our own expectation and also market expectations. And talking about the overall trend of the year, we will usually divide into the first half of the year and second half. We need to do more in the first half of the year, but in the beginning of 2022, there were many uncertainties. And we were paying a lot of attention to regulatory changes as well. So we always emphasize we need to do as much as possible in the first half of the year. We should achieve over 40% growth, and that in the second half of the year, we may slow down a little bit. So we believe there’s no problem for us to achieve our budgets. As you can see the number, 45%, 55%. And this is basically in line with our expectation for our growth and for our progress in the first and second half of the year.

And we will be under more pressure in the second half of the year, so we’ll make more efforts. So taking a whole year perspective, we did pretty well in the first half of the year 1% or 2% above our expectation, but it’s difficult to say with assurance. Looking at the first half of the year alone or only July, things looks pretty good. But since August, we’ve been facing more sales pressure. There’s no denying that, so we don’t want to be overly optimistic. So it is true just like the weather, there has been some — a lot of pressure that is a chilling reminder for us, that’s why we will be cautious.

Justin Kwok

Why is our different from other peers?

Enlin Jin

We believe healthcare demands are rigid, while supply chains are flexible, and our operations are resilient. I want to stick to our whole year guidance. And well, ensuring cash flow and profitability, we’ll try to achieve more as much as possible. I can’t give you a specific number. When thinking for a whole year, it will be 39% to 43%. We’ll try to achieve higher. And moving on to bottom line, we think it will not be less than last year. We’ve taken measures to reduce costs and enhance efficiencies in the first half of the year to great effect. We have seen significant improvement in our profitability. I think it reached new high since our IPO and our non IFRS net profit also turned positive.

So on top of the good foundation last year, we’ll do more to raise our profit. But here we’ll be more cautious, and as I said, we are resilient in our operations. Now moving on to gross profit and margin. It’s still on a downward trend. But to the medium to long-term, our expectation remains, we believe it will be between 25% to 30%.

And it’s in line with our long-term strategy as services account for a larger share of our revenue, I believe our gross profit margin will increase. But in the short to medium-term, our business model will — it is still not mature enough. And with — embarked with changes in industry and in the regulation, but we hope that the gross margin will be above 25% and approach 30%. And we will be committed to improve our gross profit margin. And even in the short-term when there was a decline, I can explain, in the first half of the year, the management had clear expectations for us in making our four-year plan that we need to maintain stability, gross profit margin, we need to keep it from declining.

If we look at the numbers, it’s actually okay, the margin numbers for our different product categories. And if we compare the gross profit margin with the marketing expenses of that product category, of course, we would hope the brands would spend more on marketing, at least our overall gross profit margin is not down. Of course, we did have some promotions, but mainly the decline in gross profit margin had to do with our business competition. For instance, direct sales, which is accounting for a larger share of our business. Its revenue — in terms of its revenue growth, it has a lower commission rate, that’s why it sort of dragged down our overall growth rate. But otherwise, other business segments they’ve achieved higher gross margin growth than our direct sales. But the high-margin segments, their share is declining. And as I said, our direct sales business is gaining more user mindshare, and its percentage in our revenue is growing.

We do want to maintain a healthy ecosystem by paying more attention to the operations of our merchants and building an ecosystem. And we’ve seen this consistent increase in the share of our direct sales. And it’s accounting for about 60% of our business and non-direct sales is 40%. And a few years ago, it was just the opposite. So as I said, direct sales had lower gross profit margin, that’s led to our lower gross profit margin growth in the first half of the year.

Revenue from pharmaceutical products is over 50% — accounts for over 50% of revenue growth and its percentage is also growing. I can tell you frankly that we’ve seen a significant improvement in the gross profit margin of our drug products. But because of the product mix, it has some negative effect on gross margin. So basically, overall growth is good, but gross margin is down slightly. We had hoped to achieve a higher gross margin. The drugs, they are growing faster than we expected, especially prescription drugs, which has a lower gross margin. And the gross margin of our OTC products is okay.

Now back to the growth of pharmaceutical products, putting regulations aside, and we are optimistic about people’s medication needs, we can feel that more and more people are buying drugs online, especially during COVID-19 outbreaks, that was a big issue. So we are confident that this trend will continue, then more and more people will buy drugs online both prescription and OTC drugs, because it’s more convenient. That’s why we believe the growth of drug sales will be relatively high. And those drugs closely connected to the macro economy and personal consumption ability like tonics. I think its growth will be more closely connected to macroeconomic growth. And for drugs, we think it’s okay. We don’t expect a significant decline in its growth.

But again, there are uncertainties, especially in terms of regulations. According to the latest information, we’ll have this new regulation released at the end of this month or early next month. And we have maintained communication with the regulatory authorities to follow up and making emergency plans to respond. And so far, we are really ahead of our peers in our compliance.

Of course, there are still uncertainties, and we are cautiously optimistic. And as I mentioned before, our operations are resilient. That’s why we’ll keep a close watch on regulatory changes and then respond accordingly. And on top of compliance operations, we’ll work hard to improve revenue and profitability. And again, we have high expectations for pharmaceutical products. And this is what I wanted to share regarding the topics, I think you’re all very interested in.

Operator

Next question comes from CICC.

Unidentified Analyst

Thank you very much for taking my question. I have two questions. First, is about expenses. Both Mr. Jin and Mr. Cao mentioned that the company took measures to control expenses, and especially considering the economic pressure in the second half of the year. So I was wondering whether the company still has initiatives to reduce costs and enhance efficiencies? And will those improve profitability in the second half of the year? And secondly, the company has ample cash reserves. So how does management plan to use such cash? And will the cash be invested in any new businesses? Thank you.

Enlin Jin

Thank you for your questions. Again, two very important questions. Regarding cost reductions and efficiency enhancement measures, yes, we did take action. And most of those measures were implemented in the first half of the year, and it will be on a continual basis. And you can see the overall decline or expense ratios at a pretty fast rate, but this will not be for the long-term. And I would like to reiterate our model to help to help you understand. We hope to achieve integration of online and offline services will be at the entry point. And by offering not only drug products, but online medical consultation services, and by doing that, we’ll achieve over 25% of gross margin, even reaching 30%.

So we have this expectation, we hope to have 8% to 10% net margin. But, of course, during our business operations, we’ll make adjustments. After all, anything can happen. In the first half of the year, we’re pretty disciplined in our spending. And for next year to drive growth, we may have some new spending or try to find new ways to acquire new users. So we may not be too restrained in our spending in the second half of the year. And given the macroeconomic situation, we’ll pay more attention to profit and cash flow. And as to cash, I guess not many companies have as much cash as we do on our hand.

We haven’t really looked at a lot of innovative business projects on a consistent basis. We — but we are trying new business like pet health and traditional Chinese medicine. We spent over RMB2 billion buying related assets to form a closed-loop business system. When it’s necessary, we’ll spend the money, and overall, we’ll keep a steady approach.

As you can imagine, when the pharmacy situation was not good and we spent a lot of money, we may end up with impairment charges. So we need to keep a steady approach and be careful with our cash investment. But well, we’ll be keeping a watch on any market opportunities, not to miss any investment opportunities. So if necessary, we’ll increase our investments. On the precondition, that we maintain a healthy bottom-line.

Unidentified Analyst

Thank you.

Operator

Because of time constraint, that concludes today’s Q&A session. I’ll turn the call back to Jin Enlin.

Enlin Jin

Thank you once again for joining us today. If you have any further questions, please contact our IR team directly. Thank you.

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