Can JD.com be "revived" by relying on "national subsidies"?

On the evening of November 14th, Beijing time, before the US stock market opened, $JD.com(JD.US)$JD-SW(09618.HK) announced its financial report for the third quarter of 2024. Overall, due to the company's prior communication with the market, the revenue indicators were largely in line with expectations, resulting in no surprises. From a profit perspective, although the group's operating profit exceeded expectations by 13%, it was still considered decent; however, the core mall segment's profit margin expansion has (temporarily) stalled, which is the biggest flaw. The detailed points are as follows:

1. The largest segment, self-operated retail business, reported revenue of 204.6 billion yuan this quarter, a year-on-year increase of 4.8%, showing a significant recovery compared to last quarter's year-on-year zero growth. This is mainly attributed to the sales of electrical products benefiting from the national subsidy policy for home appliance upgrades, with revenue growth rebounding from a year-on-year decline of 4.6% last quarter to a positive increase of 2.7%. Retail of general merchandise maintained a relatively high growth rate of about 8% this quarter, showing little change from last quarter.

The recovery in electrical products driving the growth of self-operated retail revenue was originally good news, but since the market had already digested this in advance and adjusted expectations accordingly, the surprise is no longer there.

2. The commission and advertising business aimed at 3P sellers reported revenue of 20.8 billion yuan this quarter, a year-on-year increase of 6.3%, following the trend of 1P business, and also accelerated by 2.2 percentage points compared to last quarter. However, this was about 1.9% lower than expected, and the growth rate lagged behind that of self-operated retail, indicating a less favorable performance.

3. The logistics revenue, including JD Logistics and Dada Now, saw its growth rate slow from about 8% to 6.5%, with actual revenue slightly lower than expected by about 1.4%. Recently, JD Logistics' integration with the Taotian platform is expected to boost logistics business growth, but there was little reflection of this during the third quarter. However, although the logistics segment's growth was somewhat disappointing, the profit release was remarkably impressive.

4. As mentioned earlier, the group's overall operating profit was 12 billion yuan, exceeding expectations by about 1.4 billion (beat of about 13%), which is considered decent overall. However, the core JD Mall's operating profit only grew by 5.5% year-on-year, which underperformed compared to the segment's revenue growth of 6.1%, indicating that the operating profit margin of the mall segment has slightly declined year-on-year. Although the decline is minimal, it signals that the trend of improving mall profit margins may have reached a plateau, which is a "huge" issue. 5. The main contribution to the group's profit beat actually comes from the JD Logistics segment. According to the financial report disclosed by JD Logistics (independently listed), compared to a revenue growth rate of 6.6%, JD Logistics' costs only increased by 2.2% year-on-year. Among these, employee and external costs, which are labor costs, grew at a low single-digit rate year-on-year; rental depreciation, fuel, packaging, consumables, and other costs remained largely flat or even decreased year-on-year. This is the main reason for the significant profit beat in the logistics segment.

6. From the perspective of costs and expenses, what are the reasons for the decline in the operating profit margin of the mall segment? At the gross profit level, the overall gross profit margin of the group reached 17.3% this quarter, a significant increase of 1.7 percentage points year-on-year. The gross profit amount was nearly 3 billion higher than expected, indicating that there are no issues with gross profit.

However, as mentioned earlier, while the increase in the proportion of general merchandise may raise the gross profit margin, it may not necessarily be beneficial for the operating profit margin (the low average transaction price leads to a higher proportion of fulfillment costs). The difference in revenue and cost growth rates in the logistics segment, while reflecting an increase in the group's overall gross profit margin, is not beneficial for the mall segment's profit.

7. In terms of expenses, marketing expenses significantly increased to 10 billion this quarter (vs. 8 billion in the same period last year), exceeding the expected 9.1 billion. Similarly, R&D expenses also grew from 3.8 billion last year to 4.4 billion, which is higher than the expected 4 billion. It is evident that this quarter's expense spending has significantly increased and exceeded expectations. It can be inferred that JD must have genuinely increased its subsidies or customer acquisition investments in Q3, which should be the main reason for the slight decline in the mall segment's profit margin.

Additionally, due to the reduction in the free shipping threshold, the proportion of fulfillment costs relative to self-operated retail sales has also increased year-on-year (+0.2 percentage points), which may also be one of the factors suppressing the mall's profit margin.

Dolphin Investment Research Opinion:

Originally, with the recovery in the sales of electronic products driving the overall revenue growth of the group to accelerate, combined with the slightly better-than-expected overall operating profit of the group, this quarter's financial report was considered a decent result. However, the market had already anticipated this, and after the surprise of revenue growth recovery was no longer present, the issue of the core mall business's operating profit margin (temporarily) stagnating became the biggest focus of this financial report.

Although the operating profit margin of the mall segment decreased by 0.03 percentage points year-on-year this quarter, which is nearly negligible. However, under the premise that JD's current revenue growth rate is still firmly stuck in single digits, the previous significant improvement in the mall segment's profit margin, which led to profit growth clearly outpacing revenue, is one of the key reasons JD has become the most favored e-commerce target in the market over the past quarter. After all, if the logic of profit margin improvement is lost, how can a company with only single-digit revenue growth and similar profit growth rates attract market attention? However, in the short to medium term, Dolphin Investment Research's view on JD.com is not pessimistic. Given the pressure from the overall environment in the third quarter, some performance flaws are understandable. During the Double Eleven period, JD.com's sales of electric products, stimulated by national subsidies, are still reported to be impressive, with the potential for further acceleration in growth. Moreover, the market's expectation for the revenue growth rate of the e-commerce segment in Q4 is 6.2%, which shows no acceleration compared to this quarter. In other words, the market has not been "spoiled" regarding Q4 performance, leaving room for positive surprises. Therefore, what will have a greater impact on future trends is the management's update on Q4 guidance during the conference call, as well as how long this significant benefit from national subsidies can last.

From a valuation perspective, after a recent pullback of about 25% from a high of around $48, our calculations show that the pre-market market capitalization corresponds to approximately 9.5x PE of the after-tax operating profit for 2025 (after adding back stock incentives and non-recurring expenses). It has returned to a relatively neutral and low price level. Therefore, if there can be an upward adjustment in Q4 guidance, the current price still holds potential.

Detailed interpretation of this quarter's financial report:

I. Rapid recovery in electric sales under national subsidies, but the market has already digested it.

1. looking at the self-operated retail business, which accounts for the largest share, this quarter achieved revenue of 204.6 billion yuan, a year-on-year increase of 4.8%, showing a significant recovery compared to last quarter's zero growth year-on-year. However, as mentioned earlier, the market has already anticipated this improvement, with consensus expectations for growth raised to 4.6%, thus it can generally be considered in-line.

Specifically, the revenue from electric products rebounded from a year-on-year decline of 4.6% last quarter to a positive growth of 2.7%, clearly reflecting the impact of national subsidies, but the market had also anticipated this, with actual performance only slightly exceeding expectations by 0.8%. According to the overall retail data released by NBS, the sales growth rate of home appliances surged from negative growth in June and July to over 20% year-on-year in September, indicating a clear improvement trend. We can look forward to whether there will be surprises in the growth of electric products in Q4.

Meanwhile, general merchandise retail has continued to maintain a high growth rate of 8% this quarter after overcoming the impact of model changes, which is relatively unchanged from last quarter and generally meets expectations. At the same time, the growth rate of general merchandise still outpaces that of electric products, and this category has a relatively high gross margin, which will have a positive effect on the overall gross margin of the mall.

2. Platform service revenue: The commission and advertising business revenue for 3P sellers this quarter is 20.8 billion yuan, a year-on-year increase of 6.3%, and there has also been an improvement in 1P business compared to the previous quarter (an acceleration of nearly 2.2 percentage points). However, the actual revenue was about 1.9% lower than expected, and the growth gap leading self-operated retail is also narrowing. According to the company, the number of transaction users for 3P merchants grew by 20% this quarter, and the transaction volume increased by 30%. The actual business growth does not seem bad, but it appears to be mainly affected by a decline in average order value or monetization rate.

3. Logistics and other services: Including JD Logistics and Dada Now, the logistics segment's revenue growth this quarter slightly slowed to 7%, which is 1.1 percentage points lower than market expectations. Recently, JD Logistics officially connecting to the TaoTian platform is expected to boost logistics business growth, but there has not been much reflection during the third quarter. However, although the logistics segment's growth has slowed, the profit release has been quite impressive, which will be discussed in detail later.

II. Advantages: Profit beat, disadvantages: beat not from the mall segment

Summarizing the above businesses, JD achieved an overall revenue year-on-year growth rate of 5.1% this quarter, with a significant quarter-on-quarter increase, but this was already within market expectations. This is mainly attributed to the sales of electronic products under self-operated retail.

The previous section categorized by revenue type, categorized by business segment:

1）The most critical JD Mall's revenue this quarter increased by 6.1% year-on-year (mainly following the trend of 1P self-operated retail revenue), which also met expectations.

2）JD Logistics (JDL) revenue growth this quarter slightly decreased by 1.1 percentage points to 6.6%, as mentioned above, which is slightly lower than expected.

Including Dada and other innovative businesses, this quarter revenue continued to decline year-on-year, with a decrease of 26%. The decline was slightly lower than expected. Overall, JD is continuing to cut back on unprofitable marginal businesses.

From the revenue perspective, the significant improvement in the growth rate of core electric products in the core self-operated retail this season is a notable positive, but unfortunately, the market had already anticipated and digested this, so it does not bring any surprises. However, on the profit side, JD.com still had some impressive performance this season, with the group's overall operating profit reaching 12 billion, about 1.4 billion higher than expected (beat by about 13%). But overall, while the results are good, the profit structure is not favorable.

Looking at the business segments:

1) JD Mall's operating profit was 11.6 billion, a year-on-year increase of 5.5%, although it was still 600 million higher than the market consensus expectation. However, the segment's operating profit growth lagged behind the revenue growth of 6.1%, indicating that the operating profit margin of the mall segment is declining year-on-year (from 5.19% to 5.16%). Although the decline is minimal, the issue is that with less than 10% revenue growth, the market's relative optimism about JD in the e-commerce segment is based on its profit margin expansion, which can bring profit growth that exceeds revenue. Therefore, once the trend of profit expansion halts, how can less than 10% revenue and profit growth attract attention?

2）JD Logistics, although growth slightly declined this season and fell short of expectations, the profit release was astonishing, achieving 2.09 billion in operating profit this season, far exceeding the market expectation of 1.26 billion.

Combining JD Logistics' (as a separately listed entity) own performance report, the main reason for the profit exceeding expectations is the significant decline in cost rates. JD Logistics (under the independent company’s criteria) achieved a revenue growth rate of 6.6% this season, while costs only increased by 2.2% year-on-year. Among them, labor costs such as employee and external costs grew at a low rate year-on-year, while rent depreciation and other costs such as fuel, packaging, and consumables remained basically flat or even decreased year-on-year.

In this capital-intensive logistics business, as the volume increases, there is considerable room for the release of scale effects and per-unit revenue logic, so JD Logistics may still have significant further upward potential.

3）As for the other business segments including Dada, it still incurred a loss of 620 million this season, which is more than the expected loss of 420 million.

III. lowering procurement prices and improving gross profit margins are the biggest contributors to profit expectations.

So from the perspective of costs and expenses, what are the reasons for the operating profit margin of the mall segment not only not declining but actually increasing?

1. In terms of gross profit, it can be seen that the group's overall gross profit margin reached 17.3% this season, a significant year-on-year increase of 1.7 percentage points, showing considerable improvement. The actual gross profit amount was nearly 3 billion higher than expected, indicating that there were no issues on the gross profit side. **

We believe that the increase in gross margin is attributed to two factors mentioned earlier: the rising proportion of high-margin general merchandise in the self-operated retail product mix, and the cost growth rate of the JD Logistics segment being significantly lower than the revenue growth rate.

However, while general merchandise has high gross margins, the operating profit margin may not necessarily be high (the low average transaction value leads to a higher proportion of fulfillment costs). Additionally, the logistics segment's beat is unrelated to the mall business.

2. Expense aspect, it can be seen that marketing expenses have significantly increased from last year's 8 billion to this season's 10 billion, which is also higher than the expected 9.1 billion. Similarly, R&D expenses have increased from last year's 3.8 billion to 4.4 billion, exceeding the expected 4 billion. This indicates that the expense spending this quarter has expanded beyond expectations, suggesting that JD indeed increased subsidies or customer acquisition investments in Q3, which may be the main reason for the slight decline in the mall segment's profit margin.

At the same time, due to the previous reduction in the free shipping threshold, the proportion of fulfillment costs relative to self-operated retail revenue has also increased year-on-year (+0.2pct), which may also be one of the reasons suppressing the mall profit margin.

Dolphin Investment Research's past research on [JD]:

Financial Report Analysis

August 16, 2024, minutes “ JD: Can the Unexpected Profit Continue? How is the Competitive Landscape Changing? ”

August 16, 2024, financial report commentary “ JD's "Desperate Counterattack"? Overthinking it! ”

May 16, 2024, financial report commentary “ Without Buybacks, Is JD Still Worth It? ”

May 16, 2024, conference call “ JD: Continuing to Focus on FMGC and 3P Ecosystem ” March 6, 2024 Conference Call: JD: Mid-to-high single-digit growth in 2024, ensuring profits do not decline year-on-year ****

March 6, 2024 Financial Report Commentary: JD: As long as there are more dividends and buybacks, even a poor performer can manage to survive ****

November 15, 2023 Financial Report Commentary: JD: After being so bad, can it be reborn?

November 15, 2023 Conference Call: JD: Also doing platform and live streaming

November 15, 2023 Financial Report Commentary: JD: After being so bad, can it be reborn?

November 15, 2023 Conference Call: JD: Also doing platform and live streaming

August 16, 2023 Conference Call: JD: Insisting on supply chain advantages, focusing on 3P business development

August 16, 2023 Financial Report Commentary: JD: Revenue up, profits down, the gains and losses of the 10 billion subsidy

May 12, 2023 Conference Call: JD: "Focus, efficiency, 3P sellers," keywords for 2023

May 11, 2023 Financial Report Commentary: "10 billion subsidy" is just hot air? JD is still in the same pit

March 10, 2023 Conference Call: JD: From promotion-driven to everyday low prices (minutes)

March 9, 2023 Financial Report Commentary: "Cover-up" tricks are played out, can Dong Ge help JD rise again? In-depth

April 14, 2023: Is JD.com still valuable on the "operating table" after the bone scraping therapy?

April 22, 2022: Meituan and JD.com, how can they excel in the fierce competition for existing market share?

September 27, 2021: Let's re-evaluate JD.com, which has been ridiculed across the internet

Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure