Can JD.com Sustain Its Revival Leaning on National Subsidies?

On the evening of May 13th, Beijing time, $JD.com(JD.US) announced its Q1 2025 financial report. At first glance, it looks quite good, but is it really that impressive? Let's quickly go through the numbers:

1. $JD-SW(09618.HK) reported a 16% total revenue growth and a 31% adjusted operating profit growth—this is quite a remarkable performance in the chaotic e-commerce platform landscape.

By category, the key driver of revenue growth is self-operated electric products—self-operated electric products, which account for nearly 50% of revenue, saw a growth rate soar to 17%, and since electric sales bring profits, such high electric growth naturally leads to an increase in profit.

Moreover, the traffic from self-operated electric products also contributed to a rebound in the growth rate of self-operated general merchandise (mainly supermarket categories), which reached 15% year-on-year in Q1, also a good performance.

3. Driven by the circulation of electric products, light asset income—advertising (including advertising for self-operated products, 3P product advertising, and commissions)—also accelerated to a 16% year-on-year growth.

Including $JD LOGISTICS(02618.HK) and Dada Now, the logistics segment's revenue growth this quarter was 13% year-on-year, with a quarter-on-quarter increase of 3 percentage points, showing accelerated growth, but the effect is clearly not as good as the mall business.
Overall operating profit reached 10.5 billion yuan in Q1, with the operating profit margin increasing to 3.5% year-on-year, a nearly 40% year-on-year growth! Visibly impressive.

From the perspective of various expenses, the profit performance is good, mainly due to the strong revenue growth and the fact that the largest expense item—marketing expenses—was overall controllable, without the vicious rise seen in the past; among the major expenses, the warehousing and logistics costs did not reflect the expected operational leverage.

A key factor for the excess profit release is the increase in gross margin, which almost entirely comes from the increase in gross margin of the mall business—directly rising from 16.2% in the same period last year to 16.8%.

In terms of shareholder returns: from August 2024 to August 2027, a total of $5 billion in buybacks is planned. Since the beginning of this year until the financial report release date, the company has consumed $1.5 billion, leaving a remaining quota of $3.5 billionWith such a rapid consumption rate, it is estimated that a new repurchase quota will soon be authorized.

Calculating shareholder returns: The company previously announced a dividend of $1.5 billion. Dolphin Research distributes according to the previous year's amount, considering $1.5 billion as the dividend for 2025. If $4 billion is repurchased in 2025 (after repurchasing $3.6 billion in 2024), the current stock price corresponds to a shareholder return rate of over 10%, which is quite good.

In terms of cash reserves, the company's actual net cash on the books, along with cash-like assets and short-term investments converted to USD, amounts to $22 billion, providing the financial capacity to support such repurchases.

_ (Note: JD.com raised its first-quarter performance guidance once in mid-April, but not all sell-side analysts on Bloomberg updated their data. The extent of the first-quarter outperformance was quite significant, but after the actual adjustments, many of the latest sell-side analysts have raised revenue growth to around 14%, which is not particularly exaggerated. This is for reference only.)_

Dolphin Research's investment analysis:

This time, the performance exceeded expectations, looking at the actual performance itself: whether it is over 17% revenue growth or nearly 40% adjusted operating profit growth, the main contributor behind this is the pillar business—physical e-commerce. Such performance is indeed a solid and substantial answer sheet, without any ambiguity.

Moreover, shareholder returns, according to Dolphin Research's calculations, have reached around 10%. Looking at the first-quarter performance, it seems visibly undervalued. But to truly escape the gravitational pull of an 8x PE? Dolphin Research's judgment is:

a. Capital valuation does not depend solely on how good the current profits are; more importantly, it depends on how much of the current profit growth is sustainable and foreseeable.

In this regard, it is difficult for JD.com to convince everyone, as it mainly relies on government subsidies, and there has been no fundamental change in the competitive landscape. The significant release of revenue and profit in the first quarter can actually be seen as primarily driven by the government subsidy policy for electrified products.

Government subsidies lower prices and promote sales; however, the subsidies provided to users are borne by the government and do not enter JD.com's sales costs.

At the same time, electrified products have always been a profit-generating category for JD.com. The explosive sales of electrified products correspond to an increase in sales of self-operated electrified goods and an increase in mall gross margins, with JD.com's first-quarter financial report almost precisely reflecting the benefits of government subsidies.

Other businesses in the mall, such as self-operated general merchandise and 3P platform businesses, have also benefited from a certain degree of cross-selling, leading to an increase in revenue.

However, the problem is that the effect of government subsidies has already weakened, and even the financial report from Semiconductor Manufacturing International Corporation (SMIC) provides strong evidence of this for the communications and IoT product sectors. The market cannot linearly extrapolate JD.com's future growth based solely on its first-quarter revenue and profit.

b. What about the marginal changes in the short-term outlook?

Of course, in the case of low valuation, the key is to focus on the upcoming marginal changes, but JD.com is not in a good position as it has re-entered the investment phase for new businessesIn the food delivery issue, since April, the food delivery war has been clearly explained through two articles shared by Dolphin Research — in a relatively stagnant market, JD.com has entered late to challenge the leader, raising concerns that it may ultimately lead to ineffective internal competition, resulting in a fruitless endeavor.

Of course, it is easy for Dolphin Research to understand JD.com's move into the high-frequency food delivery business: this national subsidy has already indicated that JD.com's core is the flow of electric products, but electric products are low-frequency consumption, which does not drive app engagement rates. Normally, cross-selling is very difficult. If they can enter the food delivery market, it at least can activate the app's engagement rate.

This food delivery war can be seen as a kind of investment flow and customer acquisition cost. After all, in this "hard" business of food delivery, Meituan, with its scale effect maximized, only achieves very low single-digit profit margins. The likelihood of JD.com turning it into a profitable business is extremely slim; the role of food delivery is likely just to drive traffic to physical e-commerce and help increase JD.com's app engagement rate.

Once it is positioned as a traffic-driving business, it inherently points to JD.com's growth dilemma.

Of course, a shareholder return of over 10% is indeed very attractive, and with buybacks as a safety net, it is difficult for the stock to drop significantly from this position. However, for the market to be willing to significantly buy into JD.com alongside the buyback funds, the key still lies in how much cash JD.com is willing to spend in this food delivery war and how JD.com will guide its profits for the entire year.

This also means that this conference call, as well as subsequent communications, are very important to see how much capital JD.com intends to invest in the food delivery business. If the investment can be relatively restrained, then such a high shareholder return still holds hope for stock price recovery; but if the investment is unlimited, then the funds will likely continue to keep it undervalued.

Dolphin Research will subsequently share the minutes of the conference call in Longbridge Station and in the WeChat community, so please stay tuned.

Detailed interpretation of this quarter's financial report:

1. A definite beneficiary of national subsidies, revenue "surges" in the first quarter

The self-operated retail business, which accounts for the largest proportion, achieved revenue of 243 billion yuan this season, with a year-on-year growth further expanding to 14%. For traditional e-commerce platforms that have seen single-digit growth for the past two to three years, this figure is undoubtedly "impressive."

Specifically, the revenue growth of electric products further rose to 17%, with the impact of national subsidies being very evident.

After aggregating the growth of the home appliance and communication categories in retail, the industry itself also saw an 18% growth in the first quarter, indicating that JD.com has stabilized its market share in electric products.

From the perspective of expected differences, after raising the first-quarter guidance in mid-April, the latest expectations have also been adjusted to around 14%, which is not particularly excessive.

JD.com's self-operated general merchandise retail growth, boosted by the traffic in the electronic products category, has further increased year-on-year to 15%, with quarterly revenue reaching 98 billion yuan.

2. Platform service revenue: Mainly from 3P commission advertising + 1P advertising business, with this quarter's revenue at 23.3 billion yuan, up 16% year-on-year. The normal growth rate needs to surpass the high-margin 3P business of self-operated operations, which again underperformed the self-operated electronic business. This actually indicates that the traffic source fundamentally comes from the electronic products brought by national subsidies.

3. Logistics and other services: Including JD Logistics and Dada Now, the logistics segment's revenue growth has slightly accelerated to 13% this quarter. The revenue performance is relatively good, but when considering the losses from new businesses, the revenue growth from new businesses is achieved through increased investment, with the delivery investment showing slight effects in the first quarter.

II. JD Mall is doing well, but what about sustainability?

JD's total revenue reached 300 billion yuan, totaling 301.1 billion, with a year-on-year increase of 16%. After a long period of low single-digit growth, JD has finally breathed a sigh of relief.

At least, even without considering national subsidies, with the real estate sector bottoming out, the industry growth of electronic products where JD operates is unlikely to get worse.

Classified by business segment:

The most critical JD Mall's revenue grew by 16.3% year-on-year this quarter, with revenue reaching 263.8 billion yuan;
JD Logistics (JDL) saw a year-on-year revenue growth of 11.5%, reaching 47 billion yuan this quarter.
Including Dada and other innovative businesses, this quarter's growth rate has finally stopped declining and rebounded, with a year-on-year increase of 18%, reaching 5.8 billion yuan. However, it seems that the investment in new businesses such as delivery has already begun to impact the financial statements, with the increase in revenue coexisting with a widening loss, which will be analyzed further later.

Due to the good performance of electrified products and effective cross-selling, JD's profit this season has significantly exceeded seasonal performance: Excluding stock-based compensation, the Non-GAAP operating profit was 10.6 billion, the second highest quarterly profit since JD went public.

When broken down by segment, it is very clear that the profit release almost entirely comes from the mall business:

1) JD Mall operating profit was 12.6 billion, a year-on-year increase of 38%; normally, the mall profit in the first quarter is expected to decline compared to the profit peak season of the previous year—the third quarter.

However, this first quarter, JD achieved the highest single-quarter profit in history, performing exceptionally well, with a profit margin approaching 5%, an increase of 0.8 percentage points, but 0.6 percentage points of that was contributed by gross margin, essentially still a superficial increase brought by national subsidies.

JD Logistics only made a profit of 150 million, which is a decline compared to 220 million profit in the same period last year, suggesting that logistics seems to have entered a period of intensified competition again.
As for the other business segments including Dada, the losses this season soared to 1.33 billion, with a loss rate of 23%. While revenue has recovered, the speed of loss expansion is even faster. It can be imagined that entering the second quarter, as the number of takeout orders increases, losses will only further widen.

One point to note is that in the first quarter, both new businesses and logistics saw deteriorating profitability; whether this is all due to investments in new businesses like takeout is worth considering.

Three, with national subsidies, platform subsidies can save some costs.

In terms of costs and expenditures, the main performer is the gross margin. Since JD primarily operates on a self-operated model, platform subsidies to users directly lead to a decline in gross margin.

This quarter, the gross margin increased by 0.3 percentage points year-on-year, reaching 15.6%, performing exceptionally well, with gross profit close to 48 billion. The core reason is that in the first quarter, user subsidies came from national subsidies, which saved the platform money.

Moreover, in terms of expenses, due to national subsidies bringing natural traffic, the growth of marketing expenses was relatively controllable; with revenue increasing by 16% year-on-year, marketing expenses grew by 14%, not soaring significantly like in the previous two quarters. Management expenses also showed very restrained performance.

Among the three expenses, only management expenses may have increased due to the expansion of new businesses, requiring the hiring of new professional managers, with stock option incentives and salary expenditures also increasing, leading to a year-on-year growth of 24% in management expenses; additionally, logistics expenses grew slightly higher, at 18% year-on-year, exceeding the revenue growth rate.

Ultimately, with revenue expanding, gross margin rising, and overall controllable expenditures, operating profit reached 10.5 billion, achieving a profit release that exceeded seasonal expectations.