JD.com: Hundreds of Billions in Profits Wiped Out with One Click, How Long Can the Food Delivery Dream Last?

The "fuse" of the food delivery war -- $JD.com(JD.US) delivered its first performance report on the evening of August 14 that reflects the impact of its investment in food delivery. In summary, this season's performance can be described as "fragmented." The core business—mall segment revenue and profit both exceeded expectations, but on the other hand, the losses caused by food delivery were also far above expectations, dragging the group's overall operating profit into negative territory, which is quite alarming.

Key details are as follows:

1. Revenue beats significantly, profit misses significantly: Overall, JD.com's total revenue this season increased by 22% year-on-year, far exceeding the market expectation of 15%, with actual revenue exceeding expectations by nearly 22 billion. This was mainly due to the strong growth of the main site mall business (exceeding expectations by about 14 billion). The rest was due to incremental revenue from the food delivery business, which was not considered in market expectations, but this revenue will be "given back" through subsidies and expenses, having no value.

However, in terms of profit, dragged down by massive losses in the food delivery business, the group's overall GAAP operating loss this season was nearly 900 million, turning from a single-quarter profit of over 10 billion to negative, with profit performance being extremely poor. (Net profit exceeding expectations was mainly due to non-operating gains and zero tax expenses this season, which is not significant).

2. Core mall segment revenue and profit both excel: The core highlight of this season's performance—the mall business revenue grew by only 21% year-on-year, with a significant acceleration quarter-on-quarter, also far exceeding the expected 15%. Among them, the sales growth of electrical products significantly increased to 23%, while the sales growth of general merchandise remained relatively stable at 16%. It can be inferred that the strong growth is still mainly attributed to the benefits of state subsidies, and the cross-selling brought by food delivery is not obvious at least for this quarter.

The operating profit of the mall segment was also impressive, increasing by 38% year-on-year to 13.9 billion, exceeding expectations by a full 2 billion. Moreover, the profit exceeding expectations was not only due to strong revenue growth, the profit margin of the mall segment also increased by nearly 0.6 percentage points year-on-year. Better than most sell-side expectations that due to increased investment in events like 618, the profit margin would only remain flat year-on-year.

3. Massive food delivery losses, much more than expected: Although the core business performed well, another focus of the market, the actual losses caused by the food delivery business, were far more than the already high expectations. Before the earnings release, the sell-side generally expected food delivery business losses to be around 90-100 billion, while the actual total loss of new businesses including food delivery was as high as 148 billion. Even considering the increased losses of other new businesses, the losses from the food delivery business should be at least over 120 billion. This means that the market's expectations for food delivery spending by JD.com, Meituan, and Alibaba this season and in the future may need to be further raised.

JD.com has almost precisely subsidized all the profits created by the mall and JD Logistics to food delivery and other new businesses. The determination is indeed significant.

4. From the perspective of costs and expenses, the group's overall gross margin this season was 15.9%, flat quarter-on-quarter and slightly improved year-on-year, thanks to the significant improvement in the main site's gross margin this season by 0.9 percentage points year-on-year. Therefore, although the gross margin of innovative businesses plunged from 20% to -4% quarter-on-quarter (the delivery income from food delivery was not enough to cover the delivery costs, which is not surprising), it did not significantly drag down the overall performance.

In terms of expenses, overall operating expenses increased by 63% year-on-year, exceeding market expectations by 9 billion. This was mainly due to marketing expenses surging by 15.1 billion year-on-year, exceeding the already high expectations by 8 billion, reflecting the severity of food delivery subsidies. Other expenses also rose, but the impact was not significant.

Interestingly, by segment, JD Mall's operating expense ratio this season was 12.8%, rising both quarter-on-quarter and year-on-year, indicating that spending in the mall segment did increase (e-commerce competition pressure remains) . It also suggests that not much of the food delivery spending was reallocated from the mall segment, most of it was net additional spending.

5. Buyback paused: According to the announcement, since the last quarterly report disclosure on May 13 to June 30, JD.com has not conducted any further buybacks. This is likely due to the massive investment in food delivery, leaving the company with no spare cash flow to consider shareholder returns. This is a major negative for value investors who were attracted by JD.com's excellent direct shareholder returns within the Chinese concept stock range.

Dolphin Research's View:

Based on the above analysis, the most critical information revealed by this performance is:

1) The good news is that under the benefits of state subsidies, the performance of the core mall business remains strong, with both revenue and profit continuing to accelerate, providing the necessary financial support for JD.com's "ambitions" in new businesses such as food delivery, alcohol and travel, and overseas business.

2) But the bad news is that from the growth of general merchandise sales, the food delivery business does not seem to have brought significant cross-selling to the main site, but the resulting losses far exceeded expectations, directly bringing the group's overall profit to zero. (Although it may also be intentional by the company)

3) The expense ratio of the mall segment has indeed increased as expected by the sell-side, indicating that competition in the e-commerce segment remains intense (as expected), thus requiring continued high subsidies and other investments. Correspondingly, the cross-selling brought by food delivery is still relatively limited, so the marketing budget cannot be reallocated from the main site to food delivery, resulting in actual total marketing support far exceeding expectations.

4) However, the consolation is that the combination of strong core business and weak new business gives JD.com the option to "turn back." After all, the company always has the option to abandon new businesses, even if it means losing face and previous efforts. But this still offers more room for maneuver compared to problems in the core business that cannot be abandoned.

However, the good and bad of the current quarter's performance are already in the past, what has a greater impact on the judgment of JD.com's investment logic is the subsequent performance trend and the guidance from management, so it is necessary to focus on the management's views in the conference call and later small meetings.

Dolphin believes the core issues are twofold: 1. Can the dividend period of good revenue & profit growth in the core mall segment continue; 2. How much impact will JD.com's multi-line expansion in new businesses such as instant retail, alcohol and travel, and overseas business have on short- to medium-term profitability, and when can it be contained? Although Dolphin has not yet seen the management's views, based on our own judgment:

1) In the main site mall business, Dolphin believes that although the "food delivery war" has partially diverted JD.com and Alibaba's attention and resource budget, overall, the competitive landscape of the domestic e-commerce industry remains intense, with platforms maintaining significant subsidy levels during the 618 promotion period. (Verified)

Whether JD Mall can maintain a good performance largely depends on the strength and sustainability of state subsidy policies. In this regard, from the new batch of state subsidy quotas issued by the state in early August and the "necessity" of government stimulus consumption, Dolphin believes that the support of state subsidies is likely to continue in the short to medium term (at least within 2025).

Therefore, the performance of JD Mall segment within the year is likely to remain relatively stable (such as revenue and profit growth of around 10% or slightly higher), but in terms of pace, since last year's state subsidies started in August-September, the base in the second half of the year will be higher. Additionally, it is necessary to pay attention to whether food delivery can bring some cross-selling to the main site business.

2) Since the main site business should not have major problems in the short to medium term, the subsequent business trend depends more on how much the company will invest in new businesses that are expanding everywhere.

This quarter's unexpected food delivery losses are likely to prompt the market to raise loss expectations for the next two quarters. But on the other hand, in the past month or so, as Taotian Flash Sale entered the market with larger subsidies, the main competition in the food delivery war has shifted to Taobao vs. Meituan. After JD.com announced in June that its daily order volume exceeded 25 million, it has not announced a higher order volume, and its CEO recently publicly stated that "there will be no vicious subsidy involution."

Therefore, Dolphin believes that it is difficult to predict the scale of new business losses in the 3rd and 4th quarters for JD.com. Historically, JD.com has had many precedents of "much ado about nothing" in new business expansion. It cannot be ruled out that the company may suddenly turn around and start reducing new business losses, and there is also the possibility that after the market raises loss expectations, the actual results may be lower.

However, although from a quantitative perspective, there is room for discussion on JD.com's losses in new businesses. From a qualitative perspective, Dolphin does not agree with JD.com's behavior of "relying on" the dividend period of the core mall business to expand everywhere while simultaneously developing food delivery, alcohol and travel businesses, and intending to acquire two local retailers in Hong Kong and Europe. The pancake-style diversification will excessively disperse the company's resources and management's focus, and there are few successful cases in history.

In terms of valuation, from a conservative perspective, 2025 is likely to be the profit low point for JD.com, and the valuation based on the group's overall profit estimate for this year can be used as a reference for a safe price level.

Although it is currently difficult to relatively accurately judge how much loss will be generated in new businesses throughout 2025, based on the current market's general expectation (food delivery loss of about 30 billion, which may be raised after this performance, but it is still mainly based on management guidance), the adjusted net profit for 2025 is about 25 billion, corresponding to a market value of 336 billion before JD.com's performance, with a PE valuation of approximately 13.5x.

From a neutral perspective, Dolphin believes that short-term performance fluctuations should be crossed, and the group's profit after narrowing new business losses in 2026 should be used for pricing. Dolphin expects the operating profit of the main site + logistics business to continue to grow by slightly more than 10% compared to 2025, but the annual loss of new businesses will narrow to 12 billion. The annual net profit is about 43 billion (slightly lower than 2024), corresponding to a pre-performance market value of about 7.8x PE valuation. In other words, as long as JD.com restrains itself in new businesses, there is a certain opportunity for a low-level reversal, but it is clearly not an "unmissable" opportunity.

Ultimately, the focus is on management's expectations for subsequent new business losses, which is the biggest variable.

Detailed interpretation of this quarter's financial report:

I. State subsidies remain strong, self-operated retail hits new highs

1. The largest proportion of self-operated retail business achieved revenue of 282.4 billion this season, with a year-on-year growth rate continuing to significantly accelerate quarter-on-quarter, reaching nearly 21%, far exceeding the market expectation of a slight decline quarter-on-quarter of 14.7%. Under the mainly state subsidy benefits, possibly also with limited benefits from food delivery cross-selling, JD.com's core business—mall business growth this season can be described as unexpectedly strong, far outperforming the industry's overall growth.

Specifically, the sales growth of electrical products increased from 17% last quarter to 23.4%, also far exceeding market expectations. However, according to NBS data, the overall sales growth of the home appliance and communication products industry above a certain scale also significantly increased from last quarter (from 29% to 39%). Therefore, the strong growth of JD.com's electrical products this season is still mainly due to the overall industry benefits brought by state subsidies.

As for general merchandise retail, the year-on-year growth rate only increased from about 15% last quarter to 16.4% this season. It can be seen that for products not benefiting from state subsidies, JD.com's growth is not as strong, also indicating that at least in the second quarter, the cross-selling effect brought by food delivery was not obvious.

2. Platform service revenue: The commission and advertising business for 3P sellers, driven by the strong increase in self-operated business, also saw a quarter-on-quarter increase in revenue growth of 6 percentage points to nearly 22%, slightly outperforming the growth rate of self-operated revenue. It can be seen that the overall traffic of JD Mall this season did have a good increase, even if this may mainly be the diffusion effect of state subsidies.

3. Logistics and other services: Including JD Logistics and Dada Express, mainly reflecting the logistics revenue growth of the food delivery business increased by 21 percentage points quarter-on-quarter, with actual revenue exceeding expectations by 7.2 billion. Since the revenue growth of JD Logistics is relatively stable and not significantly different from expectations, it can be inferred that this additional revenue is basically the delivery revenue generated by JD's food delivery business.

II. Main site revenue and profit both excel, new business suffers massive losses

Summarizing various businesses, due to the strong growth of the main site mall and the incremental revenue brought by food delivery, JD.com's total revenue this season was 356.7 billion, a year-on-year increase of 22%, exceeding expectations by 21.6 billion. (Among them, the main site contributed about 14 billion, and new businesses contributed nearly 8 billion).

By business segment:

1) Core business--JD Mall revenue grew by 20.6% year-on-year, far exceeding the expected growth rate of 15%, mainly driven by the benefits of state subsidies on electrical products and their spillover effects.

2) JD Logistics (JDL) revenue grew by 16.6% year-on-year this quarter, also accelerating compared to last quarter. According to JD Logistics' own performance announcement, growth from external customers was stronger, but it cannot be ruled out that it undertook part of the spillover food delivery fulfillment business.

3) Due to the inclusion of the food delivery business, the new business segment, which is highly concerned, had revenue of 13.9 billion this season, a significant increase quarter-on-quarter, and exceeded expectations by about 8 billion, which is consistent with the extent of logistics fulfillment revenue exceeding expectations mentioned above. Therefore, it is mainly the delivery revenue brought by the food delivery business. However, these "incremental" revenues from food delivery will eventually all be given back due to subsidies and other costs, so it doesn't matter whether they exceed expectations or not. (Before the performance, the sell-side did not have a grasp of the food delivery business revenue, so this part was not included in the expectations).

As can be seen from the above, JD.com's growth this season can be described as unexpectedly strong, but in terms of profit, although the main site profit was also better than expected, the massive losses caused by food delivery and other new business investments resulted in the group's overall GAAP operating profit turning negative this season, with a loss of 860 million. Even after adding back stock-based compensation and amortization, the adjusted operating profit was only +900 million, still far below expectations.

By business segment:

1) JD Mall operating profit was 13.9 billion, a year-on-year increase of nearly 39%, exceeding market expectations by a full 2 billion. This was not only due to strong revenue growth, but also because JD Mall's operating profit margin increased by about 0.56 percentage points year-on-year, better than the situation where most sell-side expectations were that the profit margin would only remain flat quarter-on-quarter.

2) JD Logistics' profit performance was also impressive, although it slightly declined quarter-on-quarter (due to the 4Q being a promotion season), but from a year-on-year perspective, the profit margin still increased by 0.7 percentage points, with an operating profit of 1.82 billion, better than the expected 1.66 billion. Overall, JD Logistics is still in the profit release stage.

3) As for the highly concerned new business losses (mainly generated by the food delivery business), this season was as high as 14.8 billion (only 1.3 billion last season), even though the sell-side expectations were already set at a not low loss of about 10 billion, the actual loss still far exceeded expectations, dragging the group's profit directly into negative territory.

Although the losses caused by non-food delivery businesses may also have increased (such as Jingxi, alcohol and travel, and overseas business), it can still be roughly estimated that the actual loss caused by food delivery should be at least around 12 billion, more than the expected 9-10 billion.

III. Marketing expenses surge, food delivery subsidies are not mainly reallocated from the mall segment

From the perspective of costs and expenses, the group's overall gross margin this season was 15.9%, flat quarter-on-quarter and slightly improved year-on-year, not significantly affected by the food delivery business. After all, in absolute terms, the gap between food delivery and the main site business is huge (the former's revenue is less than 5% of the latter's).

According to the newly disclosed segment gross margin situation by the company, the main site's gross margin continued to improve significantly, increasing by a full 0.9 percentage points year-on-year this season, which should also be mainly due to the benefits of state subsidies.

JD Logistics' gross margin slightly declined year-on-year, with little impact. However, the gross margin of innovative businesses plunged from 20% last season to -4% this season, in other words, the delivery income from the food delivery business was not enough to cover the delivery costs. (Expected, not surprising).

In terms of expenses, overall operating expenses increased by 63% year-on-year this season, exceeding market expectations by 9 billion. Among them, the main reason is that marketing expenses actually spent 27 billion, a year-on-year surge of 128%, also exceeding the already not low expectations by 8 billion. In other words, the subsidies on food delivery were higher than originally expected. As for other expense growth rates, although they have also increased, the extent is not exaggerated, and the difference from expectations is not significant.

By segment, JD Mall's operating expense ratio this season was 12.8%, rising both quarter-on-quarter and year-on-year, indicating that spending in the mall segment did increase (e-commerce competition remains) , also showing that the food delivery spending was not much reallocated from the mall segment, most of it was net additional spending.