JD.com: After hitting rock bottom, can it be reborn?

On the evening of November 15th, before the US stock market opened, JD.com (JD.US) released its Q3 2023 earnings report. In summary, the revenue growth was almost stagnant, which was expected. However, the smaller-than-expected profit release may provide some comfort to investors. The key points are as follows:

Underwhelming Revenue, as Expected: In Q3, JD.com's overall revenue was 247.7 billion yuan, with a YoY growth of only 2%. Although this growth is weak, it was already anticipated by the market. In terms of business segments, JD.com's core e-commerce platform saw zero growth in revenue, while its logistics and Dada businesses maintained low double-digit growth, continuing to drive overall revenue. However, revenue from other new businesses continued to decline MoM, indicating the ongoing contraction of non-core businesses. Compared to expectations, the performance of the e-commerce platform and Dada was not significantly different, while the revenue from the logistics segment was unexpectedly strong.

Further Breakdown: Looking into the details, the revenue growth of three major segments - electrical goods retail, general merchandise retail, and platform services & advertising - ranged between -3% and +3%, indicating little change. However, the trend of growth rate changes suggests that the decline in electrical goods sales may be mainly due to weaker-than-expected smartphone sales. The narrowing decline in general merchandise sales signifies that the impact of the transition from a 1P to 3P model may be coming to an end. The weak growth of the main 3P business also indicates that it is still in the investment phase rather than the harvest phase.

Slightly Better-than-Expected Profit: Although JD.com's revenue fell short of expectations, the company's overall operating profit exceeded expectations by about 9%, reaching 9.3 billion yuan. Specifically, the e-commerce platform achieved an operating profit of 11 billion yuan, a new historical high. This indicates that although JD.com has been involved in a subsidy war to some extent, it has successfully externalized its expenses, leading to further increase in profit. However, the operating profit of the logistics segment significantly declined by about 40% below expectations. This may be attributed to JD.com's previous announcement of lowering the free shipping threshold and providing unlimited free shipping for Plus members. As for the Dada and other innovative business segments, they all incurred losses slightly exceeding 100 million yuan, but the impact was minimal.

In terms of costs and expenses, JD.com achieved a gross profit of 38.8 billion yuan this quarter, exceeding expectations by about 1.1 billion yuan, with a YoY growth of 7%. The gross profit margin also increased by about 0.8 percentage points to 15.6%. On one hand, the increase in gross profit margin is due to the higher proportion of 3P business. On the other hand, it also indicates that JD.com's subsidies for goods did not affect its profit.

In terms of expenses, the marketing expenditure for this quarter was 8 billion yuan, showing a significant MoM decrease and a YoY increase of only 400 million yuan. This also indicates that the company's own subsidy efforts are not high. The proportion of fulfillment expenses to self-operated retail revenue increased by about 0.5 percentage points YoY, which is likely due to the impact of lowering the free shipping threshold. As for relatively fixed expenses such as research and development and management fees, they remained relatively stable without significant fluctuations.

Dolphin Research's viewpoint:

In summary, although JD.com's revenue performance this quarter is extremely poor, the company had already communicated with the market earlier, and the previous plunge had already digested this bad news, so it is not a new negative factor. The operating profit slightly exceeded market expectations, although the magnitude is not significant, it at least indicates that despite intensified competition and slowing growth, the company's profit has not been greatly affected. This to some extent alleviates the market's concerns about the company's long-term profit prospects and provides solid support for its valuation.

Looking ahead, although JD.com currently lacks advantages in the competition for market increment, it is highly unlikely to achieve performance surpassing the industry's average growth. However, the company's core customer base, characterized by "quality-oriented" consumption, is not the target that competitors are fighting for in the current environment of "downgrading everything". In other words, the core customer base remains stable.

Therefore, it is not a big problem for the e-commerce sector to achieve a profit of nearly 40 billion for the whole year, even after deducting taxes, there is still a net profit of over 32 billion. Corresponding to the company's pre-market valuation of less than 305 billion and over 240 billion in cash and short-term investments (of course, a large part of which is merchant deposits), Dolphin Research believes that JD.com should not be criticized so harshly.

Detailed interpretation of this quarter's financial report:

Although the revenue growth is extremely poor, fortunately, the market has already digested it.

First, let's look at the largest proportion of the self-operated retail business. This quarter achieved revenue of 195.3 billion yuan, a YoY decrease of 0.9%. Although the negative revenue growth is obviously unattractive, it is consistent with market expectations because the company had already communicated in advance.

Specifically, the revenue of electrical products this quarter was 119.3 billion yuan, with zero YoY growth, slightly lower than the market's expectation by 2%. In addition to the continued suppression of the real estate market on consumer electronics consumption, the third quarter is also the peak period for the release of new mobile phones, which is conducive to the sales of 3C products. However, due to the limited contribution of Huawei's new phones due to channel priority and insufficient inventory, and the not-so-good feedback on Apple's new iPhone 15 (frequent price reductions since its launch), the sales of electrical products did not improve.

On the other hand, the general merchandise retail, which continues to be affected by the transition from a 1P to a 3P business model, achieved revenue of 81.7 billion yuan this quarter, a YoY decrease of 2%. Although it is still shrinking, the YoY decrease has started to narrow, which is about 4% higher than market expectations. This may indicate that the impact of the model change is coming to an end. 2. Platform Services: The main reflection of the services provided by 3P sellers on the platform is the revenue of 19.5 billion yuan from commissions and advertising in this quarter, a 3% YoY growth that is in line with expectations. JD.com has been vigorously developing its 3P business since the first quarter of this year, but the revenue growth remains weak. This indicates that the demand is indeed weak and it can also be inferred that JD.com has not yet improved the monetization of its 3P business.

3. Logistics and Other Services: The revenue from logistics, including JD Logistics, Dada Delivery, and Deppon Logistics, was 32.9 billion yuan in this quarter. After the base period of Deppon's consolidation, the YoY growth rate dropped significantly to 19%. However, the MoM growth is still positive, which is not bad.

II. Although the revenue is poor, the slightly better-than-expected profit brings some relief

Apart from the growth in the logistics business, the growth rates of the self-operated and 3P businesses have stagnated. Therefore, in this quarter, JD.com achieved an overall YoY revenue growth of only 2% to 247.7 billion yuan. Fortunately, it did not fall below market expectations.

Looking closely at the performance of each segment,

The core JD Mall achieved a YoY revenue growth of 0.1% this quarter, which is consistent with the earlier guidance of zero growth. There were no surprises or shocks.

JD Logistics (JDL) had a revenue of 41.7 billion yuan this quarter, with a growth rate slowing down to 17%, mainly due to the base period of Deppon's consolidation, as mentioned earlier.

The revenue from new businesses, including JD-X and overseas e-commerce, was 3.8 billion yuan this quarter, continuing to shrink MoM. It can be seen that JD.com is still contracting non-core businesses.

The strategic focus, Dada, achieved a revenue of 2.9 billion yuan this quarter, with a YoY growth rate of 20.5%, maintaining a relatively high growth rate. It has growth potential, but unfortunately, the scale is still too small.

In terms of profit, JD.com achieved an operating profit of 9.3 billion yuan this quarter, nearly 10% higher than expected. Although the revenue growth is indeed weak, the company's profit release is still reassuring.

Specifically, let's look at the different segments:

JD Mall segment achieved a profit of 11 billion yuan, exceeding expectations by more than 1 billion yuan; the operating profit reached 5.2%, reaching a new historical high.** On the one hand, there were no major promotions in the third quarter, so it is indeed a seasonal high point for profits. At the same time, it also shows that most of JD's high-profile subsidies have been passed on to external parties, with little impact on the company's profits.

JD Logistics saw a decrease in operating profit to 290 million yuan compared to the previous quarter, which is significantly lower than market expectations. It is worth paying attention to whether the management has any explanation for this.

The loss of the new business segment this quarter is still only 140 million yuan, and the decline in revenue from new businesses indicates that investment in new businesses is still narrowing. The profit turnaround in the previous quarter was mainly due to the benefits from asset sales, which is not the norm.

Three, the decrease in free shipping threshold pushes up fulfillment costs, while other expenses remain restrained

From the perspective of costs and expenses, what contributed to the higher-than-expected profit in the Mall segment this quarter?

First, at the gross profit level, the gross profit this quarter reached 38.8 billion yuan, exceeding expectations by about 1.1 billion yuan, a year-on-year increase of 7%. At the same time, the gross profit margin also increased by about 0.8 percentage points to 15.6% compared to the same period last year. On the one hand, the upward trend in gross profit is still due to the increase in the proportion of high-margin revenue from non-self-operated retail. On the other hand, it also shows that JD's subsidies on product prices have not had a significant impact on gross profit.

In terms of expenses, we can see that the marketing expenses this quarter were 8 billion yuan, a significant decrease compared to the previous quarter, and an increase of only 400 million yuan compared to the same period last year, indicating that the subsidy intensity is not high. Among other expenses, research and development and management expenses remained relatively stable without significant fluctuations.

However, the proportion of fulfillment costs to self-operated retail revenue increased by about 0.5 percentage points compared to the same period last year. We believe that JD's recent reduction in the free shipping threshold and providing unlimited free shipping to Plus members, while improving the customer experience, naturally leads to an increase in cost expenses.

Dolphin Research's previous research on JD:

In-depth analysis:

April 14, 2023: "Is JD still valuable on the operating table for healing wounds?" Link
April 22, 2022: "Why are Meituan and JD performing well in the stock battle?" Link
September 27, 2021: "Getting to know JD, the company that was mocked by the entire internet" Link

Earnings report analysis:

August 16, 2023: Conference call on JD's supply chain advantage and focus on 3P business development Link
August 16, 2023: Earnings report review on JD's increasing revenue, decreasing profit, and the gains and losses of the billion-dollar subsidy Link
May 12, 2023: Conference call on JD's focus, efficiency, and 3P sellers as the keywords for 2023 Link
May 11, 2023: Earnings report review on JD still being stuck in the same pit despite the "billion-dollar subsidy" Link
March 10, 2023: Conference call on JD's shift from relying on major promotions to focusing on everyday low prices (summary) Link
March 9, 2023: Earnings report review on whether JD can make a comeback despite playing the "cover-up" strategy too much Link
November 18, 2022: Conference call on JD facing greater pressure in the fourth quarter, with plans to reduce costs this year and improve efficiency next year (summary) Link Analysis Report on the Financial Report of November 18, 2022: "JD.com's Massive Profits to the Rescue, How Long Can the Slowdown in Growth Be Concealed?"

Summary of the Conference Call on August 24, 2022: "JD.com: Continuing to Focus on Efficiency, with Local Retail as the Key Growth Area (Conference Call Summary)"

Analysis Report on the Financial Report of August 23, 2022: "Without Growth, Will JD.com Transform into a Value Stock?"

Risk Disclosure and Statement in this Article: Dolphin Research Disclaimer and General Disclosures