JD: As long as there are more dividends and buybacks, even underperformers can get by.

On the evening of March 6th, before the U.S. stock market opened, JD (JD.US) released its 2023 fourth-quarter earnings report. In summary, despite lower expectations, the actual performance slightly exceeded expectations. However, the highlight lies in shareholder returns. Here are the key points:

1. Exceeding revenue expectations with a slight beat, powered by electrical goods: This quarter, self-operated retail business revenue was 265.4 billion yuan, a year-on-year increase of 3.7%, although the single-digit absolute growth may not be robust, it still outperformed the company's guidance and the market's expected growth of over 1%. Specifically, revenue from electrical goods saw a 6% year-on-year growth, significantly better than expected. Dolphin Research believes that after the launch of billion-yuan subsidies, JD has narrowed the price gap on advantageous electrical products compared to its competitors, potentially regaining market share.

2. Strengthening the 3P merchant ecosystem, but not benefiting performance: On the other hand, JD's advertising & commission revenue and logistics service revenue growth both fell short of expectations, which was unexpected. We believe that while JD is strengthening the 3P ecosystem, reducing merchant commissions and service fees to attract sellers, lowering the free shipping threshold, and allowing merchants to freely choose logistics providers may be the main reasons.

3. Profit seems to miss, but continues to improve: This quarter, JD's overall operating profit was 2.03 billion, seemingly lower than the expected 5.37 billion, mainly due to a 5.2 billion impairment of goodwill and assets. Excluding this impairment, the actual profit is still improving.

Breaking it down by segment, the mall business achieved an operating profit of 6.94 billion, a slight decrease from last year's 7.86 billion, reflecting the impact of subsidies on the company's profitability. However, it was slightly better than the expected 6.7 billion.

In the JD Logistics segment, although growth continued to slow down, operating profit surged by nearly 50% to 1.33 billion, possibly due to cost-cutting measures.

As for other business segments, despite shrinking revenue, losses this quarter expanded to 800 million, likely due to significant investment during the promotional period. JD's unwavering commitment to growth is still evident.

4. On costs and expenses, this quarter achieved a gross profit of 43.5 billion, nearly a 5% increase, with a slight 0.1% increase in gross profit margin, meeting expectations. In terms of expenses, marketing expenditure this quarter was 13.1 billion, an increase of 1.1 billion year-on-year, a growth of nearly 9%, indicating increased efforts in customer acquisition and subsidies. However, administrative expenses decreased by about 1.2 billion year-on-year, with a reduction of 730 million in other equity incentive expenses. At a time when the company is facing challenges, reducing performance incentives seems reasonable, offsetting the impact of increased marketing spending. Research and development and logistics expenses remained almost flat year-on-year, reflecting efficiency improvements (especially in logistics).

Dolphin Research Viewpoint:

Overall, from a performance perspective, under lower expectations and guidance, JD's earnings report this time, whether from the revenue or profit perspective (excluding impairment), exceeded expectations slightly. However, from an absolute perspective, single-digit revenue growth and the year-on-year decline in mall profits are not outstanding performance, at most just a bottoming rebound.

In other words, there is a slight surprise in this performance, but not significant. Looking ahead, JD's exclusive cooperation with the Spring Festival Gala and the intention to acquire overseas retailer Currys, on one hand, demonstrate the company's determination not to lose growth. On the other hand, it also implies increased expenses and profit drag. Therefore, the absolute turning point in performance may not have officially arrived.

On the other hand, the company announced a dividend of $0.76/ADS, corresponding to a 3.2% dividend yield, slightly higher than the forecast of foreign analysts. Providing investors with direct cash returns during a period of low performance is obviously welcome. Additionally, the company also announced a repurchase amount of $3 billion as of the 27th year. However, JD only repurchased $360 million in the full year of 2023, which would be $800 million at a run rate in 4Q. With an $800 million repurchase and a $1.2 billion dividend, the return rate is about 5.9%, which is a good return, but not very generous. The company needs to truly implement substantial repurchases to truly prompt the market to reevaluate JD's valuation.

Detailed Analysis of this Quarter's Earnings Report:

1. A small beat in revenue below expectations, is the turning point here?

First, looking at the largest proportion of the self-operated retail business, this quarter achieved revenue of 265.4 billion yuan, a year-on-year growth of 3.7%. Although the absolute revenue growth in single digits is not strong, it is better than the company's previous guidance and the market's expectation of over 1% growth.

Specifically, this quarter's revenue from electrical products reached 150.4 billion yuan, with a year-on-year growth of 6%, about 5% higher than market expectations. This was the main contribution to the revenue exceeding expectations in this earnings report. Apart from the low base of electrical products in the same period last year, Dolphin Research speculates that after the billion-dollar subsidy activity, JD's narrowing price difference on advantageous electrical products compared to its peers may have helped the company regain some market share. It is worth paying attention to whether there will be any explanation during the conference call.

The general merchandise retail revenue that has been continuously affected by the transition from 1P to 3P business model in the previous period, this quarter reached 96.1 billion yuan, flat compared to the same period last year, roughly in line with expectations. According to the company, the transitional period after this quarter's model change will be completed, and the focus will be on whether it can return to normal.

2. Platform service revenue: The revenue from commissions and advertising services for 3P sellers this quarter amounted to 23.6 billion yuan, a 3% decrease compared to the same period last year, lower than the market's expected 5%. It was somewhat unexpected for advertising and commission revenue to decline despite the company's strong development of the 3P seller ecosystem. Combining news, JD's reduction of merchant commissions and service fees to attract sellers may be one of the reasons.

3. Logistics and other services: Including JD Logistics, Dada Express, and Deppon Logistics, the revenue from the logistics sector this quarter was 36 billion yuan, after the completion of consolidation, the revenue growth also significantly dropped to 8%, starting to converge with the retail revenue growth. In addition, JD's lowering of the free shipping threshold and allowing 3P sellers to freely choose logistics companies are also contributing factors.

Second, both ends of the mall sector are performing well, and the logistics sector's profit is increasing

Summarizing the above businesses, mainly due to the contribution of self-operated retail business, this quarter JD achieved an overall revenue growth of 3.6% year-on-year to 306.1 billion yuan, exceeding the 1%+ growth guidance, also slightly above expectations.

Looking closely at the performance of each sector,

The most core JD Mall's revenue this quarter increased by 9.7% year-on-year, the main contributor to exceeding expectations, mainly from the home appliances sector;

JD Logistics (JDL) revenue this quarter was 47.2 billion, with growth slowing to 9.7%, below the market's expected 14.6% growth. We believe that the decrease in the free shipping threshold and the relaxation of logistics suppliers for 3P sellers are the main reasons.

This quarter, the company once again merged Dada into other business sectors, no longer disclosed separately (the previous scandal may be the reason). The overall revenue from other businesses reached 6.78 billion, a year-on-year decrease of 8.9%, indicating that JD is still contracting its peripheral businesses.On the profit front, JD achieved an operating profit of 2.03 billion this quarter, significantly lower than expected, mainly due to the confirmation of nearly 5.2 billion in goodwill and asset impairment. Excluding this impact, profits are still showing improvement.

Breaking it down by segment:

1) JD Mall segment, operating profit was 6.94 billion, a decrease from last year's 7.86 billion, reflecting the impact of subsidy measures on the company's profitability. However, it slightly exceeded the expected 6.7 billion.

Despite the continuous slowdown in JD Logistics' growth, operating profit surged by nearly 50% to 1.33 billion, significantly exceeding the market's expected flat year-on-year performance of 930 million. Lowering the free shipping threshold unexpectedly improved profits, possibly due to measures such as layoffs and pay cuts, which may be explained during the conference call.

In other business segments, while revenue shrank, losses expanded to 800 million this quarter. However, losses usually expand during the 4th quarter peak promotion period, mainly due to discounts and promotions.

In reality, profits are not bad, as the growth in marketing expenses is offset by other costs.

Looking at it from the perspective of costs and expenses, where did the better-than-expected profits in the Mall and Logistics segments come from?

1) Firstly, at the gross profit level, the gross profit this quarter reached 43.5 billion, a 4.8% year-on-year increase, slightly higher than the revenue growth rate. The gross profit margin has slightly improved, but not significantly, aligning with market expectations.

2) On the expense side, marketing expenses this quarter were 13.1 billion, an increase of 1.1 billion year-on-year, a nearly 9% increase, indicating an increase in promotion and subsidy efforts. Among other expenses, research and development remained stable, but management expenses decreased by about 1.2 billion, a significant drop, with equity incentive expenses reduced by 730 million. It seems reasonable to reduce performance incentives during a company's low cycle.

However, fulfillment costs only saw a slight increase of 2.3%, lower than the 9.7% growth in logistics revenue and the 3.6% growth in overall revenue, indicating an improvement in logistics efficiency. The specific reasons can be expected to be explained during the conference call.In the end, considering only the performance, marketing, research and development, and management expenses, the company's operating profit is 6.4 billion, which is a significant increase compared to the 4.7 billion in the same period last year.