"Covering shame" routine is overused, can Dong Ge still revive Jingdong's fortunes?======

On the evening of March 9th, before the US stock market opened, JD.com (JD.US) released its Q4 2022 financial report with the following key points:

Overall, JD.com this quarter is still trying to cover up the problem of declining and even stagnant revenue growth by exceeding expected profits. This quarter, JD.com achieved a total revenue of 295.4 billion yuan, a year-on-year increase of only 7%, which is basically in line with market expectations, but a single-digit growth rate is not good no matter what.

Among them, the core JD.com Mall's revenue growth rate this quarter is only 3.6%, even lower than when some places were locked down in Q2, and nearly 5 billion lower than expected, which is even worse. It was only through the significant increase in JD Logistics' growth rate to 41% that the Mall's hole was filled.

According to Dolphin Jun, JD Group has adjusted the fee structure for merchants internally, reduced logistics subsidies for POP merchants using JD Logistics, and instead provided certain discounts in commission to balance the actual expenses incurred by merchants. This may be one of the reasons for the contrasting revenue growth and decline in the Mall and Logistics businesses.

However, in terms of profits, JD.com's overall operating profit of 4.83 billion yuan is still significantly outperforming the market's expectations by nearly 30%, which is the main highlight. But upon closer inspection, the operating profit margin for this quarter was 1.6%, a year-on-year increase of 1.8 percentage points, a narrower increase compared to Q3's 2.4 percentage points. Therefore, the degree to which profits exceeded expectations was not as good as in Q3, and it was even more difficult to conceal the defects in revenue.

Looking at individual business segments, JD.com Mall achieved an operating profit of 7.86 billion yuan this quarter, only 200 million yuan higher than expected, and the performance was not outstanding. On the other hand, JD Logistics' operating profit of 900 million yuan was significantly higher than the expected 570 million yuan. Dolphin Jun believes that this may be the result of the further redistribution of profits between the Mall and Logistics businesses internally, and may be due to the company's commitment to fairly treat JD Logistics and its investors as an independently listed company.

In addition, the losses for new businesses this quarter further expanded to 1.15 billion yuan, nearly 200 million yuan more than expected. It is worth paying attention to the management's interpretation of whether the expanded losses are due to layoffs or because the company is increasing its investments to offset the growth.

The key problem with revenue growth lies in poor self-operated retail. This quarter's income was 237.6 billion yuan, a year-on-year growth rate of only 1.2%, nearly 5 billion yuan lower than expected, and far below the nearly 10% growth of the domestic online physical market in Q4. Therefore, the impact of the epidemic cannot be blamed for JD's growth dilemma compared to its peers.

Specifically, the growth rate of the electrical business is only 1%, mainly due to JD's inability to achieve independent growth after eating into its peers' market share in a sluggish domestic real estate market. Meanwhile, the growth rate of general merchandise is also only 2%.

Although the company explained that in order to increase profits, it changed some profit-low businesses from self-operation to 3P mode, resulting in a decrease in revenue in terms of finance. However, Dolphin Jun believes that JD's contraction of JD Daojia, as well as the rise of Duoduo Maicai, Meituan Flash Buy, and other channels that also focus on daily consumer goods and changes in users' shopping methods are the core reasons why JD's general merchandise growth has slowed down.4. Cost control is still ongoing but with decreased intensity. This quarter, JD.com achieved a gross profit of RMB 41.5 billion, with a gross margin of 14.1%, an increase of 60 basis points year-on-year, which is the same as the improvement seen in the previous quarter. According to the previous conference call, the company reduced subsidies, shrunk loss-making new businesses such as JX and changed some of its low-margin 1P revenue to 3P, all of which contributed to the improvement.

In terms of expenses, only controllable marketing and back-end administrative expenses decreased by 10% and 3% respectively, while fulfillment costs and R&D expenditures have increased. Apart from the profit redistribution between the mall and logistics sectors, there is evidence that the company has reduced its cost control efforts, and the degree of improvement in operating profit margin is not as significant as in Q3.

Dolphin Analyst's view:

After experiencing the "lying flat for profit" strategy during the COVID-19 outbreak, the market is now seeing a big rebound in valuations, and the "smoke of war" is rising again in the online retail industry. The market's core focus on domestic e-commerce companies has shifted from profitability (survival is the first priority in difficult times) to growth (development is the key to success). Under this logic, JD.com's attempt to continue using a relatively unimpressive profit superimposed on lower-than-expected revenue growth is unlikely to satisfy the market.

Apart from the reasons for revenue and profit migration due to internal adjustments within the group's mall and logistics sectors, JD.com's revenue growth has consistently lagged behind the industry. While competitors such as Pinduoduo's main store, Meituan's flash purchase and preference, and Douyin's supermarket continue to gain ground and change the online shopping habits of users, JD's JX, which targets the sinking market, and its JX Pinpin for fresh e-commerce, have been cut. All that's left for JD.com is a main store that is constrained by quality positioning and instant retail through Dada.

Currently, JD.com's growth prospects among the various e-commerce platforms are the most uncertain, which is why Brother Dong has announced a high-profile low-price strategy, in an attempt to regain users' trust and launch an attack on the sinking market - regaining growth. But currently, the 10 billion subsidies are hurting the company's profits, and if they're not used wisely, they will have little effect on regaining growth. It can be said that the current dilemma is not easy to resolve, and the key is whether Brother Dong can lead JD.com to find a way out. (The management's view on the company's strategy for 2023 is crucial in the conference call).

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Detailed interpretation of this quarter's financial report:

1. Once again, "profits" are used to cover up the "growth" issue

Looking at the overall revenue performance, JD.com achieved a total revenue of RMB 295.4 billion this quarter, an increase of only 7% year-on-year, which is basically in line with market expectations. Although the market's expectations for the company are not high due to the impact of the COVID-19 prevention and control measures and the subsequent surge in infections in the fourth quarter, a growth rate that slips back to single digits is an embarrassing figure for both investors and management.**

Upon closer examination of the income structure of each sector, it can be seen that the core JD Mall's revenue growth rate this quarter is only 3.6%, even lower than during the lockdown in the second quarter, and almost 5 billion lower than expected. It was mainly JD Logistics' significant increase in growth, reaching 41% and exceeding expectations by nearly 1.6 billion, that filled the gap in the mall's revenue.

According to Dolphin Analyst's insider information, in addition to the contribution from consolidating Debon Logistics and CNLP (China Logistics Property), JD Group restructured the fee structure for merchants, reducing logistics subsidies for POP merchants using JD Logistics, and instead providing a certain discount on commission to balance the actual expenses of merchants. This may be one of the reasons for the simultaneous increase in the incomes of the mall and logistics sectors.

At the same time, JD is still contractingly shrinking Jingxi, overseas e-commerce, and other new businesses. This quarter, it only confirmed 4.8 billion in revenue, a continued decrease compared to the previous quarter, and the market had expected revenue of 6.3 billion, indicating that the original market expectations may have been for further expansion of new businesses to drive revenue growth. However, the actual situation seems to be the opposite.

As seen above, the problem of JD's continuous slowing growth has not been reversed, but profits are still better than expected. The company achieved a total operating profit of 4.83 billion this quarter, nearly 30% higher than expected by the market, with a profit margin of 1.6%, a year-on-year increase of 1.8 percentage points, a narrower improvement than the previous quarter's 2.4 percentage points.

Looking at each sector, it can also be found that the main contribution to higher-than-expected profits comes from the logistics sector and the reduction in head office expenses. The performance of the mall and new businesses is mediocre:

The core JD Mall sector achieved a profit of 7.86 billion this quarter, only 200 million higher than expected, showing unremarkable performance. However, the simultaneous increase in commisions and logistics revenues allowed for the transfer of some of the mall sector's profits to the logistics sector.
The now second pillar of the group, the logistics sector, achieved an operating profit of 900 million this quarter, significantly higher than the expected 570 million and growing at an accelerated pace in revenue. Dolphin speculates that as JD Logistics has already gone public independently, public shareholders may have some reservations about the group's behavior of keeping profits within the mall sector. Hence, the profit is being diverted back to the logistics sector through financial operations, thereby increasing the market value of JD Logistics.
Despite a continual decline in revenue in the new business sector, the loss actually increased to 1.15 billion this quarter, nearly 200 million more than expected. During the conference call, we can pay attention to management's interpretation of whether the loss expansion is due to layoffs or the company's reinvestment.
Last but not least, the Dolphin analyst calculated that the market was expecting an accumulated loss of 3.3 billion, while the actual loss was 2.57 billion, allowing for a profit savings of approximately 700 million**. Therefore, the overall profit exceeding expectations mainly comes from headquarter-based cost control. Although the front-end business department also exceeded expectations, it was not surprising.

II. Self-operated retail is completely sluggish

As seen from the previous section, JD.com's revenue growth this quarter is quite unimpressive, and the key reason is the poor performance of self-operated retail. It achieved income of 237.6 billion yuan this quarter, with a year-on-year growth rate of only 1.2%, nearly 5 billion yuan lower than expected. Moreover, the domestic online physical retail market grew nearly 10% year-on-year in 4Q. Therefore, the impact of the pandemic cannot be used as an excuse; JD.com is facing a real bottleneck in growth compared to its peers.

Among them, the income from electrical products this quarter was 141.7 billion yuan, with a year-on-year growth rate of only 1%. The performance can be described as miserable, but the retail market for domestic appliances and communications products also dropped by 11% year-on-year in the fourth quarter. This means that the difficult situation of JD.com's electrical products is the industry's common problem. As the Chinese domestic real estate market has not shown a significant recovery, and JD.com has eaten away at most of its peers' market share, the industry's beta is not improving, and JD.com has no power to achieve independent growth.

Similar to electrical products, the income from self-operated general merchandise this quarter was 95.9 billion yuan, with a growth rate of only 2%, which is also less than market expectations. Daily necessities are required during the pandemic and economic downturn, and are supposed to be the most resistant to growth category. However, JD.com has slowed down remarkably, which is indeed puzzling.

According to Dolphin's analysis, the company previously explained that one of the reasons for the slowdown in general merchandise revenue growth is because JD.com changed some low-margin 1P merchants to high-margin 3P merchants in order to make the profit look better. But in addition to this, JD.com has greatly shrunk its JD Daojia business. However, the rise of Duoduo Grocery, Meituan Select, and Flash Purchase, which also focus on daily consumer goods sales, represent the change in user shopping channels and the deterioration of JD.com's layout, which is more likely the core reason for JD.com's general merchandise growth slowdown.**

2. Platform Services: This mainly reflects the commission and advertising revenue of 3P sellers on the main website and JD Daojia platform, which amounted to 24.6 billion yuan this season, slightly higher than market expectations, with a relatively stable growth rate of 11%. However, among them, about 1.1 billion yuan of platform revenue is contributed by Beidian Dada, and after excluding this contribution, the growth rate is only 6%, which is also not optimistic.

3. Logistics and Other Services: Including the logistics sector of JD Logistics, Dada Express, and Debon Logistics, the revenue for this quarter is 33.2 billion yuan, a year-on-year increase of as much as 75%, which is also significantly higher than the expected 31.8 billion yuan. Dolphin Analyst believes that, in addition to the impact of consolidation, the previously mentioned income and profit redistribution of JD in the shopping mall and logistics sectors should be one of the reasons for the good performance of the logistics sector.

III. Cost Reduction and Efficiency Increase Continues, But No Longer Strict

From the above, we can see that JD's performance in releasing profits in this quarter is still good. In this section, we will break down where the unexpected profits come from.

1. First of all, JD realized a gross profit of 41.5 billion yuan this season, which is about 600 million higher than market expectations. The gross profit margin has risen to 14.1%, increasing by 60 basis points year-on-year. According to the company's previous conference call, the company has reduced subsidies to users, shrinked new businesses like JD X and changed some stores from 1P to 3P, all of which are reasons for the increase in gross profit margin.

2. In addition, in terms of expenses, JD's marketing expenses have decreased by 10% year-on-year, which is the most noticeable reduction, saving about 0.7% of the profit margin.

At the same time, after the radical downsizing (mainly in non-core business sectors such as JD Logistics and JD Health), management expenses are also decreasing, with a year-on-year decrease of 2%, also saving 0.2% of the profit margin.

But unlike the previous quarter, when all expenses were significantly reduced, R&D expenditures of the company began to rebound this quarter, increasing by about 6% to match the revenue growth rate.

At the same time, due to income redistribution, the internal mall payment to logistics for performance fees has risen, and at the same time, the epidemic has led to poor performance, causing the proportion of logistics performance fees to self-operated retail revenue to rise by 10 basis points this quarter.

Overall, due to the contraction of new business and the increased proportion of 3P, the company's gross profit margin has inertia improved by 0.6pct. Although JD is still controlling costs, the intensity has obviously relaxed compared to the third quarter. Only marketing and back-end management expenses are still declining on a year-on-year basis, while research and development expenses and fulfillment have both increased.

Therefore, although the company's profit in this quarter was slightly higher than expected, the magnitude was not as impressive as in the third quarter. JD's operating profit margin this quarter was 1.6%, a year-on-year improvement of 1.8pct, but the increase compared to the profit margin of 2.4pct in the previous quarter was clearly lower.