Is Jingdong still valuable on the operating table of bone scraping therapy?

According to the summary of the pan-e-commerce industry by Dolphin in the past few days "Battle for "Cost-effectiveness": When Will Ali, JD, PDD Stop Shenanigans?", the main logic of e-commerce at present is: 1) Domestic commodity consumption has weak recovery momentum, and under the macro headwind where offline channels are marginalizing online channels, it becomes harder for the online market to surprise; 2) In the stock market, e-commerce platforms have once again fallen into the homogenized internal friction under the name "cost-effectiveness", but the probable result is "zero-sum game". Each platform has to sacrifice certain profits and it is actually difficult to obtain excess growth.

In this context, Dolphin believes that the current highest winning strategy for the e-commerce industry is still to look for opportunities to dig out the rebound of oversold stocks when the conservative valuation is lower than core assets. Alibaba, Meituan, and Pinduoduo have recently updated their valuations, and only JD has been relatively undervalued by Dolphin for a long time; therefore, it has not been carefully calculated for valuation until now.

However, JD's stock price has now touched the "historical trough" of extreme pessimism in October 2022, with a total market value of only about 70% of Pinduoduo's. Therefore, based on our logic of exploring oversold stock rebounds, this time JD has already been chosen as the research target.

This article will mainly focus on two aspects:

1. The cause and effect of the collapse of JD's revenue growth, whether it will continue to be sluggish or be able to speed up again in the future;

2. How low is the valuation of the company's core assets and how much upward space may be brought by other assets?

The conclusions are as follows:

(1) With the stabilization of the domestic real estate market and the failure of Suning, JD still has room to continue to eat up market share. The core sales growth rate will probably rebound in 2023.

(2) Although under the strategy of "every day low cost", the marginal resources of the company transfers from 1P to 3P will lead to a decrease in the scale of revenue in the financial report, and although the company's guidance of year-on-year decline in JD Mall's revenue is frightening, the actual impact on the company's profits is very small. When following up JD's monetization, mainly focus on the change of gross profit margin and indicators such as daily active users and GMV scale, which reflect whether the strategy of "every day low cost" that prioritizes traffic has any effect.

(3) Based on a fairly conservative profit forecast, Dolphin calculated JD's safety margin and reasonable valuation to be $43 and $62, respectively. The current stock price has fallen below the safety margin of the valuation, and if it returns to the reasonable valuation, there is at least 60% rebound space. However, in the recent quarters, JD's revenue and profits may continue to deteriorate, which could further frighten the market and lead to the possibility of the company's stock price continuing to fall below $30.

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1. Is there any chance for the big problem of dividend eating ending and income slide?

1. Can mature electrical products still grow? At the forefront of the issues that JD.com faces is obviously the slide in revenue growth. In fact, as early as Q1-Q2 22, when signs of a slowdown in growth of revenue from general merchandise retail and advertising commissions began to appear, Dolphin was already worried: as one of the platforms with the slowest growth and potential for expansion in the emerging markets, live e-commerce, and community group buying sectors, JD.com was already at the bottom of the industry.

Therefore, when the growth of daily FMCG and third-party businesses (the driving force behind JD.com's total revenue growth) began to slow down, it was almost only a matter of time before JD.com's growth collapsed in the logic of normal deducation to Dolphin. As of Q3 that year, JD.com's own retail growth had already been slower than the industry average, and the expected revenue decline came very quickly.

As JD.com went from outpacing the market in growth to falling behind, the market could no longer ignore its long-term growth problems, and its preferences and stock prices began to decline accordingly. Therefore, the biggest issue in researching JD.com is when its revenue growth will stabilize.

(1) Crown Jewel of electrified retail ceases to shine

The most important and revenue-generating category, electrified products, for JD.com is already a mature online category. The overall growth rate of the category has been less than 10% since 2016-2017, and the online penetration rate surpassed 50% by 2021, with limited room for further improvement. It can be said explicitly that the growth potential of online electrified goods is limited.

However, JD.com has still maintained a growth rate of more than 10% above the industry average in 2022. In the context of limited growth in the overall market, the only way for a single company to maintain growth is to continually increase market share. Based on the calculation of company-operated retail sales/total national sales of appliances and communications, JD.com and Suning, the two largest online platforms, have been steadily increasing their market share.

It can be seen, however, that the overall market share of JD.com and Suning has begun to slow down since 2018, which can be attributed to the high online substitution rate and concentration of market leaders; JD.com was already faced with the difficult task of how to continue increasing its market share. Unexpectedly, in 2021, Suning's thunderbolt, which resulted in a drop in revenue scale, brought JD.com a lot of market share space, delaying the problem of how to grow sales of electrified products for the time being.

But from the financial data, it can be seen that Suning's retail sales have stabilized since the first half of 2022, and it is no longer losing market share. This means that the red dividend of continuing to eat Suning's share in the "easy mode" to increase market share is gradually being consumed, and JD.com must return to compete with offline stores, Alibaba, and Pinduoduo.

At the same time, Pinduoduo's extreme low prices through a billion-yuan subsidy have indeed shaken the absolute leading position of JD.com's popular products in users' minds. The "cost-effectiveness battle" initiated by Brother Dong is a forced proactive choice.

(2) Looking ahead, what is the growth prospect of JD.com's core popular products in the future? Overall, Dolphin believes that it should not be pessimistic in the short and medium-term, but long-term cannot be optimistic. First of all, from the perspective of industry beta, real estate sales, which have a significant impact on the popular industry, have clearly stabilized and warmed up in March, and the sales of the top 100 real estate companies have increased by 29% year-on-year in a single month, and the sales for the entire quarter have also shown a 3% increase. The recovery of second-hand housing transactions is even stronger.

Although there is no certainty that the current recovery of the real estate market can be linearly extrapolated, neither the market nor Dolphin is confident that the real estate market and popular product sales will continue to decline. The industry beta will no longer be a headwind and may even have some benefits. In fact, the decline in sales of household appliances above the scale in January-February has narrowed to -1.9%, and there is no big problem with subsequent turnarounds.

As for the growth of 3C products such as mobile phones, the current growth is still poor, and it may be necessary to focus on whether the new phone release cycle of major brands in the second and third quarters can drive the recovery of the 3C category.

As for whether to continue to increase market share, although Suning is no longer losing share, the total market share of JD.com + Suning is still lower than that in 2020, indicating that JD.com still has some room to eat up share. Even if JD.com cannot counterattack Pinduoduo in the internal competition of e-commerce platforms, it should have no problem in maintaining its basic market share after launching a billion-yuan subsidy. Therefore, in the medium term, JD.com should be able to slowly increase its market share in the popular product sector.

Overall, the improvement of the macro environment and the existence of market share space mean that JD.com's popular products can continue to maintain a slightly higher industry growth rate without any problems.

2. Will the "bone-breaking" transformation bring new dividends to JD.com?

In addition to the core popular business, which is relatively stable, JD.com's other two pillar business lines - general merchandise self-operated retail and 3P merchant business, are experiencing the largest transformation in several years. Dolphin believes in his summary posted several days ago that the core goal of JD's reform this time is to enhance its "cost-effectiveness awareness" in users' hearts by offering various subsidies and low-price strategies, transforming from "big promotion-driven" to "daily low-price and daily sales-driven" and ultimately cultivating users' high viscosity, daily consumption habits, and less comparison consumption habits, and bringing the platform more, high punch-in rate and stable traffic.

To achieve this ultimate goal, JD has also undergone the largest organizational change in recent years, including:

① Simplifying the organizational hierarchy, eliminating the business group level, with JD Retail CEO directly leading the business unit, and only three levels left from grass-roots employees to CEO after the reform;

② More importantly, there is no longer a distinction between POP (3P merchants) and self-operated channels inside, and the two channels are managed by the same personnel to promote traffic parity. Dolphin believes that JD has to some extent given up its flow bias towards the "progeny" self-operated channel, and its ultimate goal is to reform the rigid execution of self-operated channels through fairer competition with 3P merchants and incentivize self-operated channels.

Through the internal competition between 1P and 3P, consumers are given cheaper prices, more flexible and diversified product choices, and faster delivery speed and shipping costs to ultimately achieve "daily low price" for all categories on the JD platform.

For the above strategic objectives and profit considerations, JD is reportedly divesting some low-profit businesses such as daily necessities and fresh products to 3P merchants. This will cause JD's revenue structure to shift from total sales to commission and advertising fees, naturally resulting in a decrease in revenue scale.

In fact, after winning the partial war of the commercial super category previously, JD's retail business of general merchandise (including FMCG, daily necessities, etc.) has been growing significantly faster than the overall online market, but the growth rate has rapidly declined since 2Q22, with the impact of revenue structure changes. According to the company's claims, the impact of this 1P to 3P transition will continue throughout 2023, causing JD Retail's revenue for the whole year to decrease slightly year-on-year, but the overall impact on gross profit will be relatively small.

(2) After the "choose one out of two" policy was broken, can the reform inject new vitality into 3P businesses?

In addition to e-commerce benefiting from Suning and commercial super benefiting from the pandemic, Alibaba's mandatory "choose one out of two" policy for merchants was broken at the end of 2020, which actually created a dividend for JD with a large influx of 3P merchants.

The dispute that forced merchants to "choose one out of two" has been ongoing since 2018 and began gradually to open up between internet platforms following the 18.3 billion yuan penalty received by Alibaba in April 2021. As a result, many 3P merchants have begun to enter JD. According to data obtained by Dolphin Jun, the number of 3P merchants on the JD platform exceeded 500,000 at the end of 2020, up from under 300,000 in 2019. Following this explosive growth in the number of merchants, JD experienced an outbreak in advertising revenue in 2021, with growth rebounding to 35% after a period of continuous slowdown.

As a result, while the same problem is at play and 3P merchant growth and advertising revenue are expected to slow to 8% and 14%, respectively, in 2022 as the “choose one out of two” policy dividends gradually disappear (although macroeconomic factors may affect this and it is not all due to JD’s own issues), JD is still on the right path to boosting its support and attraction for 3P merchants, such as its recent opening of personal stores and more equitable traffic policies, in order to encourage 3P business growth recovery in 2023.

Overall, whether it is moving from self-operated to 3P retail for general merchandise, or increasing support for 3P merchants, both ultimately prioritize traffic and low prices. JD's assessment criteria has shifted from revenue to GMV, reflecting this trend. Therefore, rather than focusing too much on the decline in revenue in 2023, it is crucial to look at gross profit from a financial perspective, and third-party statistics on turnover and monthly activity from an operational perspective.

Is JD still valuable with these pitfalls? Where is the safety net of the valuation based on core business?

In summary, Dolphin Jun's outlook for JD's core retail sector is stable, with 3P business set to grow thanks to resource tilts, and general self-operated merchandise income to decline but profit to stabilise. Based on this:

(1) Dolphin Jun conservatively estimates that the sales growth of electrical products in 2023 will only slightly rebound, and will subsequently remain stable and slow, without expecting to return to double-digit growth before 2021.

(2) As for general merchandise retail, considering the impact of the shift from 1P to 3P and the company's guidance on this matter, Dolphin Jun predicts that sales revenue will fall by 12% YoY in 2023, and that the growth rate will remain below 5% subsequently. Overall, expectations for self-operated retail business are quite conservative.

(3) However, 3P business benefits from the tilt in JD's internal traffic and the transformation of some business models. Dolphin Jun predicts that JD's advertising revenue will regain momentum and return to growth of nearly 20% in 2023. As a cross-validation, while also overlooking the distortion caused by 1P to 3P's income, Dolphin still expects a total GMV growth rate of less than 10% for the company, which is also lower than Dolphin's expectations for the online retail market, and still a conservative estimate.

On the profit side, considering that the company claims that this year's total marketing spending is close to that of last year, the cost of subsidies such as the 10 billion subsidies belongs to the internally reallocated marketing budget, and the guidance for the retail business's profit margin in 2023 will be roughly the same as the previous year. Dolphin conservatively estimates that JD.com's operating profit in 2023 will not only not increase, but also will slightly shrink to 34.7 billion.

Therefore, based on the above quite conservative performance forecast, without considering JD.com's future growth, only considering the value of JD.com's core mall assets, and using 2023 as the valuation benchmark at the bottom of the cycle. By deducting the expenses and taxes not allocated to the headquarters from JD.com's operating profit, and using a PE valuation of 15 times, the estimated bottom value of JD.com is 42.2 billion US dollars. Equivalent to $26 per share, in the event that the company's subsequent performance further deteriorates, it is not impossible for the stock price to fall further to this extreme valuation.

In addition to the net cash and short-term investments of approximately $25.9 billion (at a 10% discount), the safety margin of JD's valuation comes to 68 billion, equivalent to $42.9 per share.

However, JD's current stock price is only $37.5, with a market value of only $59+ billion, which is equivalent to a PE multiple of only 11-12x based on JD's 2023 performance. It can be said that the market has completely ignored JD's growth potential and possible reversal, and is definitely in an undervalued range.

But in fact, even if JD is worse, it can still grow at a slightly lower than the industry average growth rate. Dada, which had a combined loss of nearly 6 billion in 2022 and other new businesses, although it is uncertain how much profit they can contribute, should achieve profit and loss balance in the next few years.

Based on the DCF model, Dolphin estimates that JD's fair value should be above $60 per share, which is more than 60% higher than its current value.

As Alibaba claims to list its subsidiaries in the future, the market is also beginning to pay attention to the "invisible" asset value of these large conglomerates such as Alibaba and JD.com. Therefore, regardless of which valuation method is used, JD's current stock price has entered the undervaluation range even if only the core asset value is considered. If future growth and the value of other assets in the group are taken into account, the market value has at least 60% room for regression. Therefore, for a long-term investor, buying now and waiting for the valuation to return is ideal, whether it is a victory or a loss.

Of course, valuation regression requires the drive of catalytic events (such as strong consumer rebound or eased competition). It is difficult for the Dolphin team to predict when it will come. Therefore, for investors with a shorter holding period, they still need to wait for the right time.

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Related research by Dolphin Investment Consulting:

E-commerce industry:

January 5, 2023, "The offensive and defensive situation is greatly reversed, and Alibaba, Ctrip, and Didi are going to counterattack."

September 30, 2022, "Pinduoduo vs. Vipshop: Your “poor day” is their “good day”?"

September 22, 2022, "Alibaba, Meituan, Jingdong, Pinduoduo: have they all accepted their fate? Still have to fight the “great cause”."

JD:

March 10, 2023 telephone conference calls, "JD: From large promotion to low price every day (minutes)"

March 9, 2023, financial report review, "Shameful routine is overplayed. Can Brother Dong make JD.com rise again?"

November 18, 2022, telephone conference calls, "Will JD's pressure be greater in the fourth quarter? This year's focus is on reducing costs, and next year's focus is on improving efficiency (minutes of telephone conference)" On November 18, 2022, Review of the Financial Report: "Can JD.com's substantial profit rescue its slow growth?" (https://longbridgeapp.com/en/topics/3663869)

On August 24, 2022, Summary of the Telephone Conference: "JD.com: Continuing to focus on efficiency, local retail will be the key growth point" (https://longbridgeapp.com/topics/3361197?channel=nlwi)

On August 23, 2022, Review of the Financial Report: "Without growth, will JD.com become a value stock?" (https://longbridgeapp.com/topics/3360534?channel=nlwi)

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