"100 billion subsidies" just empty talk? JD is still in the same pit

On the evening of May 11th, before the US stock market opened, JD (JD.US) released its Q1 2023 financial report. There were no surprises, the only so called "highlight" was the "boring" profits beat. The details are as follows:

1.Firstly, JD achieved a total revenue of 240.7 billion yuan this quarter, with a year-on-year growth rate of only 0.5%. Such performance can be described as extremely poor against the overall recovery of the domestic economy and consumption in the first quarter. However, JD.com has already fully communicated with the market, and the conversion of some of the company's businesses from 1P to 3P mode naturally leads to a decline in revenue. Therefore, although the performance is poor, the market has already priced-in and it is not an unexpected bad news.

Although revenue was extremely poor as expected, JD still deliver surprises in terms of profits. This quarter achieved an operating profit of 6.43 billion yuan, significantly exceeding the market's expected 4.33 billion yuan. The operating profit margin also increased by 1.6 percent points year-on-year to 2.6%, which is significantly better than the company's guidance of a steady profit margin.

2.Looking at the different business segments, although the revenue of JD's core business, JD Mall, declined by 2.4% year-on-year this quarter, it also met the company's guidance of a low single-digit decline, which is not bad news.

Instead, the revenue growth rate of JD Logistics (JDL) slowed down from 41% in the previous quarter to 34%, showing a significant decline. Dolphin Analyst believes that in addition to the disturbance caused by the Spring Festival and the epidemic, the main reason may be that after JD allowed 3P merchants to freely choose express delivery companies, the demand flowed towards the low-priced San Tong Yi Da.

In terms of segment profits, the JD Mall segment achieved a profit of 9.84 billion yuan this quarter, far exceeding the expected 7.41 billion yuan. Although the company's guidance for profit margin was steady year-on-year, it actually increased from 3.6% to 4.6%, indicating that activities such as billion-yuan subsidies did not drag down the company's profits. However, JD Logistics' profit also "failed miserably" and lost 1.12 billion yuan, possibly due to the explanation of revenue slowdown.

However, looking at the combination of commercial flow and logistics, it still released about 1 billion yuan of operating profit more than expected.

3.Including new business segments such as Jingxi and overseas e-commerce, revenue is accelerating its contraction, with only 3.5 billion yuan confirmed this quarter, a year-on-year decline of 40%, lower than the expected 4.4 billion yuan. Correspondingly, the losses of new businesses have also been significantly reduced to only 160 million yuan, while the market still expects a loss of 1.1 billion yuan (consistent with the loss in 4Q), indicating that JD's cost reduction and efficiency improvement strategy is still continuing, and the efforts are not small.

Overall, the improvement of commercial flow and logistics, and the reduction of losses in new businesses, contributed about 1 billion yuan of operating profit more than expected.

4.In terms of self-operated retail business, the revenue of electrical products this quarter was 117 billion yuan, a year-on-year decrease of 1%. Even though the impact of the change in the business model on electrical products is relatively small, the growth is still poor. JD's lead over the market growth rate is only 2%. Considering that the turnover of the real estate market began to weaken again in April and May, the future growth is probably not optimistic. As for the impact of 1P to 3P on general merchandise retail, the revenue for this quarter decreased by 9% YoY, which is 4.3 billion lower than expected. However, the revenue data for general merchandise retail is not meaningful before the end of the mode change, and the growth rate of gross profit will be a better indicator.

Correspondingly, the commission and advertising revenue for the 3P business, which benefited from the good news, was 19.1 billion yuan this quarter, significantly exceeding the expected 17.9 billion. The progress of 1P to 3P transformation is faster than expected, as self-operated revenue is lower than expected, while commission revenue exceeds expectations.

5.The revenue is in line with expectations, but the profit exceeds expectations. From the perspective of expenses, where does the profit come from? The gross profit for this quarter was 36 billion yuan, nearly 2 billion higher than the market expectation. The reason for exceeding expectations is that the gross profit margin increased by 80 basis points YoY, rather than being the same as the company's guidance and market expectations.

Since 1P to 3P naturally leads to higher gross profit margins, while the market expects gross profit to remain the same, the most likely explanation is that the market expects "billion-yuan subsidies" and other price wars to drag down gross profit, offsetting the benefits of 1P to 3P. However, the actual gross profit margin has significantly increased, indicating that the company's actual subsidy efforts are not significant.

The YoY growth of gross profit this quarter was about 8%, which probably reflects the actual growth of JD.

In terms of expenses, the marketing expenses for this quarter were 8 billion yuan, not only a decrease YoY but also lower than the market expectation of 8.8 billion. As for other expenses, they are generally close to the revenue growth rate, and the overall expense expenditure is completely consistent with market expectations.

In summary, the improvement in profit comes entirely from the improvement in gross profit, and the expenditure is still cautious. The strategy of reducing costs and increasing efficiency continues.

Dolphin Analyst's view:

Overall, there are not many highlights or lowlights in JD's financial report this quarter. However, as Liu Qiangdong's first answer after announcing the "cost-effective war" loudly, the actual performance is completely different from the vision of winning growth by waging a price war.

First of all, the revenue growth is not surprising, and there is no sign of acceleration compared to the guidance. At the same time, activities such as "billion-yuan subsidies" did not drag down gross profit as expected, and marketing expenses did not increase but decreased, which is less than expected.

In combination, JD is still in the cycle of reducing costs and increasing efficiency, which is completely opposite to the situation of increasing investment, declining profits, and recovering growth under a price war. JD has returned to its "old self" for the time being.

However, the story of profit exceeding expectations has been talked about by JD from last year to now, and the market has long been numb. Losing growth and even market share is currently the most concerned topic in the market. Therefore, the profit exceeding expectations this quarter is difficult to have much impact on the market.

Interpretation of the Quarterly Report:

1. "Terrible" Growth Expectations, "Surprising" Profits

Looking at the overall revenue performance, this quarter, JD achieved a total revenue of 240.7 billion yuan, a year-on-year growth rate of only 0.5%, basically zero growth. Against the backdrop of the overall recovery of the domestic economy and consumption in the first quarter, such performance can be said to be extremely poor.

However, JD has already fully communicated with the market that the quarter-on-quarter revenue growth rate is likely to remain flat, and the ongoing transition of some businesses from 1P self-operated to 3P mode will also lead to a reduction in revenue scale. Therefore, although the performance is poor, the market has already price-in, and it is not unexpected bad news.

Looking closely at the revenue of each segment,

The core revenue of JD Mall this quarter, although down 2.4% year-on-year, completely meets the company's guidance of a low single-digit decline, which is not bad news either. However, from another perspective, the 10 billion yuan subsidy activity launched by Liu Qiangdong himself in March does not seem to have significantly boosted growth.

In other segments, the revenue growth rate of JD Logistics (JDL) this quarter also slowed down from 41% in the previous quarter to 34%, which also has a relatively significant decline. In addition to the reason that logistics was hindered by the new crown infection during the Spring Festival period, the fact that JD allows 3P merchants to freely choose express delivery companies may also be a reason for the slowdown in demand flowing to lower-priced third-party logistics providers.

Including Jingxi and overseas e-commerce, the revenue of new business segments is accelerating to shrink, with only 3.5 billion yuan in revenue confirmed this quarter, a year-on-year decline of 40%. Lower than the expected 4.4 billion yuan, it can be seen that JD.com still has a great deal of effort to reduce costs and increase efficiency.

Dada, which is regarded as the largest source of future growth, achieved revenue of 2.58 billion yuan this quarter, a year-on-year growth of 27.2%, which is still a good growth. However, with a revenue volume of only a few billion yuan, it is difficult to have a substantial impact.

If you are interested in interpreting research reports on Chinese concept stocks, please feel free to add WeChat account "Dolphin Analyst" to join the investment research group and get Dolphin's in-depth research report and discuss investment opportunities with investment research veterans. Overall, the revenue growth was worse than expected, but there were some small surprises in profit release. "This quarter achieved an operating profit of 6.43 billion, significantly exceeding the market's expected 4.33 billion. The operating profit margin also increased by 1.6 percentage points year-on-year to 2.6%, also far exceeding expectations," said Dolphin Analyst.

Dolphin Analyst believes that the original 1P to 3P profit margin was bound to improve significantly, but the market's expected margin was still relatively conservative, possibly due to concerns that the "100 billion subsidy" would drag down profits. However, the actual performance shows that the "100 billion subsidy" is in line with Dolphin Analyst's judgment, and it is more of a case of "much ado about nothing."

Looking at the different sectors:

The core JD Mall sector achieved a profit of 9.84 billion this quarter, far exceeding the expected 7.41 billion. Since the company previously indicated that the operating profit margin of the mall sector this quarter would be flat year-on-year, the market's expectation was also that it would be the same as last year's 3.5%. However, the actual figure was 4.6%, indicating that the benefits of 1P to 3P were not offset by other factors.

However, JD Logistics recorded an operating loss of 1.12 billion, far below the expected profit of 250 million, while its growth slowed down. Dolphin Analyst believes that one possible reason is that some 3P sellers have abandoned JD Logistics, and there may also be changes in profit distribution between the mall and logistics sectors.

The new business sector continued to reduce costs, and the loss this quarter was significantly narrowed to only 160 million, while the market still expected a loss of 1.1 billion based on the 4Q level.

Last but not least, the unallocated losses generated by the headquarters also narrowed by more than 300 million year-on-year to 1.92 billion.

Overall, the mall and logistics sectors contributed about 1 billion in unexpected profits, while the new business and group headquarters reduced losses and contributed another 1 billion in unexpected profits.

2. The transformation to 3P is progressing faster than expected

As the company has shifted some of its retail sales from 1P to 3P. The revenue from self-operated retail is now literally meaningless (with a year-on-year growth rate of no reference value). "This quarter, self-operated retail achieved revenue of 195.6 billion, a year-on-year decrease of 4.3%," although poor, the market has long been aware of and digested this fact.

Among them, the revenue of power products this season was 117 billion yuan, a year-on-year decrease of 1%. Even though power products were less affected by changes in the business model, the growth was still poor. At the same time, the growth rate of JD.com's leading home appliances and communication market also dropped to only 2% this season. It can be seen that JD.com is increasingly difficult to offset the decline of the market by increasing its market share, and it is likely to continue to return to the market performance in the future. The real estate transaction began to weaken again in April and May, and the future growth is probably not optimistic.

For general merchandise, which is more affected by changes in the business model, the revenue in this quarter is naturally worse. The actual revenue achieved this quarter was 78.6 billion yuan, a year-on-year decrease of 9%, which is much lower than the market expectation of 82.9 billion.

However, the significance of focusing on revenue scale is not significant at present. Due to the small impact of 1P to 3P on gross profit, it may even be beneficial, so the year-on-year growth rate of gross profit should better reflect JD.com's actual growth situation.

Moreover, combined with the 3P business growth exceeding expectations mentioned later, the greater the decline in general merchandise under the 1P model, the faster JD.com's progress in the 1P to 3P transition.

Platform services: Reflecting the commission and advertising business of 3P sellers on the main station and JD Daojia platform, the revenue this season was 19.1 billion yuan, which significantly exceeded the expected 17.9 billion. Self-operated revenue is lower than expected + commission income exceeds expectations, indicating that the progress of 1P to 3P transformation is faster than expected. At the same time, as a beneficiary of the transformation, the year-on-year growth rate has only slightly slowed from 11% to 8%, and it is already the most robust sector. However, the absolute growth of 8% is still very weak.

Logistics and other services: The logistics sector, including JD Logistics, Dada Express, and Debon Logistics, had a revenue of 28.3 billion yuan this quarter, a year-on-year growth rate slowing from 75% to 61%. As mentioned earlier, the reason for the slowdown may be that some 3P merchants have changed their logistics service providers.

3. No increase in costs, is the "billion subsidy" merely a name?

As we can see from the previous section, JD.com's profit this quarter still exceeded expectations by a large margin. So from the perspective of costs, where did the profit come from?

First of all, at the gross profit level, the company achieved a gross profit of 36 billion yuan this quarter, nearly 2 billion yuan higher than market expectations. Since revenue growth is already a given, the reason for the higher-than-expected profit is entirely due to an 80 basis point increase in gross profit margin compared to the same period last year, while the company's previous guidance and market expectations were for gross profit margin to remain basically flat year-on-year.

Since the natural result of 1P to 3P conversion is a higher gross profit margin, and the company's guidance and market expectations were for gross profit to remain flat, the most likely reason is that the market expected "billion subsidies" and other price wars to drag down gross profit and offset the benefits of the model change. The significant increase in actual gross profit margin indicates that the company's actual subsidy efforts are not significant.

At the same time, gross profit increased by about 8% year-on-year this quarter, compared to 12% in the previous quarter. Dolphin Analyst believes that this 8% growth rate may reflect JD.com's actual growth.

As for costs, we can also see that marketing expenses this quarter were 8 billion yuan, a decrease from the same period last year and lower than the market's expected 8.8 billion yuan. That is to say, JD.com not only did not increase marketing investment, but instead reduced it.

As for other expenses, fulfillment expenses decreased by 1% year-on-year, research and development investment decreased by 5%, which is basically the same as the decline in revenue, while management expenses increased slightly by 5%. Overall, the growth rate of expenses is basically consistent with that of revenue, and total expenses are 30.1 billion yuan, which is exactly the same as the market's expectations.

To sum up, JD.com's cost expenditure this quarter is still relatively cautious and basically consistent with market expectations. However, due to the significant improvement in gross profit and the unexpected increase of about 2 billion yuan, the company's final operating profit also exceeded the market's expectations by about 2 billion yuan.

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Previous Research:

In-depth

April 14, 2023 "Is there still value in JD.com on the operating table for bone scraping treatment?"

April 22, 2022 "Why are Meituan and JD.com performing well in the stock battle?"

September 27, 2021 "Get to know JD.com again, the company that was mocked by the entire internet"

Earnings Season

March 10, 2023 Conference Call "JD.com: From driving sales with big promotions to focusing on everyday low prices (summary)"

March 9, 2023 Earnings Review "With the 'cover-up' routine played out, can Dong Ge still lead JD.com to a comeback?"

November 18, 2022 Conference Call "Will JD.com face greater pressure in Q4? This year will focus on cost reduction, and next year will focus on efficiency improvement (conference call summary)"

November 18, 2022 Earnings Review "Can JD.com continue to cover up slowing growth with massive profits?"

August 24, 2022 Conference Call "JD.com: Continuing to focus on efficiency, local retail will be the key to growth (conference call summary)"

August 23, 2022 Earnings Review "Without growth, will JD.com become a value stock?"

May 17, 2022 Conference Call "Q2 will be 'taking a break,' but cost reduction and efficiency improvement still have potential (JD.com conference call summary)"

May 17, 2022 Earnings Review "Fighting the pandemic and holding back profits, JD.com is still full of sincerity" 2022 March 10 Telephone Conference "Uncertainty Increases, Can Self-Operated Mode and Self-Owned Logistics Help JD.com Maintain Its Market Position?" (Conference Summary)

2022 March 10 Financial Report Review "JD.com Arrives at a Crossroads, Revenue Shines, Future Uncertain?"

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