Missing the buyback, is JD still worth it?

On the evening of May 16th, before the U.S. stock market opened, JD.com (JD.US) released its financial report for the first quarter of 2024. In summary, although the revenue growth met expectations without surprises, the operating profit of the e-commerce business declined much less than previously guided. As a result, both the segment and overall profit of the group exceeded expectations by a considerable margin. The detailed key points are as follows:

1. Emerging from business restructuring, growth returning as expected: In this quarter, JD's self-operated retail revenue was 208.5 billion RMB, a year-on-year growth of 6.6%. After the impact of business restructuring, the revenue growth rate began to approach the GMV growth, with a sequential acceleration of about 3.4 percentage points. However, compared to the company's guidance of high single-digit revenue & GMV growth, the actual performance was almost in line with expectations, without surprises.

Specifically, the revenue of electronic products grew by 5% year-on-year, with a slower growth rate of 1% compared to the previous quarter. This was a significant drag despite the overall sales growth in the home appliance and mobile phone industries this quarter. The general merchandise retail, which was more affected by the restructuring, significantly improved its growth rate to 9% this quarter, about 2% higher than expected. This reflects JD's higher growth potential in categories such as supermarkets and apparel that have been strengthened.

2. The ecosystem of 3P merchants is still in the nurturing stage, not yet at the harvest period: This quarter, commission and advertising revenue was 19.3 billion RMB, with a year-on-year growth rate of only 1%. Although there was an improvement compared to the -4% in the previous quarter, it still shows that JD's 3P merchant ecosystem is far from reaching the harvest period. The revenue of JD Daojia business decreased by nearly 30% year-on-year under commission waivers and delivery subsidies, which further highlights this situation. In the future, it will be important to see if JD can truly turn 3P merchants into a new revenue growth engine after the ecosystem matures.

3. Logistics growth also showed significant improvement: The logistics business revenue growth of JD Logistics and Dada Kuai Song rebounded to 14%, with a significant sequential acceleration of 6 percentage points, slightly higher than expected. Mainly, the instant delivery business (Dada Kuai Song) grew rapidly, with revenue increasing by 57% this quarter. JD Logistics also cooperated with Miniso for cross-border transportation, with revenue growth accelerating by 5 percentage points.

4. While revenue was not surprising, profit was not as bad: Despite mediocre revenue growth, the operating profit of the e-commerce business this quarter was 9.33 billion RMB, only a 5% decline from the same period last year, far exceeding the market's expectation of 8.3 billion RMB. Initially, due to JD's sponsorship of the Spring Festival Gala, billion-dollar subsidies, and various measures such as lowering the free shipping threshold, the market had a rather pessimistic profit expectation for the e-commerce business (expected to decline by 16% year-on-year). However, the actual performance was not as bad, which was the biggest highlight of this performance.

In other segments, while JD Logistics saw a turnaround in profitability and achieved an operating profit of 220 million RMB, slightly exceeding expectations, Dada and other innovative businesses collectively increased their losses this quarter, slightly dragging down the overall performance. Ultimately, with the contribution from the e-commerce segment, JD achieved an overall operating profit of 7.7 billion RMB, nearly 1.6 billion RMB higher than expected. 5. Expenses grew as expected, with gross margin improvement beyond expectations: On the expense side, marketing expenses were 9.3 billion, with an increase of about 1.3 billion year-on-year due to increased investment, but did not exceed expectations. Meanwhile, fulfillment costs also increased by 9% year-on-year, higher than the growth rate of self-operated retail, indicating that JD.com's order growth rate should be greater than GMV growth rate and revenue growth rate.

However, research and development and management expenses decreased both year-on-year and quarter-on-quarter, with a significant decrease in equity incentives. It can be seen that similar to Alibaba, although external spending is not stingy, internal expenses are still "frugal", maintaining a focus on cost reduction and efficiency improvement.

The main source of profit exceeding expectations is that gross profit was about 1.7 billion higher than expected (about 4.3%), driven by a gross margin increase of about 0.5 percentage points to 15.3%, higher than expected. Dolphin Research believes that JD.com may have exerted more pressure on upstream suppliers than the discounts provided to consumers. This essentially reflects a stronger bargaining power for platforms over merchants in times of oversupply.

Dolphin Research's viewpoint:

Overall, after overcoming the impact of business restructuring on revenue, JD.com's revenue growth rebounded as expected this quarter. However, there were no outstanding highlights compared to expectations. Based on the underlying GMV growth, we speculate that JD.com's growth should be in the high single digits, making it likely the slowest growing among the top platforms. Therefore, from a growth perspective, the performance is not considered good.

Correspondingly, despite the "grand gestures" of investment and subsidies, the profit of the e-commerce segment was not significantly eroded, which was a surprising outcome. However, when combined, there is a feeling that JD.com has not truly committed to aggressively pursuing growth, hence the operating conditions have not significantly improved (market share should still be declining this quarter). In simpler terms, "all talk, little action".

Furthermore, in terms of shareholder returns, from the end of March to the earnings release date, JD.com only added $1-2 billion in share buybacks. This is a significant reduction compared to the "massive" buyback scale of about $12 billion in 1Q of this year. Although it is reasonable to reduce buybacks after a significant rebound in stock price and valuation, Dolphin Research believes that the substantial rise in the stock price previously should have been largely contributed by the massive buybacks. The recent significant reduction in buybacks is clearly not good news for investors who value shareholder returns.

Detailed analysis of this quarter's financial report:

I. After the change in business model, revenue growth returns to normal as expected

The largest self-operated retail business achieved revenue of 208.5 billion this quarter, a year-on-year increase of 6.6%, after overcoming the impact of business restructuring, revenue growth and GMV growth converged, accelerating quarter-on-quarter, but aligned with company guidance and market expectations, without any surprises.

Specifically, this season's revenue from electrical products increased by 5% year-on-year, with a growth rate slowing down by 1 percentage point compared to the previous quarter, slightly below expectations. Despite the decent sales performance of mobile phones and home appliances in the first quarter (increasing by 13% and 6% respectively), JD.com's growth rate did not improve much. It is worth paying attention to whether the explanation during the conference call is due to price discounts or simply poor sales volume.

On the other hand, the revenue from general merchandise retail, which was greatly affected by the transition from self-operated to 3P mode, saw a significant improvement this quarter, reaching 9% growth "as expected," which is about 2% higher than anticipated. After overcoming the impact of the transition, categories such as supermarkets, clothing, cosmetics, and others that JD.com is strengthening still have higher growth potential.

2. Platform service revenue: The revenue from commissions and advertising services for 3P sellers amounted to 19.3 billion RMB this quarter, a 1% year-on-year increase. While JD.com is still nurturing the ecosystem for 3P sellers and monetization is not a priority, the growth is indeed weak. However, there has been some improvement compared to the previous quarter. In the future, it will be important to observe whether JD.com can truly turn 3P sellers into a new revenue growth engine once the ecosystem matures.

3. Logistics and other services: The revenue growth of the logistics sector, including JD Logistics and Dada Group's instant delivery, rebounded to 14% this quarter, showing a significant acceleration (6 percentage points) and slightly exceeding expectations. Instant delivery (Dada Group) saw a revenue growth of over 50% this quarter. JD Logistics also experienced a 5 percentage point increase in revenue growth due to its cooperation with Miniso in overseas markets.

II. Although there were no surprises in mall revenue, the profit was not as bad

Summing up the various business segments mentioned above, JD.com achieved an overall revenue growth of 7% year-on-year to 260 billion RMB this quarter. As the largest proportion of revenue comes from self-operated retail without any surprises, the overall revenue basically met expectations

Taking a closer look at the performance of each segment,

The core JD.com's revenue for this quarter increased by 6.8% year-on-year, completely in line with expectations.

JD Logistics (JDL) recorded a revenue of 42.1 billion this quarter, with a growth rate significantly accelerating to 15%, slightly higher than expected. JD Logistics and Cainiao's cooperation have shown good growth in cross-border logistics.

Including Dada and other innovative businesses, the revenue for this quarter decreased by 19% year-on-year, significantly lower than expected. However, Dada disclosed that its revenue only slightly decreased by 3% year-on-year. It can be seen that the main reason for the revenue decline of approximately 30% in innovative businesses, but the reduction in unprofitable marginal businesses may not necessarily be a bad thing.

In terms of profit, JD.com achieved an operating profit of 7.7 billion in total, nearly 1.6 billion higher than expected, which is the main highlight of this performance.

Looking at specific segments:

1) JD.com's operating profit reached 9.33 billion, only a 5% decrease compared to the same period last year, far exceeding the market's conservative expectation of 8.3 billion. Due to the company's conservative guidance, as well as cooperation with the Spring Festival Gala, billion-dollar subsidies, and lowering the free shipping threshold, the market's profit expectations for the mall were quite pessimistic, but the actual performance was not as bad.

With the recovery of JD Logistics, the operating profit for this quarter turned losses into profits again, reaching 220 million, achieving profitability earlier than expected. For specific details, please refer to JD Logistics' financial reports and performance meetings.

As for the other business segment including Dada and startup businesses, although revenue has significantly declined, the loss for this quarter was only 200 million more than expected, reaching a loss of 670 million. Dada's loss this quarter narrowed by about 6% year-on-year to 360 million. Mainly due to the significant revenue decline in JD Daojia, which has high-profit margins (the company reduced monetization and lowered the free shipping threshold from 59 yuan to 29 yuan).

III. Expenses grew as expected, and the increase in gross profit is the source of the better-than-expected profit

So, from the perspective of costs and expenses, what is the source of the better-than-expected profit for the mall and logistics segments? On the gross profit front, despite the revenue for this quarter not exceeding expectations, the gross profit exceeded expectations by about 1.7 billion (approximately 4.3%), mainly due to the gross profit margin increasing to 15.3%, compared to 14.8% in the same period last year and market expectations. In other words, the unexpected increase in gross profit margin is the main, if not the only reason for the profit exceeding expectations.

On one hand, with the increase in the proportion of higher-margin 3P service revenue, there is a long-term trend of improving gross profit margin. Additionally, it may be that JD.com is exerting more pressure on upstream suppliers to lower prices than the discounts provided to consumers.

At the expense level, firstly, marketing expenses were 9.3 billion, although they increased by about 1.3 billion year-on-year, reflecting a significant increase in promotion and subsidies, but it did not exceed the expected 9.5 billion.

Fulfillment expenses also increased by only 9% year-on-year, higher than the growth rate of self-operated retail, and only 4% more than expected. This is likely a result of the situation where order volume growth rate > GMV growth rate > revenue growth rate.

However, in terms of relatively internal expenses, research and development expenses decreased by 2-3 billion both year-on-year and quarter-on-quarter, with equity incentive expenses nearly halved. Administrative expenses also decreased by about 5 billion year-on-year (about 1/4), with equity incentives reduced by 4 billion. Similar to Alibaba, it can be seen that although JD.com is not stingy in external investments such as promotion and fulfillment to drive growth, it remains "frugal" in internal expenses, maintaining a focus on cost reduction and efficiency improvement.

In the end, the company's total operating expenses amounted to 32.1 billion, completely in line with market expectations. From this perspective, the expense level is not the reason for the profit exceeding expectations, mainly due to the improvement in gross profit margin.

Dolphin Research's previous research on JD.com:

Financial Analysis

March 6, 2024 conference call "JD.com: Mid to high single-digit growth in 2024, ensuring profit does not decline year-on-year"

March 6, 2024 financial report review "JD.com: As long as there is more dividend repurchase, even poor students can get by"

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Financial report review on November 15, 2023: "JD.com: Can it be reborn after hitting rock bottom?"

Telephone conference on November 15, 2023: "JD.com: Also focusing on platforms and live streaming"

Financial report review on November 15, 2023: "JD.com: Can it be reborn after hitting rock bottom?"

Telephone conference on November 15, 2023: "JD.com: Also focusing on platforms and live streaming"

Telephone conference on August 16, 2023: "JD.com: Upholding supply chain advantages, focusing on the development of 3P business"

Financial report review on August 16, 2023: "JD.com: Revenue up, profits down, the gains and losses of billions in subsidies"

Telephone conference on May 12, 2023: "JD.com: "Focus, efficiency, 3P sellers", the keywords for 2023"

Financial report review on May 11, 2023: "Is the "billions in subsidies" just empty talk? JD.com is still stuck in the same pit"

Telephone conference on March 10, 2023: "JD.com: Shifting from major promotions to everyday low prices (summary)"

Financial report review on March 9, 2023: "Tired of the "cover-up" routine, can Brother Dong lead JD.com to rise again?"

In-depth

April 14, 2023: "Is there still value in JD.com on the "operating table" for healing?"

April 22, 2022: "Why are Meituan and JD.com performing well in the fierce competition?" On September 27, 2021, "Getting to Know JD.com Again, Mocked by the Entire Internet"

Risk Disclosure and Statement for this Article: Dolphin Research Disclaimer and General Disclosure