JD's "counterattack"? Overthinking!

Before the US stock market opened on the evening of August 15th Beijing time, JD.com (JD.US) released its financial report for the second quarter of 2024. In summary, the overall revenue growth rate was only slightly above 1%, which was quite weak. However, it was slightly better than the more pessimistic expectations. The main highlight was the profit release, which greatly exceeded expectations. The detailed key points are as follows:

1. In this quarter, JD's self-operated retail revenue reached 233.9 billion RMB, with a year-on-year growth rate close to zero. Although the market expectations were not high, it was still 0.4% lower than expected. The overall online retail growth rate in the industry decreased by 5.2% in 2Q, while JD's self-operated revenue growth rate decreased by 6% compared to the previous quarter, which was relatively higher.

Specifically, the revenue from electrical products in this quarter decreased by 4.6% year-on-year, mainly due to poor sales of popular summer appliances such as air conditioners and refrigerators. General merchandise retail continued to maintain a high growth rate of 8.7% this quarter, which was slightly higher than expected and remained relatively stable compared to the previous quarter. JD performed better in categories such as supermarkets and daily necessities.

2. Commission and advertising business revenue this quarter was 23.4 billion RMB, with a year-on-year growth of 4% and a noticeable acceleration compared to the previous quarter (nearly 3 percentage points), which was also better than market expectations. The strong growth in advertising revenue (double-digit growth) contributed to the growth in service revenue. JD's support for 3P businesses finally began to pay off.

3. The logistics sector's revenue growth rate decreased by about 6 percentage points to 7.9% this quarter, which was consistent with the decrease in self-operated retail revenue. Although the growth slowed down, it was slightly better than expected (1%). Overall, the performance of logistics and retail businesses matched, showing a relatively neutral performance.

4. Despite the overall slowdown in revenue growth across all businesses, JD's performance in terms of profit this quarter was very impressive. The group achieved an operating profit of 10.5 billion RMB, a year-on-year increase of 27%, far exceeding the market's expected 8.7 billion RMB.

Among them, the core JD Mall's operating profit was 10.1 billion RMB, a 24% increase from the same period last year, significantly higher than the market's expected 9.36 billion RMB. Due to the company's conservative guidance, only seeking to achieve flat year-on-year profit, increased marketing investment, billion-dollar subsidies, and lowering free shipping thresholds were not conducive to profit release. The market does not have very high expectations for the profit of the mall sector.

In addition, although JD Logistics slowed down significantly this quarter and slightly below expectations, the profit release was very impressive. The operating profit reached a whopping 2.18 billion RMB this quarter, far exceeding the market's expected 820 million RMB. The operating profit margin has reached 4.9%, the highest level in history, excluding the abnormal values in 2Q of 2020 due to the pandemic. It can be inferred that significant cost reduction or efficiency optimization measures have been taken internally.

5. From the perspective of costs and expenses, the biggest contributor to the better-than-expected profit this quarter was the increase in gross profit margin. Despite a significant slowdown in year-on-year revenue growth, which was only slightly above 1%, the growth rate of gross profit increased to 10.9%, with a gap of over 9 percentage points between the gross profit and revenue growth rates. The gross profit exceeded market expectations by 2 billion RMB, undoubtedly the biggest contributor **

The gross profit margin reached 15.8%, continuing to increase by 0.5 percentage points compared to the previous period, and even higher by 1.4% compared to last year. According to the company's explanation, the main reason is the company's advantage as the largest single retailer, optimizing the procurement process and reducing procurement costs, leading to a greater-than-expected increase in gross profit.

On the expense side, marketing expenses were 11.9 billion, an increase of about 800 million year-on-year, reflecting an increase in brand promotion and subsidies, exceeding the expected 11.3 billion. Research and development expenses only slightly increased by 1 billion year-on-year, while management expenses decreased year-on-year. Equity incentives overall decreased by over 30%. It can be seen that while JD.com is not stingy in external investments in promotion and fulfillment to drive growth, it remains quite "frugal" in internal expenses, maintaining a focus on cost reduction and efficiency improvement. Overall, the company's total operating expenses for the four categories amounted to 35.4 billion, slightly higher than the market's expectation by 4 billion.

Dolphin Research Viewpoint:

Overall, in a relatively weak overall environment, JD.com's performance in terms of growth is also quite weak, lagging behind social e-commerce. Although the company disclosed low to mid-single-digit GMV growth and double-digit growth in orders, these have not translated into revenue. Making noise without real results gives a sense of "busy work".

The difference is that JD.com's previously released revenue and profit were both pessimistic expectations of zero growth, but now there has been an improvement in profitability. However, as an online retailer that bears inventory risks, JD.com's real marginal benefits in this performance are:

a. In terms of gross profit margin, after Alibaba strategically retreated from self-operated retail, JD.com, as a retailer that bears inventory risks, faced more aggressive price cuts from suppliers, squeezing out a bit of gross profit margin;

b. As an online retailer with both self-operated commercial flow and logistics, its ability to squeeze costs at the edges is actually stronger;

c. According to research, in the process of promoting appliance subsidies, due to the more transparent online retail process and the fact that JD.com operates its own retail, this time the gross profit margin exceeded expectations. Dolphin believes that JD.com may benefit to some extent from the major policy of promoting equipment updates.

Due to the better-than-expected profit performance, JD.com has changed its previous guidance of zero growth in revenue and profit to an adjusted net profit guidance for the full year with a double-digit growth rate.

However, the first half of the year already saw a 45% year-on-year growth, and there are uncertainties about whether the second half of the year can perform better. The better-than-expected gross profit margin brought about by purchasing pressure, as well as the indication from the company's private conference call that low prices rely on self-operated procurement to pressure prices, indicate that JD.com's future still lies in self-operated retail.

In the current situation where self-operated retail is not even growing as fast as social e-commerce, Dolphin still believes that JD.com is the weakest player in the environment of consumer price reductions and intensified industry competition. In this scenario, the so-called better-than-expected profits are only short-term stimuli. With self-operated retail stagnating, the support for the stock price still comes from share buybacks However, in terms of repurchases, JD.com's momentum has clearly weakened: In this quarter, JD.com has repurchased a total of $2.1 billion worth of shares, repurchasing 7.1% of the total share capital in the first half of the year. Even after excluding the dilution of approximately 2.9% from the previously issued $1.5 billion convertible bonds, the total share capital has still been reduced by 4.2%.

However, one issue is that JD.com currently only has $400 million left in repurchase quota. Therefore, without increasing the quota, it will not be able to maintain the current repurchase intensity in the second half of the year. JD.com has also expressed difficulties in further high-intensity repurchases in the short term due to quota constraints.

Therefore, regarding JD.com's financial report, Dolphin believes that the marginal benefits brought by better-than-expected profits are more about short-term repairs under extremely pessimistic expectations. Another support for the stock price—repurchases in the future—is expected to decline marginally. As for the long-term support of the stock price—the growth potential of self-operated retail, even core electrified products remain sluggish despite the stimulus of device upgrades. The time to be optimistic about JD.com has not arrived until a clear inflection point in revenue growth appears.

Detailed interpretation of this quarter's financial report:

I. Weakness in electrified products, better performance in fast-moving consumer goods and 3P

The largest proportion of self-operated retail business achieved revenue of 233.9 billion yuan this quarter, with a year-on-year growth close to zero, although the market expectations were not high, it was still 0.4% lower than expected. Compared to the overall online retail industry's 2Q quarter-on-quarter slowdown of 5.2%, JD.com's self-operated revenue growth rate decreased by more than 6% compared to the industry.

Specifically, the revenue of electrified products this quarter decreased by 4.6% year-on-year, significantly dragging down performance, although the market expectation was also a 3.6% year-on-year decline, the actual performance was still 1.1% lower than expected. According to the company's explanation, the poor sales of summer hot-selling home appliances such as air conditioners and refrigerators were the main reason.

After the general merchandise retail, which was previously affected by the transition from self-operated to 3P mode, maintained a high growth rate of 8.7% this quarter after passing the base period, which was roughly in line with the previous quarter and slightly higher than expected. It can be seen that JD.com's focus is more on categories such as supermarkets, daily necessities, and fashion and beauty products that are high-frequency or need strengthening.

However, it should be noted that after lowering the free shipping threshold for self-operated large supermarkets, the breakeven threshold that the self-operated business was supposed to reach has been pushed back.

2. Platform Service Revenue: The revenue from commission and advertising business targeting 3P sellers this quarter was 23.4 billion RMB, a 4% year-on-year growth with a more significant acceleration compared to the previous quarter (nearly 3 percentage points), which also exceeded market expectations. According to the company, the strong growth in advertising revenue (double-digit growth) drove the growth in service revenue. Although we cannot determine how much of the growth is from the increase in 3P business GMV and how much is from the improvement in take rate, it is certain that JD.com's support for 3P business is starting to pay off.

3. Logistics and Other Services: Including JD Logistics and Dada Express, the revenue growth of the logistics sector this quarter slowed by about 6 percentage points to 7.9% year-on-year, with a decline similar to that of self-operated retail revenue. Despite the slowdown in growth, it slightly outperformed expectations (1%). Overall, the performance of the retail sector was neutral.

II. Weak Growth, But Profit Release Far Exceeds Expectations

Summing up the various businesses mentioned above, this quarter JD.com achieved a total revenue growth of 1.2% year-on-year to 291.4 billion RMB. Although from an absolute perspective, a growth rate of just over 1% is relatively weak, it is not unexpectedly bad news as the market expectation was even lower at 0.9%. JD.com is facing challenges amid the deleveraging of residents and significant consumer downgrading.

Looking closely at the performance of each sector,

1) The core JD Mall's revenue this quarter increased by 1.5% year-on-year, with a 5.3 percentage point decrease compared to the previous quarter, but slightly better than the expected 0.6%;

2) JD Logistics (JDL) had a revenue of 44.2 billion RMB this quarter, with a 7% decrease in growth compared to the previous quarter to 7.7%;

3) Including Dada and other innovative businesses, the revenue this quarter plummeted by 35% year-on-year, significantly lower than expected. Since Dada has not disclosed its performance separately, we cannot make a detailed breakdown. However, it can be speculated that JD.com is continuing to aggressively cut back on unprofitable marginal businesses.

Despite the overall slowdown in revenue growth across all businesses, JD.com's performance in terms of profit this quarter is very impressive, with a total operating profit of 10.5 billion RMB, a 27% year-on-year growth, far exceeding the market's expected 8.7 billion RMB **

Breaking it down by segment:

1) JD.com's operating profit reached 10.1 billion, a 24% increase compared to the same period last year, significantly higher than the market's expected 9.36 billion. Due to the company's conservative guidance in the past, only aiming to achieve flat year-on-year profit.

JD.com's series of billion-yuan subsidies, increased marketing efforts, and reduced shipping costs to cater to consumer downgrading measures, up to now only indicate that between 1P and 3P, 1P is still the fundamental core of JD.com as an online retailer, while 3P has always been a "supplementary" role to expand product variety. The so-called offering discounts are just a marketing gimmick.

With 1P playing the leading role, it is not easy to significantly offer discounts to consumers, and what JD.com can balance is after competitors gradually exit the 1P model, it crazily negotiates with suppliers during the procurement process, achieving no decline in revenue while trying to maintain its profit.

2) JD Logistics, although the growth rate slowed significantly this quarter and slightly missed expectations, the profit release was extremely impressive, achieving an operating profit of a whopping 21.8 billion this quarter, far exceeding the market's expected 8.2 billion. The operating profit margin has reached 4.9%, excluding the abnormal values in 2Q 2020 due to the impact of the epidemic, it is already the highest in history.

Treating the 3% growth in fulfillment costs as an increase in internal logistics revenue, with revenue growth slowing down to less than 8%, it likely means that the slowdown in external logistics revenue growth is also very apparent.

Combined with some express delivery peers such as ZTO Express starting to tilt towards profit in the "market share vs. profit" balance, and logistics is originally a business with revenue growth and cost control driving in both directions, here Dolphin reasonably suspects that JD Logistics is starting to focus on cost control again to release profits.

3) As for the other business segment including Dada and entrepreneurial businesses, although revenue has shrunk significantly, the loss this quarter is only slightly higher than expected at 2 billion, reaching a loss of 670 million. Dada still incurred a loss of 700 million this quarter, slightly expanding from the previous quarter, with no clear signs of improvement.

III. Lowering procurement prices and increasing gross profit margin are the biggest contributors to profit expectations

So, from the perspective of costs and expenses, what is the source of the better-than-expected profits in the mall and logistics segments?

In terms of gross profit, with revenue growth slowing significantly this quarter and only slightly higher than 1% year-on-year, the growth rate of gross profit increased to 10.9%, with a gap of over 9 percentage points between the growth rate and revenue, exceeding market expectations by 2 billion, undoubtedly the biggest contributor to exceeding profit expectations.

The gross profit margin reached 15.8%, continuing to rise by 0.5 percentage points compared to the previous period, increasing by 1.4% from last year. Although the long-term trend of increasing gross profit margin was expected due to the increase in high-margin income from 3P services, the actual growth rate still exceeded expectations According to the company's explanation, the main reason for the significant increase in gross profit beyond expectations is the optimization of the procurement process and reduction in procurement costs as the largest single retailer.

On the expense side, marketing expenses amounted to 11.9 billion, an increase of about 800 million year-on-year, reflecting an increase in brand promotion and subsidies, exceeding the expected 11.3 billion.

Fulfillment costs only increased by 3% year-on-year, slightly higher than the growth rate of self-operated retail, indicating that the increase in order volume > GMV growth rate > revenue growth rate, but the deviation is not significant and within an acceptable range.

Among the internal expenses, research and development expenses increased by only 1 billion year-on-year, while management expenses decreased year-on-year. Equity incentives overall declined by more than 30%. It can be seen that while JD.com is generous in external investments to promote growth in promotion and fulfillment, it remains quite "stingy" in internal expenses, maintaining its focus on cost reduction and efficiency improvement.

Overall, the company's total operating expenses for the four categories amount to 35.4 billion, slightly higher than the market's expectation by 4 billion. However, due to a higher increase in gross profit margin, the final operating profit exceeded expectations by about 1.8 billion (20.7%).

Dolphin Research's previous research on JD.com:

Financial Analysis

May 16, 2024 Financial Report Review "Is JD.com still worth it without buybacks?"

May 16, 2024 Conference Call "JD.com: Continuing to focus on FMCG and 3P ecosystem"

March 6, 2024 Conference Call "JD.com: Mid to high single-digit growth in 2024, ensuring profit does not decline year-on-year" 2024 年 3 月 6 日财报点评"Jingdong: As long as there are more dividends and buybacks, even the poor students can get by"

2023 年 11 月 15 日财报点评"Jingdong: After being rotten, can it be reborn?"

2023 年 11 月 15 日电话会"Jingdong: Also acting as a platform and live streaming"

2023 年 11 月 15 日财报点评"Jingdong: After being rotten, can it be reborn?"

2023 年 11 月 15 日电话会"Jingdong: Also acting as a platform and live streaming"

2023 年 8 月 16 日电话会"Jingdong: Adhering to supply chain advantages, focusing on the development of 3P business"

2023 年 8 月 16 日财报点评"Jingdong: Revenue up, profits down, the gains and losses of billions in subsidies"

2023 年 5 月 12 日电话会"Jingdong: "Focus, improve efficiency, 3P sellers", the keywords of 2023"

2023 年 5 月 11 日财报点评"Is the "billion subsidy" just empty talk? Jingdong is still in the same pit"

2023 年 3 月 10 日电话会"Jingdong: Shifting from major promotions to everyday low prices (minutes)"

2023 年 3 月 9 日财报点评"Playing the "cover-up" routine too much, can Brother Dong still make Jingdong rise again?"

In-depth

2023 年 4 月 14 日"Is there still value in Jingdong on the "operating table" for healing?" April 22, 2022 "Why are Meituan and JD.com performing well in the stock market despite fierce competition?"

September 27, 2021 "Getting to know JD.com again, the company once mocked by the internet"

Risk Disclosure and Disclaimer for this article: Dolphin Investment Research Disclaimer and General Disclosure