JD.com: Can the better-than-expected profits be sustained? How will the competitive landscape change?

The following is a summary of the JD.com Q2 2024 earnings conference call. For financial report analysis, please refer to " JD.com "Counterattack in Desperation"? You're Overthinking It! 》

I. Review of Core Financial Information:

II. Detailed Content of the Earnings Conference Call

2.1. Key Points from Executive Statements:

1) Business Progress

① User Growth and Engagement

a. Strong growth in high-tier and low-tier market users, with double-digit year-on-year growth in quarterly active users for the third consecutive quarter, covering a wide range of new and existing users, especially JD PLUS members.

b. User purchase frequency and order volume grew by double digits year-on-year, but average order amount decreased year-on-year due to weak consumer spending, low-price strategies, and changes in category structure.

c. Self-operated business continues to enhance user experience by offering services such as free shipping, doorstep returns, delayed delivery cashback, and expanding to 3P business, with 3P business Net Promoter Score improving for two consecutive quarters.

② Price Competitiveness

a. Self-operated business achieved sustainable price competitiveness by strengthening supply chain capabilities and implementing daily low-price strategies on a low-cost basis.

b. Expansion of the user base in low-tier markets led to strong growth in order volume and shipment frequency, with Net Promoter Score for price competitiveness increasing year-on-year in self-operated and 3P businesses.

③ E-commerce Platform Ecosystem

a. Increased activity of 3P merchants, with a significant expansion in the number of active merchants year-on-year and quarter-on-quarter.

b. 3P merchant order volume grew by over 20% year-on-year, the fastest growth rate in two years.

c. The impact of reduced commission rates weakened, resulting in a narrower decline in commission income this quarter; 3P advertising revenue achieved double-digit growth, demonstrating the platform's monetization capabilities.

④ Performance by Category

a. Revenue from electronics and home appliances decreased by 4.6% year-on-year, mainly due to high base effect from last year and JD's cautious strategy during the 6.18 promotion, prioritizing sustainable business growth over short-term growth through excessive subsidies.

b. Revenue from general merchandise category grew by 8.7% year-on-year, further accelerating from previous quarters. Revenue from supermarket category achieved double-digit growth.

2) Financial Performance

Shareholder Returns

a. Repurchased 137 million shares of Class A common stock in the second quarter, worth $2.1 billion, representing 4.5% of the total common shares issued as of March 31, 2024.

b. Repurchased a total of 7.1% of the total common shares issued as of the end of 2023 in the first half of the year

Free Cash Flow

a. The free cash flow for the past 12 months was RMB 56 billion, an increase of RMB 23 billion year-on-year, driven by seasonal factors, strong profits, and moderate capital expenditures.

b. As of the end of the second quarter, the total cash, cash equivalents, restricted cash, and short-term investments amounted to RMB 209 billion.

Future Outlook

a. Accelerate revenue growth, aiming for a full-year growth rate exceeding the total retail sales growth in China.

b. Continue to invest in key areas such as user experience, low-price strategy, and platform ecosystem.

2.2 Analyst Q&A

Q: Recently, we have seen some competitors adjusting their strategies from low prices to focusing more on GMV. Will JD.com adjust its low-price strategy accordingly? What is your strategy in terms of price competitiveness?

A: Our commitment to the low-price strategy remains unwavering. Over the past 20 years, JD.com has been focused on maintaining price competitiveness by reducing costs, improving efficiency, and enhancing user experience. User experience is our core, and price competitiveness is an important component. As a supply chain-based retailer, we continuously enhance price competitiveness through economies of scale and technology-driven innovation without sacrificing product and service quality. Our low-price strategy is not only reflected in our self-operated business but also extends to 3P merchant cooperation through partnerships with industrial belts and white-label manufacturers. For example, the Jingxi business directly sources and ships products from manufacturers to provide customers with a wide range of low-priced products.

To further enhance the platform's price competitiveness, we have launched projects such as "Billion Subsidies" and "RMB 9.9 for Free Shipping," and will continue to strengthen these efforts. Through the "Super 18% Discount Day" event, we hope to further strengthen user awareness of JD's 618 promotion and daily low prices, enhancing the shopping experience for users on low-priced products. We always focus on core business metrics, striving to maintain a balance between GMV, profit, and cash flow to ensure sustainable business growth.

Q: Regarding the platform ecosystem, could management share their views on accelerating the monetization path and timetable for 3P businesses?

A: Our goal is to establish a platform ecosystem that drives the co-development of self-operated and 3P businesses, providing users with an excellent shopping experience by combining both models. 3P merchants play a crucial role in enriching product supply and meeting diverse user needs. In the second quarter, the number of active merchants continued to grow strongly, and the growth rate of 3P GMV exceeded the total GMV growth.

We have taken several steps to enhance the platform ecosystem. Firstly, we will continue to expand the merchant base, enrich product supply, promote merchant growth and participation. Secondly, we closely monitor key user metrics such as the number of users purchasing 3P merchant products, 3P order volume, and the growth of 3P GMV. In the second quarter, the number of 3P transaction users and orders experienced accelerated growth.

Regarding monetization, commission income showed steady improvement in the second quarter, and the growth rate of advertising revenue exceeded the growth of GMV. We are enhancing advertising products and models to help brands and small and medium-sized enterprise merchants develop their businesses on the platform, which will drive higher advertising revenue As the proportion of 3P orders and GMV gradually exceeds self-operated business, commission and advertising revenue will grow in a healthy manner. We believe that the platform ecosystem will continue to evolve and improve, driving long-term business development.

Q: In terms of balancing growth and profitability, the performance in the second quarter seems to lean more towards profit. How can we find the best balance among the three key performance indicators (GMV, profit, and cash flow) in the second half of the year? Will this affect the annual target, especially when profits in the first six months have exceeded expectations?

A: At JD.com, we always believe that sustainable growth is driven by excellent user experience. The performance in the second quarter demonstrates our efforts in achieving high-quality growth. Due to a high base last year, especially in seasonal product categories such as air conditioners, revenue growth in the second quarter slowed down, but we still achieved a historical high net revenue of RMB 14.5 billion, with a net profit margin reaching 5% for the first time. The improvement in profit margin is mainly due to a significant increase in supply chain efficiency, leading to a year-on-year increase of 137 basis points in gross profit margin. It is worth noting that since the second quarter of 2022, our gross profit margin has improved for 9 consecutive quarters. These results reflect our continuous efforts in cost and efficiency optimization and our commitment to high-quality growth.

Looking ahead to the second half of the year, we will take a more dynamic approach to balance growth and profitability. We plan to continue investing in areas such as enhancing user experience, acquiring new users, and expanding market share. At the same time, our business departments will further enhance operational capabilities and efficiency to continue driving improvements in supply chain efficiency. These developments will help us maintain competitiveness in the second half of the year while ensuring further enhancement of the overall operational efficiency and profitability of the company.

Regarding the annual target, our goal is to achieve GMV growth surpassing the average growth rate of the consumer goods retail market. Despite exceeding profit expectations in the first half of the year, we will continue to invest in user experience and market share expansion to ensure long-term sustainable growth. We expect JD Group's profit and profit margin to continue year-on-year growth in the second half of the year. Overall, we believe that by focusing on enhancing user experience, we can find the best balance among GMV growth, profit, and cash flow, thereby achieving long-term healthy business growth.

Q: How do you view the changes in the e-commerce competitive landscape in the second half of the year?

A: China has the world's largest e-commerce market and possesses the most mature infrastructure to support its continuous growth. We believe that this market will continue to expand in the long term, and JD.com has established a strong competitive advantage with its unique self-operated supply chain and logistics services.

Firstly, the Chinese retail market, especially online retail, still has huge growth opportunities. Whether from the perspective of product categories or user demographics, there is still significant room for improvement in online penetration rate. For example, in categories such as supermarkets and home goods, there is still great growth potential for online sales. Even in categories such as 3C products or home appliances where we believe the online penetration rate is already high, we still see growth opportunities in online sales At the same time, we are actively expanding the offline retail network of these categories to provide users with a more professional shopping experience. Secondly, the younger generation has become accustomed to online shopping, with a very high level of dependence on e-commerce platforms. Now, the older generation of users is also gradually starting to accept online shopping, creating new opportunities for market growth. At JD.com, we have observed very strong growth rates for both of these user groups, even exceeding our overall user growth rate.

Furthermore, the emergence of new forms of online shopping is also driving further increases in online penetration rates. Overall, China's online physical retail market is growing at a pace faster than the traditional retail market. Regarding the competitive landscape of the e-commerce market, we believe that the Chinese market is vast and dynamic, providing space for participants with different models and characteristics. Despite fierce competition, we believe that the essence of retail ultimately lies in enhancing user experience and achieving win-win outcomes with partners. JD.com will continue to focus on these long-term goals, continuously optimizing cost efficiency and user experience. Over the past year, we have strengthened our supply chain capabilities and enhanced user experience. In the second quarter, we continued to see double-digit growth in users, mainly from our core long-term users and those who have been cooperating with us for over two years, with their shopping frequency also maintaining double-digit growth. Overall, we are confident in the long-term growth potential of the Chinese e-commerce market and believe that JD.com will continue to maintain a leading position in this field.

Q: Considering the recent announcement by the central government to support the promotion of the old-for-new home appliances program, what cooperation plans does JD.com have with local governments and home appliance suppliers? What incremental impact will this have on JD.com's revenue growth in the coming quarters?

A: Promoting the old-for-new program has always been an effective way for JD.com to stimulate bulk consumption. We have established strong partnerships with brand partners and accumulated rich experience. We highly support and welcome government initiatives to promote the old-for-new program and other measures to stimulate consumption. At the end of July, the National Development and Reform Commission issued policies supporting the old-for-new service, with home appliances being one of the key areas. We expect related policies to be introduced soon. We have already cooperated with multiple provincial and municipal governments to become the designated platform for distributing government subsidies, which will be used for products that meet policy standards.

With the release of central government policies, we will leverage our existing cooperation foundation to further promote the old-for-new program, helping to distribute subsidies to local consumers. We are fully prepared both online and offline, including in terms of technical backend and various processes, as well as utilizing JD's home appliance experience stores and home appliance chain stores to serve consumers. Additionally, we have partnered with brands to establish the JD Home Appliance Old-for-New Alliance and launched subsidy activities in 20 provinces and cities, providing cost-saving products and convenient services to customers in different regions. Overall, we expect the new policy to drive growth in the home appliance industry, with the old-for-new sales share on the JD platform also expected to increase.

Q: In the current situation of low consumer sentiment, will JD.com use innovative pricing promotions to boost the supply of fast-moving consumer goods (FMCG) SKUs to stimulate consumer demand for FMCG?

A: In terms of supermarket categories, we have made good progress in enhancing operational capabilities, leading to healthy revenue growth. Despite intense and fragmented market competition, we remain confident in the long-term potential of supermarket categories. By leveraging JD's unique advantages, we believe JD Supermarket will continue to enhance user experience, expand market share, and become an important driver of overall company growth. We will continue to monitor market trends, adopt innovative pricing and promotion strategies to meet consumer demand for fast-moving consumer goods during economic downturns.

Q: Can you share your views on the future profit and profit margin trends in the coming years?

A: Our medium to long-term goal is to achieve a high single-digit profit margin, and we are optimistic about this. The main drivers of growth include the expansion of the platform ecosystem, optimization of category structure, and improvement of profit margins in various categories.

In the second quarter, our net profit reached a record high of RMB 14.5 billion, with a net profit margin of 5%, mainly due to the improvement in supply chain efficiency, leading to a significant improvement in gross profit margin. We believe there is still significant potential for margin expansion in the future. With continued improvement in business and operational efficiency, we believe we can achieve a high single-digit profit margin in the long term. Long-term profitability will be supported by our strong market position and focus on user experience. We enhance user experience and satisfaction through continuous investment in products, pricing, and services, driving GMV growth and market share expansion. Overall, JD's profitability has significant room for growth and will benefit from higher 3P contributions, optimization of category structure, and profit margin improvement within each category.

Q: Can you share the latest stock repurchase and dividend situation?

A: We are committed to rewarding shareholders. In the second quarter, we repurchased approximately $2.1 billion worth of shares in the US and Hong Kong markets, equivalent to 137 million ordinary shares or 68.4 million ADS, representing approximately 4.5% of the shares issued as of March 31, 2024. In the first half of this year, we completed a total of $3.3 billion in stock repurchases, equivalent to 224 million ordinary shares or 112 million ADS, representing 7.1% of the shares issued as of the end of 2023. In addition, we completed a $1.2 billion annual dividend payment plan in the second quarter, returning approximately $4.5 billion to shareholders through dividends and repurchases in the first half of the year. In future shareholder return plans, we will continue to execute repurchase plans with the goal of gradually reducing the total number of shares issued in the long term and maintaining dividend payments based on profits, ensuring that shareholders can continue to benefit from the company's value creation.

End of Document

Risk Disclosure and Disclaimer of this Article: Dolphin Research Disclaimer and General Disclosure