JD Earnings: Maintaining Our Estimates Despite Margin Surprise in the First Quarter

Wide-moat JD.com’s, or JD’s, first-quarter non-GAAP net margin surprised to the upside. However, we leave our full-year non-GAAP net margin estimate unchanged due to our expectation that JD will need to increase sales and marketing expenses throughout the rest of the year, especially for the June 18 and Nov. 11 shopping festivals. Our fair value estimate has been trimmed by 2% to USD 88.00 per ADS and HKD 341.00 per share due to minor tweaks. The share price is still attractive for long-term investors, but we think there is near-term weakness and uncertainty amid JD’s corporate overhaul that began in 2022. We think JD’s intangible assets of quality logistics and cost advantage remain.

In the first quarter, revenue came in at CNY 243 billion, rising 1% year on year, and is 2% higher than Refinitiv consensus as of May 12. Non-GAAP net profit was CNY 7.6 billion, increasing 88% year on year, and is 35% higher than Refinitiv consensus of CNY 5.6 billion.

JD shared some data that pointed to the right trend, but we think it is too early to conclude that JD will successfully broaden its appeal to all walks of life. The number of third-party merchants that recorded a transaction grew 20% sequentially in the first quarter. The number of users who purchased repeatedly and users who made a transaction experienced year-on-year growth of nearly 20% and 30%, respectively. These users also contributed to a higher proportion of our total users mix, leading to higher shopping frequency and average revenue per user in the quarter. The CNY 10 billion subsidy program has met the company’s expectations in terms of traffic, user engagement, repeat purchase rate, and increase in active third-party merchants. Alibaba and Pinduoduo already have established network effects, connecting millions of merchants with consumers, and it would be difficult for JD to build a similar network effect while growing its first-party business with less resources.