JD.com: Fair Value Slashed by 51% to USD 43; Our Order of Preference is PDD, Alibaba, and JD.com

We’ve slashed JD.com’s JD fair value estimate by 51% to USD 43 per ADS (HKD 167 per share). We cut our forecast 10-year revenue and non-GAAP net profit CAGRs to 3% and 6%, from 6% and 14% respectively as JD’s shift to a low-price strategy will take longer than expected. Meanwhile, Alibaba has made good progress on this front and Douyin beat our estimates. Our order of preference for the e-commerce sector remains PDD Holdings, Alibaba, and JD.

In the long run, we assume JD’s gross merchandize volume CAGR in the coming decade will be 4% instead of 5% previously. We think JD’s first-party platform, or 1P, adopts more premium JD Logistics services with a gross margin target of 20% to 30%. This has led to 3% to 4% higher selling prices at its 1P versus its major peers, and will put its 1P at a disadvantage amid the value-for-money trend. We see challenges ahead for JD in achieving its low-price strategy by growing its third-party platform, or 3P, compared with Alibaba and PDD Holdings. Since we only expect a mild recovery in Chinese housing demand in the long term, this doesn’t bode well for JD’s strong category, home appliances. Furthermore, the lower monetization rate in the medium term, slower increase in bargaining power compared with suppliers, and a potential decline in its 1P gross margin led to our slower non-GAAP net margin expansion assumption to 3.7% by 2032, instead of our previously assumed 6.0%.

We increased JD’s 2023 year-on-year revenue growth estimate by 180 basis points to 2.6% as its revenue is tracking better than our expectations. However, we cut JD’s 2023 non-GAAP net profit forecast by 19% as we have reduced its 2023 non-GAAP net margin by 20 basis points to 2.6% to take into account the higher marketing expense/sales ratio due to competition.

Correction: In an earlier version, the cut to the 2023 non-GAAP net profit forecast was incorrectly listed as 4%.