JD.com's Q4 Performance Supports a Positive View

There are many things to like about wide-moat JD.com's JD fourth-quarter performance. We see higher year-on-year user engagement and average spending per user in the quarter, significantly more third-party merchants joining JD, and improving profitability of the new businesses and logistics division. However, we saw slowing year-on-year growth in the high-margin marketplace and advertising revenue to 27% and deceleration of general merchandise sales growth to 23%, leading us to cut our 2022 sales growth for the general merchandise segment to 25% from 35% previously. An associate-level loss of CNY 4.3 billion was disappointing but does not affect our views on JD's free cash flow and valuation. Given changes to our assumptions, our five-year revenue CAGR is 14% and non-GAAP net margin is expected to rise to 3.1% by 2026. Our fair value estimate is maintained at USD 105 and shares are very attractive in our view. JD has a unique advantage in the Chinese e-commerce sector, high-quality logistics, cost advantage from the first-party business, and is the best play of the rising middle class across China in our view. JD's share price has declined due to fears of delisting in the U.S., renewed concerns of a regulatory crackdown and increased common prosperity measures; we think such news will continue to weigh on investor sentiment in the near term. Other risks include uncertainty over the losses at the new businesses and whether the lagging impact of real estate weakness on home appliances and electronics will be worse than expected. Improved profitability, improving consumer sentiment in China, the U.S. and Chinese governments resolving the accounting problem, and signs of regulatory relief, will lead to a rerating in our view.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.