Company Reports

JD.com offers authentic products from its online first party (1P) business with speedy and high-quality delivery service. It adopts an asset-heavy 1P model with self-owned inventory and largely self-built logistics, complemented by an asset-light third-party (3P) model. By comparison, its competitor Alibaba relies mostly on a 3P model. Underperforming Pinduoduo and Douyin, JD’s GMV/online retail sales of goods has decreased from 30.7% in 2021 to 29.2% in 2022. To reinvigorate growth, JD wants to change customers' mindshare of JD as an everyday low-price platform and has launched a CNY 10 billion subsidy program to attract price-sensitive customers. It is removing sales of nonstrategic low-margin products from the 1P business and allowing 3P merchants and business partners to provide these products instead. JD.com is also streamlining its organization to increase its ability to respond to quickly changing market dynamics. We expect JD.com to see weaker sales growth this year amid these changes.

We are keeping our fair value estimates of USD 46 per ADS (HKD 179 per share) and forecasts for JD.com unchanged after its earnings beat. We think the China e-commerce sector is undervalued, but we prefer 1) JD.com for its turnaround story; followed by 2) Alibaba Group for its capital return to shareholders; and lastly, 3) PDD Holdings, given lower recent sales at PDD’s Temu as reported by Bloomberg Second Measure, and the headline risks from a potential ban and import tariff in the US. We believe JD.com can differentiate itself through its intangible asset of quality logistics offered by JD Logistics. In our opinion, a lower free shipping threshold and free return and exchange of products at customers’ doorsteps will enhance the customer experience. We agree with JD.com’s decision to invest earlier rather than later in user experience to build its reputation amid intensifying competition, although this will affect near-term margins.

JD.com offers authentic products from its online first party (1P) business with speedy and high-quality delivery service. It adopts an asset-heavy 1P model with self-owned inventory and largely self-built logistics, complemented by an asset-light third-party (3P) model. By comparison, its competitor Alibaba relies mostly on a 3P model. Underperforming Pinduoduo and Douyin, JD’s GMV/online retail sales of goods has decreased from 30.7% in 2021 to 29.2% in 2022. To reinvigorate growth, JD wants to change customers' mindshare of JD as an everyday low-price platform and has launched a CNY 10 billion subsidy program to attract price-sensitive customers. It is removing sales of nonstrategic low-margin products from the 1P business and allowing 3P merchants and business partners to provide these products instead. JD.com is also streamlining its organization to increase its ability to respond to quickly changing market dynamics. We expect JD.com to see weaker sales growth this year amid these changes.

JD.com offers authentic products from its online first party (1P) business with speedy and high-quality delivery service. It adopts an asset-heavy 1P model with self-owned inventory and largely self-built logistics, complemented by an asset-light third-party (3P) model. By comparison, its competitor Alibaba relies mostly on a 3P model. Underperforming Pinduoduo and Douyin, JD’s GMV/online retail sales of goods has decreased from 30.7% in 2021 to 29.2% in 2022. To reinvigorate growth, JD wants to change customers' mindshare of JD as an everyday low-price platform and has launched a CNY 10 billion subsidy program to attract price-sensitive customers. It is removing sales of nonstrategic low-margin products from the 1P business and allowing 3P merchants and business partners to provide these products instead. JD.com is also streamlining its organization to increase its ability to respond to quickly changing market dynamics. We expect JD.com to see weaker sales growth this year amid these changes.

We increased JD.com’s 2023 year-on-year revenue growth estimate by 50 basis points to 2.9%, mainly driven by better-than-expected results at JD Retail in fourth-quarter 2023. Better operating leverage as a result of a higher revenue estimate and cost controls led to a 50-basis-point increase in our 2023 non-GAAP net margin estimate to 3.1%. We raised our fair value estimates by 7% to USD 46.00 per ADS and HKD 179.00 per share. Following our earnings revisions, the 200-basis-point increase in the five-year operating income CAGR estimate more than offsets a reduction of 30 basis points in the 2024 non-GAAP net margin estimate, as a result of the compensation increase at JD Retail. We think the China e-commerce sector is undervalued currently, but PDD Holding is our preferred pick due to stronger growth in revenue and earnings, followed by JD.com, and then Alibaba Group.

While JD.com’s consolidated subsidiary Dada Nexus, or Dada, overstated an estimated CNY 500 million in revenue and CNY 500 million in costs in the first three quarters of 2023, we think this has minimal earnings impact on JD.com. The overstatement represents 6.1% of Dada’s total revenue but only 0.06% of JD.com’s revenue in the same period. While this speaks to greater corporate governance concerns, we think the recent management changes at Dada and new management with affiliation to JD.com will help to strengthen corporate governance. Henry Jun Mao, who is now JD Logistics' head of investor relations and was the previous director of budgeting and forecast at JD.com, became Dada’s CFO on Dec. 19, 2023. Meanwhile, Ian Su Shan, who is currently the CFO of JD.com, became Dada’s chairman on Dec. 19. We maintain JD.com’s fair value estimates at USD 43 per ADS and HKD 167 per share. JD.com is undervalued currently but we prefer PDD Holdings in the China e-commerce space, due to the latter’s stronger growth and market share win.

We continue to think the impact of higher employee compensation on JD.com’s earnings to be mixed as we expect the higher costs to be mitigated by stronger sales—the latter driven by improved morale and new talent, as well as lowered costs elsewhere. We retain JD.com’s forecasts and fair value estimates at USD 43 per ADS or HKD 167 per share at this stage. The shares are undervalued but we prefer PDD Holdings in the China e-commerce space. We roughly estimate the impact of the nearly 100% and 20% salary hikes for merchandising and sales personnel and JD Retail staff, respectively, could hurt profit margins by 120 basis points in 2024. The downside risk to our fair value estimate could be about 30% to HKD 116/USD 30. This is a rough estimate on our end as JD.com’s disclosure on staff costs is limited and we await additional guidance. But we believe this can be at least partially offset through enhanced sales. We expect to see higher future livestreaming gross merchandise volume generated by the merchandising and sales team. The livestreaming sessions hosted by the team attracted 380 million users during the Double 11 festival, thanks to their strong understanding of the products they sourced. The merchandising and sales team displayed a boost in morale and celebrated the salary jump by offering goods at deeper discounts in their livestreaming sessions, which we expected to lead to better sales.

JD.com will raise the fixed salaries of front-line employees, such as sourcing and sales personnel, by nearly 100% starting Jan. 1, 2024, and will increase the salaries of all JD Retail employees by an average of no less than 20% in early 2024. This was a surprise to us as JD.com cut salaries of senior staff by 10%-20% in 2023. We estimate that at most, 14% of JD.com staff will benefit from an almost 100% increase in salary and over 80% of staff will not be affected by this salary change. We maintain our forecasts and fair value estimates at USD 43 per ADS and HKD 167 per share. PDD Holdings remains our preferred pick in the China e-commerce space.

JD.com’s third-quarter non-GAAP net profit beat Refinitiv consensus as of Nov. 15 by 18% and our estimate by 19%. The beat primarily comes from lower first-party business sourcing costs as a result of its scale in the business. As merchandise currently needs lower order value to qualify for free shipping, this should continue to drive first-party business scale and reduce sourcing costs in the long run, partially offset by higher fulfillment expenses. Management is committed to striking a balance between profitability and growth, which leads us to think that it will not engage in a long-term value-destructive subsidy. We don’t think the 24% revenue CAGR seen from 2017 to 2022 will repeat itself, but we believe the negative impact on revenue growth from business restructuring will be largely behind us, starting from the first quarter of 2024. We forecast a 10-year revenue CAGR of only 4% as consumers increasingly demand value-for-money products, which is not one of JD.com's strengths. We are cautiously optimistic on JD.com.

JD.com offers authentic products from its online first party (1P) business with speedy and high-quality delivery service. It adopts an asset-heavy 1P model with self-owned inventory and largely self-built logistics, complemented by an asset-light third-party (3P) model. By comparison, its competitor Alibaba relies mostly on a 3P model. Underperforming Pinduoduo and Douyin, JD’s GMV/online retail sales of goods has decreased from 30.7% in 2021 to 29.2% in 2022. To reinvigorate growth, JD wants to change customers' mindshare of JD as an everyday low-price platform and has launched a CNY 10 billion subsidy program to attract price-sensitive customers. It is removing sales of nonstrategic low-margin products from the 1P business and allowing 3P merchants and business partners to provide these products instead. JD.com is also streamlining its organization to increase its ability to respond to quickly changing market dynamics. We expect JD.com to see weaker sales growth this year amid these changes.

We've slashed JD.com’s 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.

China’s August online and offline retail sales of consumer goods growth improved to 4.6% year on year in the month versus 2.5% in the prior month, thanks to the rollout of supportive policies by the government, in our view. Online sales of goods in the month were up 8% year on year, slightly better than the 7% in the previous month. We maintain our forecasts and fair value estimates for Alibaba Group at USD 128 per ADS and HKD 124 per share; JD.com at USD 88 per ADS and HKD 341 per share; and PDD Holdings at USD 117 per ADS. This is because we think China’s online consumption trend is in line with our expectations. In our view, PDD Holdings is fairly valued. While both Alibaba Group and JD.com are undervalued for long-term investors, we don’t see near-term catalysts for these shares. The physical goods e-commerce penetration in the month reached 26.3%, compared with 25.5% in August 2022. So far after the phasing out of the lockdown measures, we don’t see the offline segment taking market share, although people are going out more. Year-to-date physical goods e-commerce penetration was up 80 basis points year on year, supporting our forecasts of long-term e-commerce penetration increasing to 42.2% in a decade.

JD.com beat Refinitiv consensus as of Aug. 16 and our estimate for revenue and non-GAAP net income in the second quarter. However, JD.com’s Nasdaq traded shares dropped 3% on the day of earnings. We think it is because of the quarter's zero year-on-year growth in operating profit for main segment JD Retail, a sharp decline from double-digit growth in every quarter previously since the second quarter of 2022. This underperforms Alibaba’s Taobao and Tmall Group’s 9% year-on-year growth in adjusted EBITA in the June quarter. JD Retail's operating margin before unallocated items for the quarter was 3.2%, lower than 3.4% for the second quarter of 2022, and weaker than our 3.4% expectation. We estimate JD Retail’s weak operating profit is due to higher marketing spending, which was up 17% year on year for the group in the quarter, and completely offset the benefit from faster growth in the higher-margin third-party business. As a comparison, Alibaba’s Taobao and Tmall Group adjusted EBITA margin also declined by 120 basis points to 42.9% in the quarter on a year-on-year basis due to a higher mix of lower-margin first-party business and investment back into the business.

We raise our estimate for wide-moat JD.com’s second-quarter non-GAAP net margin to 3.0% from 2.5%, and raise our full-year non-GAAP net margin estimate to 3.3% from 2.9% due to lower marketing costs. We now expect 2023 non-GAAP net profit to grow 23% to CNY 35 billion. Our revenue forecast for 3.9% year-on-year second-quarter revenue growth is unchanged, with retail revenue to eke out a 1% rise and gross merchandise volume, or GMV, to improve 6%. Our fair value estimate stays at USD 88 per ADS (HKD 341 per share). We still think JD.com is worth buying. As China’s consumption sentiment improves, we expect to see JD.com’s more premium positioning to allow it to register faster top-line growth.

The readthrough from Vipshop’s (VIPS, not covered by Morningstar) first-quarter earnings for our e-commerce coverage is generally positive, with continual recovery in consumption. This is especially the case for Alibaba Group, whose core category is apparel; and PDD Holdings, which is a value-for-money platform. Vipshop is a leading online discount retailer for brands in China that focus on the apparel category. We make no changes to our fair value estimates for Alibaba, PDD and JD.com.

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.

JD.com offers authentic products from its online first party (1P) business with speedy and high-quality delivery service. It adopts an asset-heavy 1P model with self-owned inventory and largely self-built logistics, complemented by an asset-light third-party (3P) model. By comparison, its competitor Alibaba relies mostly on a 3P model. Underperforming Pinduoduo and Douyin, JD’s GMV/online retail sales of goods has decreased from 30.7% in 2021 to 29.2% in 2022. To reinvigorate growth, JD wants to change customers' mindshare of JD as an everyday low-price platform and has launched a CNY 10 billion subsidy program to attract price-sensitive customers. It is removing sales of nonstrategic low-margin products from the 1P business and allowing 3P merchants and business partners to provide these products instead. JD.com is also streamlining its organization to increase its ability to respond to quickly changing market dynamics. We expect JD.com to see weaker sales growth this year amid these changes.

JD.com has emerged as a leading disruptive force in China's retail industry by offering authentic products online at competitive prices with speedy and high-quality delivery service. JD’s mobile shopping market share has increased from 21% in 2016 to 27% in 2020 on our estimate. JD adopted an asset-heavy model with self-owned inventory and self-built logistics, while Alibaba has more of an asset-light model.

We have cut our estimates for wide-moat JD.com’s first-quarter revenue and full-year revenue and non-GAAP net margin to account for a greater impact from the strategy to fulfill low-margin merchandise using third-party platforms instead of the company's own first-party business, the creation of a flatter organization, and integrating the first- and third-party businesses under the same merchandise category leader. Our fair value estimate is unchanged at USD 90 per ADS and HKD 349 per share, after we cut it on March 10 to reflect business performance uncertainty. In the China e-commerce space, we prefer Alibaba for its plan to unlock value and PDD Holdings for its higher take rate expansion.

Wide-moat JD.com’s fourth-quarter non-GAAP net income was 26% higher than our estimate, but management’s 2023 outlook for the company appears to be less optimistic than our forecasts. The absence of the reporting of the annual active customer accounts in the quarter (which was up only 6.5% year on year in the third quarter) leads us to think user growth was weak, despite ample headroom from 588 million in the 12 months ended September versus Alibaba’s 903 million annual active consumers in China commerce retail business for the year ended March 2023. In the call, JD.com’s growth outlook for 2023 was less upbeat than we expected. Following the criticism of JD.com’s strategy and management by founder Richard Liu internally in the last quarter of last year, a strategy shift to focus on low price, and cutting certain low-margin businesses lead us to think that JD.com’s previous model wasn’t working well. We think JD.com is still testing its new strategy and there is uncertainty on how successful it is in reaccelerating high revenue year-on-year growth while maintaining a non-GAAP net margin increase yearly in the next few years. We think JD.com’s intangible asset of fast and quality logistics remains unchanged, but it will take more time to gain bargaining power against suppliers amid slower first-party business growth. We therefore reduce its non-GAAP net margin annual increase magnitude and assume it will reach 5.18% by 2031 versus 5.68% we expected previously. Our 10-year revenue CAGR is now 7% compared with 9% previously. Our fair value estimate is down 13% to USD 90 per ADS or HKD 349 per share.