JD.com: Raising Near-Term Margin Estimate Ahead of its Interim Earnings

We raise our estimate for wide-moat JD.com’s JD 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.

We are somewhat concerned about JD.com’s longer-term strategy that points to underinvestment versus peers. This may lead to slower top-line growth, and lower mindshare of low price among price-sensitive customers. Pinduoduo and live-streaming platforms have stronger mindshare of low price (that is, being first to come to mind) among such customers currently. We expect Alibaba’s Taobao Tmall Group to defend its market share by investing in user retention, ecosystem and technology. We will reassess the effectiveness of JD.com’s strategy after second-quarter results.

We believe the second quarter should see JD.com benefiting from year-on-year recovery in communication appliances sales, offset by supermarket weakness. China’s communication appliances retail sales grew 18% and 29% in April and May, year on year, respectively. The base for comparison in the supermarket category for the second quarter is high due to pandemic lockdown hoarding a year ago. Also, transferring the provision of low-margin supermarket products to a third-party platform (where only advertising and commission dollars resulting from the sales of products are recorded as revenue) from a first-party platform (where product sales are recorded as revenue) is likely to dampen the relative recovery in revenue.