JD's sky-high profits saved the day, but how long can they "cover up" the slowing growth?

On the evening of November 18, before the US stock market opened, JD.com (JD.US) released its Q3 2022 financial report with the following highlights:

1. Soft revenue growth but surprisingly high profits: Overall, JD.com achieved revenue of CNY 243.5 billion for this quarter, a year-on-year increase of 11.4%, which is basically consistent with the company's guidance and expectations of CNY 243.1 billion. However, the market expectation should have overlooked the approximately CNY 3 billion contribution from the consolidation of Deppon Logistics's revenue. Therefore, JD.com's revenue growth is actually lower than expected, and the revenue of segmented sectors is not impressive either. But the bright spot is that JD.com achieved a whopping operating profit of CNY 8.73 billion this quarter, the highest in history, and exceeding market expectations by about 60%. The actual operating profit margin reached 3.6%, an increase of about 2.4 percentage points, far better than the company's guidance of about 0.6 percentage points improvement.

2. All sectors except logistics have disappointing revenue: Firstly, JD.com's self-operated revenue for this quarter was CNY 197 billion, an increase of only 6% year-on-year, even lower than the 7% growth rate of this quarter's online physical retail market, which is a rare and unpleasant occurrence. In terms of segments, the power-on business grew by 8% due to the sustained high temperature in July and August, which was better than the pessimistic expectations. However, the growth of regular goods was only 3%, even lower than the growth rate during the pandemic. Faced with the rapid and sustained decline in regular goods, the pandemic is no longer an excuse. Considering that the models of Duo Duo Mai Cai (JDDJ), Meituan Youxuan (Meituan) and Shangou have already been put into effect, and the GMV scale is rapidly increasing, JD.com is facing significantly deteriorating competition in food and fast-moving consumer goods as well.

Next, the revenue growth difference between platform services of commission and advertising was basically eliminated after excluding the revenue contribution of approximately CNY 1 billion.

Only the logistics business achieved a year-on-year growth of 73% when consolidated with and after accounting for Deppon Logistics, but this sector is not a core business.

3. Steady improvement in gross profit and cost control: This quarter, JD.com achieved a gross profit of CNY 36.2 billion, and the gross profit margin also increased from 14.2% to 14.9% year-on-year, an improvement of about 70 basis points, which is similar to the improvement in the previous quarter. The main reason for the improvement in gross profit margin should be that the company has reduced user subsidies.

In terms of expenses, except for the usual rigid research and development expenses, which still increased by 3% year-on-year, the warehousing and logistics, marketing, and management expenses remained the same or declined year-on-year. After the drastic downsizing, the management expenses decreased by 14%, the most significant drop. Therefore, the overall cost-to-revenue ratio for the operating expenses decreased by 1.5 percentage points year-on-year, which is the main reason for the better-than-expected improvement in operating profit.

4. All sectors have reduced losses and increased profits across the board, and emerging businesses are the biggest contributors: Looking at each sector, the biggest contributor to the better-than-expected improvement in profits this quarter is emerging businesses, which have turned losses into profits, surprising everyone with a net profit of CNY 280 million from a loss of about CNY 2 billion in the previous quarter. Xiak, even excluding the CNY 1.23 billion gain from JD Property's sale of assets, the actual loss of the new business of about CNY 1 billion is still less than the market's expected loss of CNY 1.5 billion. 而核心的京东商城板块本季度也实现了超过百亿的 109 亿元经营利润，利润率增加了 1.2%，远高于公司指引利润改善的程度。此外，物流板块和达达板块本季度利润都有所增加和减少亏损。

Dolphin Analyst's View:

总的来说，京东本季度的业绩还好还坏。从营收角度来看，京东自营零售的增长速度与行业平均水平相近。然而，原本增长的主要动力之一，在面对社区团购、和美团闪购等近场零售平台的竞争时，一般商品的增长速度比在疫情期间还要低。而作为增长的另一个动力，3P 业务与 1P 业务之间的增长速度差异也已经缩小，基本可以被忽略。京东曾经能够持续领先行业的增长动力，现在已经基本断掉了。这也再次证实了市场对京东营收增长放缓的忧虑并不仅限于疫情的影响，而可能是长期趋势所致。在电商平台中，京东缺乏可见的第二增长曲线，面临的增长压力越来越大。

但幸好京东本季度的利润改善程度十分惊人，这让市场暂时忽略了营收放缓的问题。从 SEA 和阿里等公司的营收增长不尽人意，但减亏成果显著并得到市场反弹的情况来看，京东的股价可能会略微上涨，但力度会更小（因为京东估值更高）。

然而，利润永远无法替代增长成为重要的次选方案。虽然第一次实现利润大幅改善可以让市场看到希望，但若增长问题无法得以解决，那么京东就不会成为 Dolphin Analyst 在电商领域更看好的标的。

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** 本季度财报详细解读：**

** 一、营收增长平平，略低于指引和预期 **

1.自营零售： 首先从基石的自营零售来看，本季度实现了收入 1970 亿元，较去年同期增长了约 6%，但是完全恢复速度实际上并没有达到市场预期的 2009 亿元。相比之下，国家统计局公布的线上实物零售市场增长率为 7%。京东自营零售增长率之低迷，不如行业大盘的表现给人留下了不好的印象。同样，这也再次证实了市场对京东营收增长放缓并不仅仅是疫情影响，而是一种趋势。

其中，** 通电类产品 ** 本季度实现了收入 1193 亿元，较去年同期增长了 8%，超过了市场预期的 1163 亿。 In the context of concerns in the market about significant reduction in the completion of real estate projects, it was expected that the sales of home appliances would be quite weak. However, actual market data show that home appliances and audio equipments achieved a YoY growth of 8%-10% between July and August, which approaches the growth rate of jd.com. Dolphin Analyst believes that this is due to the continuous high temperatures of this summer, which boosted the sales of related devices. However, it is worth noting that the sales of home appliances in September and October have declined sharply, which is not good news for jd.com's performance in the 4th quarter.

On the other hand, in stark contrast to electric products, jd.com's own brand products underperformed despite the high expectations. This quarter, it generated a revenue of 77.7 billion yuan, which is far below the expected 84.6 billion. Its YoY growth rate continued to decrease to 3%, even lower than the rate during the pandemic. However, from the overall market performance perspective, food and groceries as well as daily necessities have been the most resilient categories in the past few months. This is the reason why the market has higher expectations for them, but jd.com's realization of these cannot keep up with the growth of these categories. The logic behind the improvement of online penetration rates for food and daily necessities was one of the driving forces of jd.com's growth. However, such a performance is sure to make the market quite worried. Facing such a rapid and sustained decline in growth, the pandemic is no longer a fig leaf, and jd.com is facing an inevitable deterioration of competition in this category. Combined with the successful modes of competitors such as Duoduo Maicai, Meituan Optimal and Meituan Flash Purchase, whose GMV scales are growing rapidly, it can be seen that the impact on jd.com from aforementioned platforms is quite significant.

The platform service mainly reflects the revenue from commission and advertisement of jd.com and JDDJ. This season revenue was 19 billion yuan, which is in line with expectations, with a YoY growth rate of 13%, showing signs of rebound. Given poor performance in self-operated businesses and inadequate timely delivery of goods, it's difficult for the 3P business to demonstrate leadership. However, after excluding the contribution of the consolidated Express delivery revenue of approximately 1 billion, the YoY growth rate was only 7%, which was only slightly higher than the growth rate of self-operated businesses.

The only silver lining is the rebound in growth rate. According to the statement of jd.com's management in the last financial report, the company subsidized 3P merchants to a certain extent due to the pandemic in the second quarter. This is presumably one of the reasons for the rebound in growth rate in this quarter. However, the problem remains that the difference in revenue growth rate between 3P and 1P businesses has not improved significantly. 3. Logistics and Other Services: This quarter, revenue for the logistics segment, which includes JD Logistics, Dada Kuaidi, and Deppon Logistics (which merged with JD Logistics in July) reached 27.6 billion yuan, representing a year-on-year growth rate of 73%, far exceeding market expectations of 22.7 billion yuan. However, Dolphin Analyst believes that market expectations may not have fully reflected the contribution of the Deppon merger. Nevertheless, even if we exclude contributions from the Dada merger of approximately 1.3 billion yuan and Deppon's revenue contributions (whose specific scale is unknown, but should be less than 4 billion yuan), the comparable revenue growth rate of the logistics segment is still significant, becoming a major contributor to the company's revenue growth.

4. Overall Revenue Performance: Combining the aforementioned business segments, JD.com's overall revenue for the quarter was 243.5 billion yuan, a year-on-year increase of 11.4%, which is basically in line with market expectations of 243.1 billion yuan. However, market expectations for the logistics segment's revenue were significantly low, so in reality, the company's total revenue should be slightly lower than expected (but in line with the company's guidance). Furthermore, looking beyond the expected differences, the trend of the company's previously fast-growing fast-moving consumer goods and 3P business revenue growth continuing to slow down has yet to see a turnaround, so the lack of growth is becoming a label for JD.com.

5. User Numbers: In addition, as the only one of China's three major e-commerce platforms to disclose user data (and possibly the only one with room for growth), JD.com had 588.3 million annual active users in the third quarter. After a slow second quarter with virtually no growth, the number of annual active users in this quarter increased by about 8 million compared to the previous quarter. Although the growth rate has slowed down, for JD.com, which already has the fewest users of the three platforms, the halt in user growth would be a "heavy burden."

II. Unleashing "Enormous" Profits: The Earning Power of Internet Companies

1. Improved Gross Profit Is in Line with Expectations: This quarter, JD.com achieved a gross profit of 36.2 billion yuan, which is in line with market expectations of 35.9 billion yuan. The gross profit margin also increased from 14.2% to 14.9% year on year, a gain of 70 basis points, which is close to the 90 basis points improvement seen in the previous quarter. According to the company's conference call in the second quarter, the main reason for the improvement of gross profit margin is that the company found that after reducing subsidies to users, users still continued to stay and the habit of using JD.com had been established. Therefore, the trend of gross profit improvement will continue throughout this year, and this quarter has also validated the company's guidance.

In addition, after removing performance-related expenses from the gross profit margin, it can be seen that the improvement is greater than that of the gross profit margin, so JD.com's control over logistics performance and cost-effectiveness has also achieved some success.

2. Drastic reduction in expenses: As mentioned above, after overcoming the logistical challenges during the pandemic, the company's warehouse and logistics expenses have decreased significantly compared to last quarter and almost no growth compared to last year, reflecting the increase in logistics efficiency. Additionally, marketing expenses have also been reduced by 2% compared to last year, continuing the trend of necessary cuts. After heavy layoffs in non-core business sectors such as JD Logistics and JD Health, this quarter's management expenses have been reduced by 14% compared to last year.

Despite the drastic reduction in expenses, there has only been a slight increase of 3% in R&D investment which is necessary for a technology company.

Overall, due to the reduction in non-R&D expenses, the company's overall operational expenses were only 28.7 billion, significantly lower than the market's expected 30.2 billion. The operating expenses rate also decreased by 1.5%, which is 0.6% more than the market's expectation.

3. Operating profit: In summary, due to the expected improvement of 0.7% in gross profit margin and the unexpected reduction of 1.5% in the operating expense rate for this quarter, JD achieved a high operating profit margin of 3.6%, compared to only 1.2% in the same period last year. This is far beyond the company's guidance for the second quarter call that the profit margin would improve by about 0.6%.

Finally, JD achieved an operating profit of 8.73 billion this quarter, more than half of the market's expected 5.52 billion, and created a record for the highest single price profit in JD's history. Therefore, although JD's revenue growth was not satisfactory, the level of improvement in profitability was amazing which results in mixed feelings in the market. In other technology companies, such as SEA and Alibaba, despite the unsatisfactory revenue growth, the rebound in stock prices was still significant after their impressive reduction in losses. The Dolphin Analyst believes that the increase in JD's stock price may also be slightly lifted, but not to the same magnitude (as JD's valuation is higher).

4. Emerging businesses turn losses into profits, the biggest dark horse in this financial report

It is already known that JD's profits greatly improved this quarter. Surprisingly, the most exceeding expectations is the reduction of losses in emerging businesses, but profitability has also improved in other business segments.

1. It is truly surprising to see that the operating profit of the emerging business sectors, including Jingxi, JD Property, and JD Health, has reversed from a single-quarter loss of around 2 billion, and achieved a net profit of 280 million. Although the market expected a narrowing of losses, there was still a loss of 1.5 billion. Upon closer inspection, although the emerging business has turned losses into gains with the 12.3 billion profit from the sale of JD Property assets, even if this part is excluded, the actual loss of 1 billion of the new business is still far less than expected.

2. In terms of the core JD Mall sector, the operating profit rate has also increased by 1.2 percentage points year-on-year this quarter, significantly higher than the improvement range indicated by the company. The operating profit has exceeded 10 billion yuan, reaching 10.9 billion yuan. The improvement range of the market's expected profit rate is only 0.4 percentage points, which is close to the guidance of the company.

3. While revenue is growing rapidly, the logistics sector's profit is also rapidly expanding. This quarter, the profit was 250 million yuan, and it has been profitable for two consecutive quarters. In contrast, the market was expected to lose about 30 million yuan again.

4. While the income of the Dada sector remained basically the same as the previous quarter, the loss also narrowed from 420 million in the previous quarter to 300 million. It is evident that the operating efficiency of the sector has significantly improved.

Past Research:

In depth

April 22, 2022 "Meituan, JD, Why are they doing so well in the stock market competition?"

September 27, 2021 "Get to know JD, the company that was mocked by the entire internet"

Earnings season

August 24, 2022 Earnings Call: "JD: Continuing to Focus on Efficiency, Same-city Retail Will Be the Growth Focus (Earnings Call Summary)"

August 23, 2022 Earnings Report Review: "With No Growth, Will JD Become a Value Stock?" On May 17, 2022, Conference Call: "In the second quarter, although business has slowed, cost reduction and efficiency improvement still have potential (Longbridge Telephone Conference summary)" was released. On May 17, 2022, financial report review "Resolutely fighting against the epidemic, JD is still full of sincerity" (Longbridge article). On March 10, 2022, Conference Call: "With increasing uncertainty, can JD's self-operated model and self-owned logistics still help maintain its core competitiveness? (Longbridge Telephone Conference summary)" was released. On March 10, 2022, financial report review "JD comes to a crossroads, with dazzling revenue growth but uncertain prospects?" (Longbridge article) was released. On November 18, 2021, Conference Call: "In the Lead: Summary of JD's Performance Review" (Longbridge Telephone Conference summary) was released. On November 18, 2021, financial report review "JD: Is e-commerce growth cooling down? JD disagrees" (Longbridge article) was released.

Risk Disclosure and Statement for this article: Dolphin Analyst disclaimer and general disclosure.