Resilient Growth In A Challenging Environment

JD has recovered 11% from its low of HK$246.60 following the divestment announcement made by Tencent. We like JD for its: a) above-average top-line growth, b) lower susceptibility to regulatory risk, and c) continued healthy margin growth. We forecast a 21% revenue growth and 1.8% net margin (27% yoy net profit growth) this year, which will support its 2022 share price performance given the current attractive valuation. We maintain BUY with a lower target price of HK395.00 (US$94.00).

WHAT’S NEW

Resilient growth despite soft macro environment. JD.com (JD) will be reporting its 4Q earnings in mid March. We estimate solid revenue growth of 26% for 4Q21, underpinned by product categories from communication equipment (ie benefitting from the strong seasonality of new phones launched during the quarter) as well as supermarket categories. In terms of the impact from the pandemic, JD stated that the logistics impact largely depends on the provincial lockdown measures, and separate regions have limited impact on its overall financials. JD Logistics has been increasing its presence in lower-tier cities with new infrastructure being set up; it now offers same-day and next-day delivery in 93% of counties/84% of villages in the country. In addition, we expect the omni-channel strategy to be defensive under current Zero-COVID Policy through 2022, especially for the FMCG categories during the lockdown.

Exposure to resilient product categories. JD does not expect the slowing macro environment growth to have significant impact on 3C categories as compared with apparels and cosmetic items for the following reasons: a) better brand awareness among customers, and b) higher user stickiness. For Oct 21/Nov 21, communication equipment achieved 34.8%/0.3% yoy growth whereas cosmetic and apparel growth was 7.2%/8.2% and -3.3%/- 0.5% respectively. However, the chip shortage may continue to weigh on the electronic products supply in 1H22.

Continued strong growth from 3P segment. Management guided that its 3P business growth would continue to outpace 1P growth in 4Q21, on the back of a better ROI-driven algorithm (despite low take rate charge) as well as support initiatives (ie rebates offered during shopping gala) provided to the merchants. We estimate JD to see 3P revenue growth of 30% in 4Q21 (vs Baba’s customer management revenue growth of 2.5%).

Margin overview. We estimate JD’s operating margin to come in at 1% in 4Q21 (vs 0.5% in 4Q20) as management had guided that the investment scale for New Businesses segment would ease in 4Q21 (due to seasonality) as well as continued gradual growth of revenue contribution from the 3P business. For full-year 2021, we expect JD to see a top-line growth of 29% (similar to 2020) with adjusted net margin edging down slightly to 1.6% (vs 2.3% in 2020, 0.3% social security benefit).

STOCK IMPACT

Least exposed to regulatory risk. Amid the tightening regulatory landscape in the China internet sector, we view JD as the least susceptible player to be subjected to regulatory probes as: a) it is less aggressive in terms of market share expansion, which means it provides less subsidies; b) it has the lowest customer acquisition cost among the Big 3 (vs Baba and PDD) with an overall S&M spending of 3.5-4.5% vs Baba’s 14% and PDD’s >50%. Recently, JD had secured a deal to serve as the exclusive partner for China Central Television (CCTV) to give away cash as virtual red packets at the coming Chinese New Year
Gala. The deal had been viewed by many as the blessing granted by the regulators towards the company. JD is expected to give out Rmb1.5b worth of virtual red packets from the eve of Chinese New Year till the 15th day of Chinese New Year. However, JD has stated that it will be collaborating with other merchants to dole out the Rmb1.5b for this initiative.

Impact from Tencent’s divestment. We think that the divestment from Tencent by way of special dividend will have minimal financial impact on JD given that the latter had been recognised as a matured investee company by Tencent following an eight-year-long investment. According to JD’s annual report, the company had renewed its Strategic Cooperation Agreement with Tencent starting 27 May 19 for three years until May 22, under which Tencent will offer tier 1 & 2 access points on the Weixin platform to provide traffic support. The contract will continue to be enforced even in the event of divestment. According to JD’s annual report, the company had contributed Rmb3.2b (0.7% of Tencent’s 2020 total revenue) in terms of advertising and payment processing services to Tencent and generated Rmb730m from the partnership (0.8% of JD’s services revenue). Management guided it will begin to negotiate the contract renewal with Tencent and announce the results in due time.

EARNINGS REVISION/RISK

 We have lowered our 4Q21/2021 revenue estimates by 3%/1% factoring in a minor top-line impact from the lockdown measures. We raise our 4Q21 non-GAAP net margin estimate by 0.4ppt in view of: a) lower subsidies from the New Businesses segment, and b) continued strong growth from the 3P business, which will be offset by a small margin drag from JD Logistics as the strict lockdown measures may incur higher delivery costs due to re-routing.

Risks: Intensified competition in the fresh produce and FMCG segments from PDD,
slowdown in macro environment.

VALUATION/RECOMMENDATION

 Maintain BUY with a lower target price of HK$395.00 (US$94.00), implying 0.9x EV/Sales. We like JD for: a) its room for margin improvement on better operating efficiency in its own ecosystem, b) its above-average top-line growth, c) it being less susceptible to regulatory risk, and d) continued healthy margin growth anchored by the 3P segment’s growth. The company is trading at 0.48x EV/Sales, which is 1.7SD below its historical mean of 0.67x.

SHARE PRICE CATALYST

 Strong new user growth, continued margin expansion with improved operating efficiency and further extension of logistics services to internal and external customers.