Cautiously Optimistic; Still Expecting Better-Than-Peers Growth
We expect the recent COVID-19 lockdowns to drag JD’s bottoming-out recovery in
2Q22. However, we still like JD due to its: a) better-than-peers top-line growth, b)
unique 1P business model and solid logistics network, c) lower susceptibility to
regulatory risk, and d) continued healthy margin expansion anchored by 3P segment
growth. We forecast 17% revenue growth in 2022, and 1.5% net margin growth (-2%
yoy net profit growth). Maintain BUY. Lower target price to HK320.00 (US$82.00).
WHAT’S NEW
• Expect resilient growth despite challenging environment. We forecast 1Q22 revenue to
grow at 15% (at the lower boundary of the management’s previously guided 15-20% yoy
growth) as the intermittent lockdowns that started since mid-Mar 22 has put pressure on its
fulfilment activities. JD.com (JD) stated that its offline stores are currently facing restrictions
from operating. However, most of its offline stores are mostly located within the lower tier
cities, thus the overall top-line impact should be limited. The main concern by the company
currently is its fulfilment capabilities as consumers may need to wait longer than expected to
receive their items, which put the items ordered at risk of being cancelled. On top of that, JD
also mentioned it does not face a rider shortage despite the lockdowns. The management
however mentioned risks such as the lack of warehouse sorting staff as other concerns in
delaying its fulfilment capabilities. All in, we estimate 1Q22 revenue to come in at Rmb233b,
representing 15% yoy growth, versus consensus’ estimate of Rmb241b. We also trim 2Q22
revenue forecast by 5% to 13% yoy growth, reflecting the lockdown in several regions.
• Margin expectations. The company expects margin pressure due to potential higher
fulfilment expenses (ie higher shipping charges, rental cost), higher S&M spending in
conjunction with the CNY Gala show and higher opex charges (due to the recent staff
reorganisation which will result in one-off compensation) to weigh on overall margin. JD had
guided that the layoff is mainly within the New Initiative segment (mostly from Jingxi PinPin
as well as other experimental business units from JD Retail and JD Logistics). In terms of
1Q22 adjusted net margin, the company expects contraction of 1ppt yoy which should
translate to approximately 1% adjusted net margin in 1Q22.
• Exposure to resilient product categories. JD expects demand for 3C products to remain
resilient despite supply constraint (due to chip shortage). Product categories such as
apparels and beauty items are expected to face headwinds mainly due to seasonality (ie
change of weather) as well as weaker consumer sentiment. According to the National
Bureau of Statistics (NBS) during Jan 22 and Feb 22, China’s retail sales of communication
equipment and apparel achieved 4.8/4.8% yoy growth respectively.
• 3P segment. Management expects 3P business growth will continue to outpace 1P growth.
JD had introduced merchant support initiatives since 4Q21 in conjunction with the policy
support towards SMEs recovering from the pandemic. Although JD expects the merchant
support initiative to hurt its overall margin performance, the company expects the gradual
increase in revenue contribution by 3P segment should offset the shortfall. We estimate 3P
revenue growth of 32% (vs Baba’s CMR revenue growth of 1.7%) to Rmb18.6b, accounting
to 8% of total revenue in 1Q22 (vs 1Q21: 7%).
STOCK IMPACT
• Least expose to regulatory risk. Despite the accommodating remarks by vice-president
(on 15 Mar 22), there are still four new regulation-related news circulating to-date (two
entertainment-related, one e-commerce- & local consumer service-related and one
cybersecurity-related). At this juncture, we think JD is the least susceptible player to be
subjected to regulatory risk due to it being less aggressive in terms of market share
expansion.
• 2022 outlook. For full-year 2022, management remains cautiously optimistic pending the
easing of lockdown measures. The tone had actually turned softer compared to the
management’s previous guidance of FY22 top-line growth of 20% and stable JD retail
margin for FY22 vs FY21: 3.1%. Management expects operating loss for the New Business
segment to narrow sequentially in 2022. As the near-term visibility remains unclear, we
forecast 2022 revenue growth of 17% to Rmb1,100.6b versus consensus’ estimate of
Rmb1,144.6b, with adjusted net margin estimate of 1.5%.
EARNINGS REVISION/RISK
• We lowered our 1Q22 revenue estimate by 4%, factoring in impact from the pandemic. We
lowered 1Q22 adjusted net profit by 45% in view of the higher opex, representing 15.4% of
total revenue (vs 1Q21: 13.6%).
• Risks: Intensified competition in the fresh produce and FMCG segments from PDD,
slowdown in macro environment, delisting from US market, regulations.
VALUATION/RECOMMENDATION
• Maintain BUY with a lower target price of HK$320.00 (US$82.00), implying 0.7x
EV/sales. We like JD for its room for margin improvement on better operating efficiency in its
own ecosystem as well as: a) above average top-line growth, b) being less susceptible to
regulatory risk, and c) margin which should be supported by 3P segment growth. The
company is trading at 0.38x EV/sales, 2.2SD below its historical mean at 0.63x.
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.