Weaker than expected 3Q23 performance
- Expect JD Retail revenue growth to be flat y-o-y in 3Q23, revised down from our previous forecast of 3%
- Weaker consumption and strategic adjustment for FMCG segment are key reasons
- Cut FY23F/FY24F/FY25F non-GAAP earnings by 10%/12%/11% on slower JD Retail revenue growth
- Maintain BUY as we expect growth momentum to pick up in FY24 post-strategic adjustment; TPs lowered to US$206/ US$52
We expect JD Retail revenue to be flat y-o-y in 3Q23 and 4Q23, respectively, vs. the previous expectation of mid-single-digit growth, and overall revenue to increase by 1% y-o-y in 3Q23. Overall consumption sentiment remains uncertain. There are also additional reasons for the sluggish 3Q performance, e.g., lower demand for air conditioners in 3Q23, due to high base from last year, as well as a shorter iPhone sales cycle this year. The strategic adjustment for the FMCG segment (of reducing loss-making SKUs) is dragging revenue growth, and management expects the transition to end by 1Q24. Note that the growth rate would have been double digit in 2Q23 if we were to exclude the strategy adjustment impact. Additionally, industry-level growth in JD’s key focus categories has weakened in recent months due to soft macros. For example, home appliance-related categories recorded a 3% y-o-y decline in Aug 2023, lagging the 5% y-o-y growth in overall retail sales, according to National Bureau of Statistics. We expect JD Retail’s operating margin to remain resilient, at 4.5% in 3Q23 (vs. 5.2% in 3Q22), and we expect the non-GAAP net margin to reach 3.6% in 3Q23.
Double 11 festival benefits merchants’ growth, but limited revenue impact
JD has recently announced its Double 11 promotion plan, which will focus on low-price and value products. Its cross-store promotional campaign offers a discount of Rmb50 for every Rmb299 spent, which implies a discount of c.17%. Meanwhile, BABA’s Taobao and Tmall offers at least 15% discount for specific products without the requirement of combining orders. We believe that “low-price” will be the key theme for e-commerce platforms this year amid the consumption downgrade. In addition, JD’s Double 11 festival will offer more merchant support to drive increased merchant participation and user engagement, and thus sales volume. However, it may not be directly translated into stronger revenue, given the increased subsidies and focus on the lower price categories.
Earnings revision and recommendation
We revised down our non-GAAP earnings forecast by 10%, 12%, and 11% for FY23F, FY24F, and FY25F, respectively. We believe revenue growth will improve to 6% y-o-y in FY24 and then 6% y-o-y in FY25, from 2% y-o-y in FY23F, especially after the strategic adjustment for the FMCG segment. We expect non-GAAP net profit to grow by 15% y-o-y to Rmb32.3bn in FY23F and 16% y-o-y to Rmb37.6bn in FY24F, as well as 15% y-o-y to Rmb43.5bn in FY25F, translating into 3%, 3.3%, and 3.6% non-GAAP net margins for FY23F, FY24F, and FY25F, respectively. The stock is trading at 8x adjusted FY24 PE, at which the macro challenges should be partially priced in. We maintain BUY on JD.com with an SOTP valuation of HK$206/US$52, based on (1) core retail business valuation: 8x PE on FY24F core profit (HK$105) vs. 10x PE previously – the lower PE multiple is mainly due to moderate growth momentum for JD Retail; and (2) fair value of other investees (HK$101).