EUR 850.00 For Business Accounts Only

Morningstar | JD Will Be Affected by the Weaker Economy; Remains Undervalued

We plan to reduce our fair value estimate for JD.com by a high-single-digit to low-teens percentage from the current $41 per share, but the stock will continue to be undervalued. We now assume JD’s net revenue for the fourth quarter will grow at 19% year over year (at the low end of weaker-than-expected guidance of 18%-23%) as a result of a slowing economy and weak performance of the big-ticket electronics and home appliance category (63% contribution in the first half this year) as a result of the slowing property market. We plan to reduce our total revenue growth estimate to 26% in 2018, 20% in 2019, and 15% in 2020, reflecting the weaker macro environment, before rebounding to 20% in 2021 and 24% in 2022 as the economy recovers.

Despite the downbeat guidance, there were a few bright spots in the third-quarter results. Higher-margin third-party marketplace gross merchandise volume registered strong growth of over 40% across electronics and general merchandise categories, helped by the addition of long-tail products and merchants. We expect this trend to continue. Higher-margin general merchandise revenue was up more than 40% on a year-over-year basis. Management said it will improve JD’s gross profit and also net profit next year and balance the top line and bottom line to make the business more profitable. Management guided for the logistics business to see substantial improvement next year as utilization increases, as the discounts offered during the trial period are gradually removed. In fact, the loss ratio for the logistics business in the third quarter reduced sequentially despite weaker seasonality. In addition, the research and development to sales ratio will stabilize as key leaders and teams are in place, and capital expenditure  is set to reduce next year.

Net revenue grew at 25% year over year in the third quarter, at the low end of guidance and a deceleration from 31% in the second quarter due to slower consumption of electronics and appliances. Gross margin registered a 10-basis-point decline year over year to 15.4%. JD registered an operating loss of CNY 651 million or an operating margin of negative 0.6%. Non-GAAP operating margin was 0.6%, still a large contraction from 1.8% in the same period last year, mainly due to higher research and development expense, though it was a small improvement from 0.5% in the second quarter. JD Mall direct sales business’ gross margin saw an improvement of 15 basis points year over year, demonstrating its increasing economies of scale. On a non-GAAP basis, operating margin for JD Mall was 2.2% in the quarter, 3.1% lower than the year-ago period; we believe this is attributed to increased research and development expenses. We believe research and development is crucial in the Chinese Internet sector and expect the R&D/sales ratio to stay at 3.3% until 2020.