EUR 850.00 For Business Accounts Only

Morningstar | JD's Core Business Solid; New Business Expenses and Currency Force FVE to USD 41. See Updated Analyst Note from 17 Aug 2018

JD.com reported a solid second-quarter result from its core e-commerce business but spending on logistics and related new businesses such as logistics asset management drove the consolidated earnings back into operating loss and management has stepped away from its previous guidance of 1% to 2% non-GAAP net margins in 2018. We retain our view that in the long term, as JD Mall expands in scale and increases bargaining power against suppliers, and as the third-party logistics capacity is digested gradually, margins will gradually creep up. We reduce our near-term revenue forecasts with our long-term forecasts largely unchanged. Our fair value reduces to USD 41 from USD 45 previously almost entirely due to a weaker renminbi since our last update and we retain our no-moat rating on the company.

Second-quarter total revenue was up 31.2% on the year-ago period, slightly below our estimate. First-half non-GAAP operating profit of the core JD Mall business was up 41% with the operating profit margin growing to 1.56% from 1.44% in first-half 2017 due to increasing economies of scale and higher contribution from the higher-margin advertising business. New business non-GAAP operating profit margin declined to negative 40% from negative 16.2% with new business including logistics services provided to third parties, logistics asset management, technology initiatives, and overseas business. In the long term, we expect investment in AI and automation will reduce reliance on labor, which continues to expand in costs in China, and increase logistics efficiency. AI-driven advertising and data analytics can also help revenue in the long term, which gives support to our operating margin expansion assumptions in the long term.

In the second quarter of 2018, JD Finance entered into an agreement to raise further financing valuing JD Finance at over RMB 130 billion on a post-money basis. The transaction is expected to close in the third quarter of 2018. At the end of first-half 2017, JD Finance was deconsolidated from JD.com as a result of the reorganization of JD Finance. JD.com's current agreement with JD Finance sees it receive 40% of the future pretax profit of JD Finance when JD Finance has a positive pretax income on a cumulative basis, and JD.com may be able to convert its profit-sharing right into 40% of JD Finance's equity interest, subject to applicable regulatory approvals. Upon completion of JD Finance's this round of financing, the 40% will be diluted proportionally to approximately 36%. The recent funding would value JD's stake in JD Finance at around USD 4.85 per share.

The third-quarter guidance for net year-over-year revenue growth is 25%-30%, a slight slowdown from the 33.1% in the first quarter and 31.2% in the second quarter. JD saw some softness in its sales growth in the last 10 days of June and in July. However, from the start of August sales growth has largely recovered and management is optimistic looking ahead. Previously, the non-GAAP net margin guidance for 2018 was between 1% and 2%. JD reported 0.7% in the first half and management does not see much upside to this for the second half given continued heavy investments in new business as well as research and development. There may be some lumpy profits from the logistics asset management business but these will likely be booked next year rather than this year.