We Like JD.com Prioritizing User Experience and Market Share Over Profitability in 2024

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JD.com offers authentic products from its online first party (1P) business with speedy and high-quality delivery service. It adopts an asset-heavy 1P model with self-owned inventory and largely self-built logistics, complemented by an asset-light third-party (3P) model. By comparison, its competitor Alibaba relies mostly on a 3P model. Underperforming Pinduoduo and Douyin, JD’s GMV/online retail sales of goods has decreased from 30.7% in 2021 to 29.2% in 2022. To reinvigorate growth, JD wants to change customers' mindshare of JD as an everyday low-price platform and has launched a CNY 10 billion subsidy program to attract price-sensitive customers. It is removing sales of nonstrategic low-margin products from the 1P business and allowing 3P merchants and business partners to provide these products instead. JD.com is also streamlining its organization to increase its ability to respond to quickly changing market dynamics. We expect JD.com to see weaker sales growth this year amid these changes. 

In the medium term, we expect to see stable margin, after cutting much of its unprofitable businesses such as community group purchase, Jingxi, and international businesses in 2022. JD.com will continue to put more emphasis on high-quality profitability instead of low-quality growth. JD's logistics business JDL became an independent business unit that opens its services to third parties. JDL management will be squarely focused on profitability as well, and has achieved positive non-IFRS net profit in 2022. As the logistics business gains scale and reaches higher capacity utilization, we will see gross profit margin improvement. 

JD is a long-term margin expansion story driven by increasing scale from its 1P and 3P businesses. Larger scale in each category will increase its bargaining power with suppliers. Since 2016, JD no longer fully reinvests its gains from improving scale and is committed to delivering annual margin expansion in the long run. The increase in mix from higher-margin third-party platform business and efficiency of scale will help lift margins.

Business Strategy & Outlook

We think JD.com has a wide moat based on an intangible asset of high reliability and assurance (on-hand inventory, quality, fast proprietary logistics services), and cost advantage resulting from its growing economies of scale in its first-party business. We believe JD Logistics and JD.com create synergies and a moat cannot be assessed by segment. Adjusted return on invested capital in 2019 and 2020 reached 9.9% and 15.6%, respectively, but reverted to 4.5% in 2021 due to investments in new businesses such as community group purchase, versus the weighted average cost of capital of 9.9%. ROIC has tipped back up to 15.3% in 2022 amid cost-cutting, and we expect it to reach 26% by 2027, supporting our wide moat rating. 

JD.com's intangible asset is derived from its fast, efficient and high-quality proprietary logistics services. To a less extent, JD is known for higher assurance of authentic products on its first-party platform in a country where knocks-off are easy to find. 

JD’s logistics generally provide quicker delivery versus peers due to a difference in business models compared with Alibaba. Its high-quality logistics networks cover almost all districts and counties in China and the total population in PRC. JD Logistics places inventory at warehouses closest to the likely end consumers, leveraging on JD.com’s first-party businesses’ retail insights and data. When a customer order is placed, JD Logistics can dispatch the goods stored in the nearby warehouses, leading to quick fulfillment. As of Dec. 31, 2022, JD's warehouse covered almost all counties and districts in China with over 1,500 warehouses operated by JD and over 2,000 cloud warehouses operated by third-party warehouse owner-operators under the JD Logistics Open Warehouse Platform. This model is fundamentally different from Alibaba, as the latter is mainly a platform for third-party merchants, many of whom have their own warehouses and don’t necessarily place their inventory at the warehouses as near the likely end consumers as JD, as these consumers spread across the nation. JD logistics was established as early as 2007, and JD was the only e-commerce platform with self-owned logistics. Realizing the importance of logistics and speed in delivery, Alibaba has chosen to operate Cainiao’s logistics intelligence platform and global fulfillment network that leverage Alibaba’s self-developed and its logistics partners’ capacity and capabilities. For instance, Cainiao provides real-time insights for express courier firms to optimize delivery routes, for consumers to track their orders, and for merchants to manage their inventory and warehousing. To date, JD can still deliver merchandise to the hands of consumers faster in general in more developed areas. Established in 2013, Cainiao could provide same-day or next-day delivery to 1,500 districts and counties as of mid-2018, and this number remains unchanged on Cainiao’s website as of May 4, 2022. As of the end of 2017, JD had already been able to provide same-day and next-day delivery service to 1,752 counties and districts. According to Taobao.com, as of May 10, 2023, there are 122 cities where next-day delivery is supported. The speed in delivery donation also allowed us to conclude JD has faster speed. With the help of JD logistics, JD.com delivered medical supplies to Wuhan’s hospitals on the date of donation, Jan. 26 2020, amid the covid-19 outbreak. Alibaba’s Cainiao organized the delivery of medical supplies to Wuhan’s XieHe hospital on Feb. 1 at around 10:00 am, after XieHe hospital called for donation again on Jan. 30. Meanwhile, JD reported that there are over 200 cities where delivery can arrive within minutes during double 11 festival in 2020. Approximately 90% of the total online retail orders processed through JD Logistics networks were delivered on the same day or the day after the order was placed in 2021 (not disclosed in 2022, probably due to covid-19 disruption on logistics). JD Logistics achieved same-day or next-day deliveries in 93% of counties and 84% of towns and villages in China as per the JD Logistics 2021 annual report (not disclosed for 2022). While we don’t have comparable data for Alibaba, these numbers are very impressive, in our view. In the 2022 Double 11 Consumption Trend Insight report conducted by Nan Fang Du Shi newspaper, JD ranked number one with 88% of surveyees identifying it as the platform with the highest reliability when it comes to logistics time efficiency. Taobao Tmall received 54% votes, ranking number two.

JD has quality logistics services. As per the State Postal Bureau, JD’s express delivery overall user satisfaction rate has been ranked among the top three from 2018 to 2022, which speaks to its high quality. As of Dec. 31, 2022, the team of over 362,171 warehouse and delivery personnel and self-operated mission-critical logistics infrastructure help ensure more accurate and timely delivery. In contrast, having multiple logistics providers will result in less control and is more likely to create confusion and delay in Alibaba’s case. JD Logistics also connects with an extensive crowd-sourced on-demand delivery network. JD Logistics cooperates with Dada Group, which was 53% held by JD Group as per Dada’s 2022 annual report, leveraging its leading on-demand delivery platform in China to supplement its self-operated last-mile delivery. This helps JD group to fulfill customer needs, especially in peak seasons such as the June 18 Anniversary Sales and the Nov. 11 online shopping festival every year. JD’s logistics network provides services to external parties, but unlikely to its closest competitors Alibaba and Pinduoduo in our view. Should these closest competitors use JD Logistics, the latter would have the formers’ big data, such as the names and addresses of the customers, which merchants they buy from, how often and when they make such purchases. Given JD Logistics is a subsidiary of JD.com, JD.com’s competitors would be worried that JD Logistics could pass along such data to JD.com. The founder of JD.com, Richard Liu, is the chair of the JD Logistics board and the JD.com board. He still wields significant influence over JD Logistics and is unlikely to allow it to provide services to Alibaba, which will weaken the intangible asset of JD.com. This means JD.com will be able to own such competitive advantage against its close peers in the future. We therefore expect this comparative advantage should be able to be maintained for the next 20 years. 

JD’s logistics allows JD.com to more quickly turn over inventory versus global peers. Since 2012, JD has maintained its inventory turnover days below 40 days despite rising SKUs, thanks to JD Logistics. JD’s inventory turnover days in 2021-22 was 29.9/31.1 by our estimate, similar to Costco’s 28.3/29.4 and lower than Sun Art’s 54.0 in 2021 (not yet reported for 2022), Suning’s 51.4/59.5, Amazon’s 37.8/42.4, Walmart’s 43.1/44.5, and Best Buy’s 52.7/55.7. 

Covid-19 has provided us a better glimpse into the importance of on-hand inventory resulting from the first party business model and self-owned logistics. JD was able to assume full operations very quickly after the Spring festival in 2020 amid covid-19, and provide broad product selection and uninterrupted timely services to its customers in most parts of the country. JD also said it was the only major platform that could fulfill these orders in many cases. JD’s first-party business gross merchandise volume grew 20% in the March quarter of 2020. On the other hand, Alibaba’s Tmall gross merchandise volume grew only 10% in the March quarter of 2020, due to order cancelation as a result of logistic disruption, merchants not being able to ship orders on time, and other factors. Alibaba’s delivery relies on its strategic partners and it's difficult to control the workforce of these strategic partners. 

We think JD Retail, the largest listed retailer in China by revenue, enjoys a wide economic moat, driven by maintainable cost advantages relative to peers. According to our moat framework, a firm with higher market share can lower unit costs enough to create a cost advantage, which applies to JD Retail in our view. JD has a leading scale in the electronics and home appliance and supermarket categories, which has led and will continue to lead to increasing bargaining power against suppliers, thereby reducing sourcing costs. We think it will be hard for this trend to reverse in the next 20 years given its dominant scale in these verticals, quality and quick logistics services, and tailwind of increasing e-commerce penetration. 

JD Retail is developing economies of scale in our view, with a cost advantage in sourcing products in its direct sales business (instead of third-party platform business). JD’s electronics products and home appliances segment revenue was CNY 516 billion, representing 33% of China’s CNY 1,564 billion communication equipment, home appliance, and audio-visual products retail sales in 2022. This is higher than its main competitors in the electronics products and home appliance segment, with closest competitor Suning generating only CNY 49 billion sales in electronics and home appliance (down 51% year over year) by our estimates in the same year. 

In addition to our estimate of JD’s share in the communication equipment, home appliance, audio-visual equipment above, two different organizations gave a very different market share estimate of JD in the home appliance market, but both pointed to the conclusion that JD has one of the top two market shares across all channels. According to CENA, in 2022, JD’s market share in the home appliance market was 36.5%, versus Tmall's 16.2% and Suning’s 8.7%. 

Within the general merchandise segment, JD supermarket declared it has become the largest supermarket in terms of sales across all channels in China in 2020. JD’s general merchandise sales were CNY 349 billion, higher than the closest offline peer in China in 2022. We think Alibaba and JD’s first party supermarket businesses are of similar scale and both of them should have some cost advantages versus other peers. There are categories that JD had over 50% market share across all channels, examples include imported maternity goods, milk powder, diapers, imported milk, instant cereal et cetera, according to Nielsen’s 2019 Fast moving consumption market insights released in February 2019. 

JD has a lower cost structure versus its peers due to its lower sourcing costs and operational efficiency, and we believe JD Retail margin will increase due to economies of scale. We note that the electronics segment of JD had positive operating margin while the traditionally offline electronics retailer Suning, which was established in 1990, had a negative operating margin from 2020 to 2022. Management mentioned its cost advantage or efficiency several times previously. In the earnings call for the first quarter of 2020, management indicated its electronics and home appliance categories have a cost structure that is 50% lower than its peers. JD said in May 2019 its operating expense ratio is 5 percentage points lower than the top five offline retailers. Non-GAAP JD Retail operating margin has been increasing over the years from 2.5% in 2019 to 3.7% in 2022, thanks to the improving bargaining power, among other things. We expect the margin to increase to midsingle digits after 10 years. 

We don’t think the lead of JD.com, the second-largest e-commerce player by GMV, and the number-one player Alibaba against other retailers in first-party retail revenue can be surpassed by other competitors in the next 20 years, except by acquisitions. Pinduoduo's GMV was similar to JD in 2022 and it has no plan to grow the first-party business. In its 1P trial, it aims to fill the gap of missing products its users need temporarily while searching for merchants to offer these products on its marketplace. We don’t see any offline players in JD’s main categories being able to catch up with JD’s revenue scale, which gives it a sourcing advantage. JD’s closest competitor in the first-party electronics and home appliance businesses, Suning, generated only CNY 188 billion, CNY 99 billion, and CNY 49 billion sales in electronics and home appliance by our estimates in 2020, 2021, and 2022, respectively, significantly less than JD’s scale.

Wide

Economic Moat

JD.com

JD.com, Inc. is a technology-driven E-commerce company. It engages in the sale of electronics products and general merchandise products, including audio, video products, and books. It operates through the following segments: JD Retail, JD Logistics, and New Businesses. The JD Retail segment offers online retail, online marketplace, and marketing services. The JD Logistics segment includes internal and external logistics businesses. The New Businesses segment is composed of JD Property, Jingxi, overseas businesses and technology initiatives. The company was founded on June 18, 1998 by Qiang Dong Liu and is headquartered in Beijing, China.

Earnings data Q1 2024

JD.com reports improved Q1 performance, announces leadership transition

JD.com's Q1 2023 earnings call highlighted improved performance, a leadership transition, and challenges related to organizational restructuring and competition. The company remains confident in its ability to navigate these challenges and capitalize on upcoming opportunities.

JD.com exceeds Q2 revenue expectations, focuses on marketplace growth

JD.com delivered ahead of expectations in Q2 2023, demonstrating strong financial performance and strategic focus on customer experience and marketplace growth. While facing challenges in pricing strategy and differentiation, the company is well-positioned to capitalize on long-term opportunities.

JD.com reports stable Q3 performance, focuses on user experience

JD.com's Q3 performance reflects stable top-line growth and a focus on user experience and platform ecosystem. The company faces challenges with leadership changes and supermarket categories but sees opportunities in returning to normal growth rates and meeting consumer demands for quality and low prices. JD.com remains committed to sustainable growth and development, prioritizing a reasonable profit for the industry over short-term very high monetization and profitability.

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