Photo by Kanchanara on Unsplash
 

Summary

JD Group is undergoing organizational and strategic reform, however, the effects of the spin-off, “tens of billions of subsidies” and so on are still obscure.

JD’s unfavorable performance in the latest years forced it into the inevitable price war with the other E-commerce giants, which may lead to a series of chain reactions of JD.

Threats from other dimensions, such as the short-video platform--Tiktok, the similarities, and the regulatory scrutiny, could make the situation even more complicated.

Although the present stock price is near the predicted intrinsic value, it is still not the right time to buy it in case of oversold risks.
 

Investment Thesis

After a long decline, JD.com (JD) took a series of measures to improve this poor situation. On the evening of March 30, JD Group announced that it intended to spin off its subsidiaries JD Production and Development and JD Industry for an independent listing on the main board of the Hong Kong Stock Exchange. What's more, JD has stepped up its "tens of billions of subsidies" as an important driving force, and will inevitably start a war with PDD and others. Who will win and who will lose, or what price to pay, is not known.

In today’s analysis, we explore what are the chances of success of JD's new initiative. As well as the market and risks of the certain issue, combined with the Chinese domestic business environment and Xi’s policy direction. Considering the sheer number of actions it has taken, the analysis cannot be done from a single level. I will go out on Lime and say that investors need to keep a close eye on the performance of its newly released activities separately. Once the result is difficult to meet JD's expectations, it may trigger a series of negative chain reactions. As discussed in this analysis, I hold on the not buying and keep watching opinion on it.
 

A quick look at the operating performance of JD in 2022

The earnings report showed that JD's revenue for the fourth quarter of 2022 was 295.4 billion yuan, up 7.1% year-on-year; net income for the year was 10,462 billion yuan, up 9.9% year-on-year; and net income attributable to common shareholders under non-GAAP was 28.2 billion yuan, up 64% year-on-year.

On the bright side, this is the first time that JD's net income has surpassed the trillion dollar mark, and both revenue and profit have maintained some growth. But if you go back and look at the past few years' performances, the results of JD last year were not as bright as the data showed. Especially in terms of growth rate, which is highly valued by the industry and it did not fully meet expectations.

In terms of revenue, for example, JD's total revenue in 2020 and 2021 will be 745.802 billion yuan and 951.592 billion yuan, up 29.3% and 27.6% year-on-year, respectively. While the revenue in 2022 will break a trillion, the year-on-year growth will be only 9.9%. Such performance is naturally unsatisfactory. Not only the full-year revenue but also the quarterly revenue showed the same sluggish growth. In the third quarter of last year, JD's net income was 243.5 billion yuan, up 11.4% year-on-year, while the year-on-year growth in the fourth quarter of last year was only 7.1%, which is obviously also hardly satisfactory to the industry.

It will be found that JD's self-operated business was 237.599 billion yuan in the fourth quarter of 2022, up just 1.25% year-on-year; and its self-operated business revenue for the whole year of 2022 was 865.062 billion yuan, up 6.06% year-on-year. It can be seen that JD has been difficult to maintain the rapid growth rate.
 

Forced into the price war

Perhaps JD is also aware of its own problems and is ready to make strategic adjustments in 2023. JD's strategic adjustments are directly related to changes in the consumer environment. In recent years, consumers' lifestyles and consumption concepts are changing, and the consumption structure and consumption power are showing polarized characteristics. On the one hand, the number of middle-class and family users who attach importance to the quality and function of goods is expanding, while on the other hand, consumers have become more adept at careful budgeting, and their consumption needs and consumption scenarios have become more and more diversified. Especially in the aspect of "careful budgeting", the performance is more prominent.

Just like the main sink market, PDD (PDD Holdings Inc. Nasdaq) through the "10 billion subsidies", a large number of continuous subsidies to achieve a continuous rise in GMV. In 2022, JD’s GMV is 3.47 trillion yuan, a decrease of 8.81%. According to LatePost, PDD's GMV for the same period is expected to exceed 3 trillion yuan, up 22.95% year-on-year. If JD does not make adjustments, it is likely to be overtaken at an accelerated pace.
 

JD's redemption-10 billion subsidies

On March 7, the JD Retail Recognition Conference was held. JD Retail CEO Xin Lijun put forward the four must-win battles of JD Retail 2023 - sinking markets, supply chain center construction, open ecological construction, and crosstown business. Since the released “10 billion subsidy” policy launched for one month, the results of the series of promoted activities far from the original expectation.

"Low price has become the first priority, whether it is self-operated or third party, low price first." A person from JD's retail business line told that the low-price strategy has triggered "dramatic changes" in the performance model, process model, and business actions of several key departments. "The performance assessment and promotion evaluation of each person in these departments will be related to the low-price strategy."

With the implementation of the low-price strategy, the flow strategy of the JD platform has undergone fundamental changes. As an investor, I am excited about the new changes. But as an analyst, I am worried about the possibility of failure.

From the current point of view, the price advantage of JD's ten billion subsidies is not obvious, and it is difficult to really make consumers interested and stimulate the desire to buy. Perhaps in JD's view, through a series of low-cost service matrix that can play a multi-bird effect - not only to reshape their own daily low-price image, but also to pull the old users back, bring new users, attract brands, and absurdly more merchants. In other words, JD wants to fully revitalize its ability at multiple levels through low prices. However, it may be difficult to help JD create a new growth engine by adding tens of billions of subsidies and other low-price initiatives. low prices mean a massive increase in costs, which may affect JD's profit performance, and investors may not want to accompany "burn money". The most intuitive manifestation of this is that in February. Once the news of JD's upcoming $10 billion subsidy came out, its share price on Nasdaq plunged 11%, which was the biggest drop in the past four months.
 

Threats from other dimensions may be even more deadly

Perhaps the dilemma of JD has something to do with the rapid rise of new live short-video e-commerce platforms such as TikTok or Kuai Shou(01024.HK) as well as the continued impact of PDD.

There is another signal of great concern: for the first time, JD did not disclose the specific data of annual active users in the earnings report. It's not hard to see that JD is also caught in shackles at the user growth level. In fact, from the third quarter of 2021, JD's annual active user growth rate has been declining on a year-over-year basis. It bottomed out in the second quarter of 2022, with a net increase of only 300,000, and rebounded to only 1.3% in the third quarter of 2022. When the growth of active users is no longer continuous, JD's old road of burning money for scale is no longer sustainable and must take a new road of cost reduction and efficiency.

Of course, As maintain a dominant market share, I can’t help to take the regulatory scrutiny of the Chinese regulators into consideration as well.
 

Valuation

JD’s previous revenue growth could be maintained at 30%-40% and the market gave a higher valuation multiple, now revenue growth has dropped to 10%-20% and profits have fluctuated dramatically.

According to the future performance forecast, its net profit compound growth rate for 2019-2024 is 21%. Given the instability of net profit, it is more prudent to discount 25%, which is 15.75%.

Therefore, JD is within 20 times the P/E ratio, which is the safety margin area. Due to the volatility of JD's profit level in 2021-2022, we tentatively estimate the earnings per share at 13 yuan per share based on the forecast net profit in 2023, and the share price is 260 yuan, or $37, based on 20 times P/E ratio. As we have seen, the JD.com stock price was $36.85 on 14th April. But It is not a good time yet and we need to continue to wait patiently, because of oversold always happens around the bad period time.
 

Conclusion

Given my analysis and assumptions, JD’s recently announced a corporate restructuring plan and strategic adjustments should be thought twice before making any investing action. In the near term, JD is definitely a risky investment. The price war is beginning. As the old saying that when the gun goes off, there are no winners. This time, JD is behind the eight ball.