Summary
JD.com maintains a conservative outlook for Q1 2023, citing soft consumption and cost efficiency focus.
The Street predicts a recovery in H2 2023, and JD's restructuring efforts are setting the company up for a strong comeback.
JD launched a subsidy campaign to attract new customers with a low-price strategy, which may impact margins but support its competitive position.
The company is spinning off its property and industrial units to enhance efficiency and attract investors, following in Alibaba's footsteps.
Investment Thesis
JD.com, Inc. (NASDAQ:JD) has a compelling turnaround story with AI expansion, low price strategy, and spin-off plans. With a conservative outlook for Q1 2023 due to soft consumption, JD's restructuring efforts are setting up the company for a strong comeback.
JD's low-price strategy aims to expand the user base, and the spin-off plans are expected to enhance efficiency, attract investors, and increase operational and financial transparency. With its first-party marketplace and focus on improving profitability, JD has the potential to increase income per user and maintain its competitive edge in a recovering economy with low consumer confidence, making it a strong buy.
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JD Remains Optimistic On 2H23 Recovery
JD.com operates both a first-party and third-party marketplace, with the main difference between these two marketplaces being who owns and manages the products being sold. On the other hand, JD's third-party marketplace enables other retailers to offer their goods to customers directly on JD.com's network. In addition, JD is a mediator, giving the buyer and seller a venue to conduct business.
JD has the highest annual revenue of any retailer in China, its first-party marketplace accounts for the majority of its revenues, and it is progressively growing its third-party marketplace to increase profitability. Compared to other Chinese retailers, who run third-party markets, JD serves fewer online customers, but thanks to its primary first-party marketplace, it can increase income per user. In addition, JD's first-party marketplace maintains its inventories and earns substantially lower margins than other competitors, which do not preserve any stocks for their third-party markets.
JD's management had a conservative outlook on its first-quarter 2023 top-line growth due to soft consumption sentiment, a continued focus on cost efficiency, and the company's exit from loss-making businesses. JD has also launched several subsidy programs focused on a low-price strategy, which could temporarily change the product mix and average selling price.
Analysts forecast that JD.com's Q1 2023 revenue will grow by only 0.5% YoY, which is slower than the previous quarter. It is primarily due to a decline in JDR revenue, partially offset by increased JDL revenue. Although JD.com's net margin is expected to maintain its improving trend, it may not be as significant as in 2022 as the efficiency push effect gradually fades. JD.com's marketing budget will also be managed more holistically to balance competitiveness and return. As a result, the estimated Q1 2023 NG NPM is expected to increase by 0.3 ppt YoY to 2.0%.
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Low Price Strategy Set To Enhance User Base
JD.com launched a new subsidy program called the RMB 10 billion Subsidy Campaign in March, aimed at expanding its user base by offering a low-price strategy to consumers. Although subsidies may hurt profits, JD plans to reallocate its quarterly sales and marketing expenses budget, and merchants will also bear the price differences.
Therefore, the actual financial impact of the subsidy program should be limited. Initially, the program may reduce the gross profit margin and increase sales and marketing expenses. However, JD.com's dynamic scaling down of loss-making business units and continuous cost optimization initiatives could also improve its group-level margin performance.
Lastly, JD.com faces competition from traditional e-commerce platforms and rising short video platforms. However, a low-price strategy could help the company maintain its competitive edge in a recovering economy with low consumer confidence.
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JD To Spin-Off Units, Following Alibaba's Lead
JD.com is set to spin off its property and industrial units and list them on the Hong Kong Stock Exchange, following in the footsteps of Alibaba Group Holding Limited (BABA). The move is expected to enhance efficiency, release potential in the subsidiaries of the companies, and provide clarity of credit profiles of the industrial supply chain technology and services business for rating agencies and financial institutions.
The company will indirectly own more than 50% of the shares of both units after the spin-off is completed. JD.com has previously streamlined its operations by listing its healthcare arm as JD Health and JD Logistics. The proposed spin-off will benefit both JD.com and JD Industrials. It will allow investors to better evaluate JD.com's focus on the Group and increase operational efficiency and transparency. In addition, JD Industrials will be valued separately from JD Group to attract investors interested in high-growth industrial supply chain business.
Additionally, the spin-off is expected to enable investors to value JD.com's core business better than at current levels, allowing the company to allocate resources more effectively. It is also likely to increase the operational and financial transparency of JD Industrials Group and attract an investor base that values high-growth opportunities in the industrial supply chain technology and services business.
Furthermore, by segregating JD Industrials as a listed entity, JD.com can focus on developing its core JD Group business without considering JD Industrials Group's funding requirements. Finally, the move is also likely to clarify the credit profile of JD Industrials Group for rating agencies and financial institutions.
Interestingly, JD Retail is moving from a business group to a business unit system. It leads to former heads of business groups being heads of respective units. Operating units will be segregated by subcategories and integrate third-party store operations and JD's operations under unified unit managers. The move marks JD Retail's most significant restructuring since upgrading from a departmental system in 2018 and its first integration of self-operated with third-party-operated businesses.
Further, the trend in the technology sector in China of breaking up conglomerates into independently run entities is expected to enhance efficiency and release potential in their subsidiaries, which could benefit investors. For example, Alibaba recently announced its most extensive restructuring, splitting the conglomerate into six independently run entities. JD.com's spin-off follows in Alibaba's footsteps and positions the company for growth and success in the highly competitive e-commerce industry.
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Bloomberg
Overall, JD.com's spin-off of its property and industrial units is a forward-looking move expected to enhance efficiency, attract investors, and provide clarity of the credit profile for rating agencies and financial institutions. In addition, it allows the company to focus on developing its core JD Group business without considering JD Industrials Group's funding requirements. The move follows a trend in the technology sector in China of breaking up conglomerates into independently run entities, which is expected to benefit investors.
Technical Indicators Signal A Bottom
Technically, JD's stock price is at critical support (double bottom). The possible benefits from low price strategy and spin-offs infused with a positive market sentiment about the resumption of the Chinese economy and performance efficiency (such as better-than-expected Q1 and Q2 results) can push the valuation into a bullish trajectory. However, the Relative Strength Index (RSI) also indicates oversold levels as it hovers near 30, signaling a bottom.
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Takeaway
In conclusion, JD.com's AI expansion, low-price strategy, and spin-off plans set the company up for a strong comeback. While the company maintains a conservative outlook for Q1 2023 due to soft consumption and a continued focus on cost efficiency, its restructuring efforts are expected to pay off in H2 2023.
The low-price strategy may impact margins, but it aims to expand the user base and maintain the company's competitive edge. Finally, the spin-off plans will enhance efficiency, attract investors, and increase operational and financial transparency. With its potential to increase income per user and maintain profitability, JD is a strong buy in a recovering economy.
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