JD.com: Mixed Earnings But A Rebound Is Poised

JD.com (NASDAQ:JD) is one of the largest e-commerce companies in China and is often referred to as the "Amazon of China". The company is more like Amazon (AMZN) from a pure e-commerce perspective than Alibaba (BABA) which is also sometimes called the "Amazon of China". Either way, JD has built up a vast user base of ~600 million users across its platforms, which to put things into perspective is 1.8 times that of the U.S. population of 330 million. Of course, relative to China's 1.4 billion people, this represents 42% of the population. This is substantial especially given a large portion of the Chinese population is in low-income farming regions and thus not necessarily JD's prime consumer. A positive is China has a growing middle class and its Gross National Income [GNI] has increased by 10 times since the year 2000. JD.com is poised to benefit from this trend. In this post, I'm going to break down its recent financial results, before revealing my valuation for the stock. Let's dive in.

Mixed Financials

JD.com reported mixed financial results for the fourth quarter of 2022. Its revenue was $42.8 billion (RMB295.4) which increased by 7.1% year over year (on a constant currency basis). Breaking down the revenue by mix, its largest segment, JD Retail, contributed 87.7% of the total and grew its revenue by 3.64% year over year. This is not a fantastic growth rate, but given the tepid consumer demand in China driven by CV19 lockdowns, this is not terrible. There are also signs in China that the tide is turning and the economy is "reopening". A series of aggressive protests across China (which is rare for the country) looks to have sparked policy changes with regard to its "hard lockdown". A report by the Guardian indicates that Chinese health officials may be in the process of changing the categorization of CV19 from Class A to Class C, which would put it in the same category as the common flu.

Health Benefits

JD.com is not a complete loser when it comes to the effects of CV19 in China; in fact, the company has utilized the healthcare business "JD Health" to benefit. This business has partnered with over 30 pharmaceutical companies and ensures supply pricing stability. JD Health even launched an "Internet Hospital" which was effectively an online anti-CV19 service. This was a great idea as healthcare systems globally are fairly dated and illogical. For example, if someone has an illness, they must go to a doctor in order to be checked. However, of course, if the illness is contagious, this will spread and it's not a great consumer experience overall. Therefore, "telemedicine" is seen as the answer. China's telemedicine industry was valued at $4.88 billion in 2022 and is forecast to grow at a rapid 19.7% compounded annual growth rate [CAGR], reaching a value of $20.6 billion by 2030. JD.com is poised to benefit from this trend and many investors are likely unaware of this. JD's Internet Hospital also helps to ensure medical service in remote areas, and in the fourth quarter, over 80% of orders were from small towns and counties.

JD has also expanded its health proposition to include a "Hearing Center" which provides hearing aid fitting, launched in October 2022. Then in November 2022, the company launched a Pet Health service which included a Pet Pharmacy and Pet Hospital.

Ecosystem Advantage (JD Plus)

The company has also continued to grow its consumer base with its net active users increasing by 10 million year over year to 588 million by Q3 '22. Then in the Q4 earnings call, the company stated that it has "close to 600 million users" and thus a further increase would be expected.

JD has also developed the largest paid loyalty program in China with its JD Plus program which reported a staggering 34 million members in the fourth quarter of 2022. Similar to Amazon Prime in the west, this membership program offers consumers a variety of benefits.

This includes shopping discount coupons, festival discounts, and even utility bill coupons which looks to be fairly unique. In addition, the company has a "Yihaodian membership store" which serves the mid to high market customer cohort, who are a lucrative consumer base with higher spending power than most. The proof is in the numbers for its Plus members which reportedly spend 8 times the average of nonplus members.

Brands, Partnerships, and Omnichannel

In February 2023, JD partnered with the iconic jewelry brand Tiffany to launch a flagship store on its platform. The company also expanded its "J Shop" fashion store with new partnerships with Decathlon and HLA. This basically means the 170 Decathlon stores and 754 HLA stores can be leveraged for JD's one hour delivery service "Shop Now." This service grew its usage by 80% year over year which is a positive sign.

JD also continued to expand its private label brand (Jing Zao) which grew its revenue by over 60% year over year. This is a positive sign as JD effectively benefits from greater margins by selling its own products.

Logistics Strength

One of JD.com's competitive advantages is its vast logistics network which vertically integrates in the business. This includes over 1,500 warehouses and over 30 million square meters of floor space. The company even owns an airline (JD Airline) that recently expanded its cargo routes across all major Chinese cities. Its logistics business has been profitable the past three quarters and achieved its "breakeven" target for the full year of 2022.

Margins and Balance Sheet

JD.com reported strong improvement in its profitability in the fourth quarter. The company reported Non-GAAP earnings per share of $0.69, which beat analyst forecasts by $0.19. Its non-GAAP operating income went from RMB 2.8 billion in Q4 '21 to RMB 7.8 billion ($1.075 billion) by Q4 '22. This growth was mainly driven by improved cost and efficiency across JD Retail, which reported an operating margin of 3%, up 90 basis points year over year.

Valuation and Forecasts

In order to value JD, I have plugged its latest financial data into my discounted cash flow valuation model. I have forecast 9% revenue growth for "next year" or 2023 in my model. This is based upon a similar growth rate achieved for the full year of 2022. I have also forecast a faster 12% compounded annual growth rate in years 2 to 5. I expect this to be driven by the "reopening" of the Chinese economy and improving consumer demand, given the policy changes surrounding CV19. I also expect JD's telehealth business to continue to perform well and its JD Plus membership program to continue to grow at a solid pace.

To improve the accuracy of my model, I have capitalized R&D expenses, which has boosted net income. I have forecast a pre-tax operating margin of 11% over the next 10 years. I expect this to be driven by continued efficiency improvements in JD retail (as per the current trend). In addition, JD's supermarket category is currently going through a business model change as it focuses more on higher margin products; thus, I expect this to benefit profitability long term.

Given these factors, I get a fair value of ~$149 per share. The stock is trading at ~$42 per share at the time of writing, and thus it is nearly 72% undervalued.

The company also trades at a price-to-sales [P/S] ratio = 0.38, which is cheaper than other major e-commerce players in China such as Alibaba and Pinduoduo (PDD), as you can see on the chart below.

Final Thoughts

JD.com is a tremendous e-commerce company that is poised to benefit from the growing middle class in China and of course the recognition of consumer demand. Its vast logistics network and diverse operations across the healthcare segment give the company a competitive advantage and offer diversification to its revenue. According to my valuation model and forecasts, JD stock is undervalued intrinsically, and thus it could be a great long-term investment.