Q2 Updates: Turning Profitable And More
JD.com (NASDAQ: JD) released their 2019 Q2 earnings on August 13th. The satisfying revenue growth rate (over 22% yoy) and the profitability (net profit of US$90 million) sent the share price up over 12% on the release day. Here are some of the key highlights of the Q2 results:
- Revenue growth: Net revenues were RMB150.3 billion (US$121.9 billion), an increase of 22.9% from the second quarter of 2018. The total revenue growth was largely driven by net service revenues, which grew by 42% yoy and contributed 11.2% of overall revenues. Within this sector, logistics and other service revenues grew 98%.
- Profitability improvement: Gross margin in the second quarter was 14.7%, up from 13.5% in the same quarter last year. Income from operations for the second quarter of 2019 was RMB2,266.6 million (US$330.2 million), compared to loss from operations of RMB1,033.9 million for the same period last year. Net income attributable to ordinary shareholders was RMB618.8 million (US$90.1 million), compared to net loss attributable to ordinary shareholders of RMB2,212.5 million for the same period last year.
Q2 was indeed a good quarter for JD, almost every business line saw substantial growth on a yoy and qoq basis:
Source: JD’s ER
Out of all the remarkable achievements for JD in Q2, there are two we think investors should pay special attention to:
- The growth of logistics and other services revenues, and
- The continuous improvement of the fulfillment expense ratio.
In case you haven’t noticed, yes, these two are both referring to one topic, JD Logistics.
JD Logistics: The Real Game Changer
JD Logistics, which became a standalone entity in April 2017, has been in charge of all the logistics-related business for JD.com, as well as providing 3rd party logistics services to other players. In February 2018, JD Logistics raised US$2.5 billion from a range of investors, including Hillhouse Capital, Sequoia China, China Merchants Group, Tencent, China Life, China Development Bank Capital FOF, China Structural Reform Fund and ICBC International, with a valuation of US$13.5 billion. JD remains the majority shareholder with a stake of 81.4 percent. As of June 30, 2019, JD.com operated approximately 600 warehouses. The total warehouses covered an aggregate gross floor area of over 15 million square meters, including approximately 2.5 million square meters managed under the JD Logistics Open Warehouse Platform.
In fact, JD Logistics has been the key focus of JD.com since day one of its foundation. Richard Liu, founder and CEO of JD, experienced quite some criticism when he first decided to build out JD’s own logistics network 12 years ago. But today, with one of the largest logistics networks built up across the nation, covering almost all counties and districts in China, JD Logistics has become the most valuable asset of JD, and will be the eventual game changer.
Source: JD’s Q2 ER slides
A powerful logistics network is the KEY to a successful e-commerce business. Every investor familiar with modern e-commerce should agree with us on this. A good benchmark could be Amazon (NASDAQ: AMZN), which is essentially becoming a player in the logistics and shipping industry, by expanding Amazon Air with 50 planes and several new regional hubs, including a $1.5 billion hub opening in northern Kentucky in 2021. Building up an own logistics network is definitely more costly and time-consuming at first, but it also brings unbeatable advantages in the long run:
- It gives better bargaining power over general logistics services. If JD or AMZN has to rely on 3rd party delivery services, they will be in a really bad negotiation position with these service providers. A good example was AMZN suffering when USPS proposed price hikes.
- It brings more space for operating efficiency and generating revenues. As we mentioned above, revenues from logistics services saw 98% yoy growth in Q2, marking the fastest growing sector within JD’s business. On the cost side, fulfillment expenses as a percentage of net revenues decreased to 6.1% in the second quarter of 2019, compared to 6.7% in the same period last year, mainly due to economies of scale from enhanced logistics capacity utilization and staff productivity. With the in-house logistics function, JD was able to manage the expenses with great ease, as they did earlier this year.
JD has also been actively expanding in other related areas of logistics. JD.com’s joint venture with Walmart (NYSE: WMT), Dada-JD Daojia, is China’s leading on-demand logistics and omnichannel e-commerce platform. In the second quarter, Dada cooperated with JD Logistics to provide fast intra-city delivery services for merchants and consumers, with the majority of goods delivered within 30 to 60 minutes, marking probably the fastest delivery service worldwide.
We think the established JD Logistics network as well as the expanding territory will help JD to achieve tremendous advantage in future competition.
Although JD has turned into a profitable business, we are still reluctant to use P/E to price it. After all, over 20% top line growth rate and huge potential in JD Logistics and JD Digits should still prove JD as a growth company. With 0.6 Price/Sales, we believe JD is largely undervalued.
We found JD’s Q2 results very promising, especially on the logistics services. JD has built up a great fence for their e-commerce business with JD Logistics. We believe JD is largely undervalued at current price.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.