Introduction
JD.com (JD) reported another strong quarter with key metrics such as revenue, profit, and free cash flow all showing encouraging growth. More importantly, the company also inspired investor confidence by giving guidance of at least 10% revenue growth, despite the slowdown in the Chinese economy driven by the unfortunate COVID-19 situation.
4Q 2019 and Full Year 2019 Highlights
As the leading direct online retailer in China, JD delivered another exceptional quarter with revenue growth at 26.6% to $24.5B, well ahead of estimates of $23.9B. This was in part driven by a hugely successful Singles Days promotion on 11 Nov as well as their reinvestment strategies such as focusing on the everyday low process, enhancing user engagement and logistic services in lower-tier regions.
On the back of the strong revenue growth, user growth and traffic momentum were equally robust. There was an additional 28M active customer since Sep 2019, reaching a total of 362M active customers for the year, which represented a growth of 18.6%. Over 70% of those new customers came from lower-tier cities, which demonstrates that it is successful against rival Pinduoduo’s (PDD) aggressive acquisition of lower-income shoppers. Mobile DAU also grew by 38% in Q4, which was the fastest in 2 years as the company continues to make progress in lower-tier regions across China via innovative activities, diverse product offerings and improving logistic services.
For the full year, net revenue increased by 24.9% to $83B with strong performance across all product mix. General merchandise such as food and beverage, fresh produce, cosmetics, healthcare, and home products grew by 37% while the net service revenues which include higher-margin businesses such as third-party marketplace, advertising, and third-party logistics, grew by 43.6% to $83B. Net service contributed to 11.5% of total revenue in 2019, up from 9.9% in 2019, driven by superior supply chain and technology capabilities.
Fulfilled gross margin for the full year rose by 88 basis point despite heavy reinvestment in everyday low prices and logistic service level in lower-tier regions, showing signs of economies of scale and technology-based efficiencies. These improvements led to a positive free cash flow of $2.8N, which not only marks a record high but also a significant improvement from its negative free cash flow of $1.1B in 2018.
In all, the company had a terrific quarter and 2019, aptly summed up in the words of their CFO, Sydney Huang:
“In summary, JD.com finished a remarkable year with robust revenue growth, solid profitability, and free cash flow, and most importantly, accelerating user growth. This is supported by our customer-centric focus, evidenced by the continuously improving net promotion scores, our number one internal KPI, as well as our persistent investments in tech-based infrastructure and in our people. This long-term approach to running our business has also proven its unique advantage, as we provide aid and support in the battle against the coronavirus during recent weeks.”
Supporting the COVID-19 Cause
Beyond delivering a solid quarter, the company has also been in the thick of the action in Wuhan, the epicenter of the unfortunate COVID-19 outbreak. Due to its excellent supply chain, logistics, and technology, the company has been able to help provide support to the city during the outbreak.
Not only did the company donated critically needed medical supplies such as masks and protective materials there were in urgent demand, but the company’s JD logistics arm also opened a dedicated channel for relief materials across the country to assist Wuhan. JD logistics have since transported over 15M items of medical emergency materials to the Hubei Province. In addition, the company has also launched free round the clock online medical consultation and psychological consulting services to people across the whole of China. Admirably, the company has also not been profiting from this pandemic by offering a series of policies such as subsidies, fee reductions and waivers for their merchants to tide through this period of the uncertain economy.
Among the citizens whose daily lives have been impacted by the unprecedented cities lockdown, they have also been utilizing JD’s e-commerce platform to order daily groceries and other necessities. While the sale of large ticket goods and discretionary products have obviously been impacted, the lockdown has generated far more online demand in consumer staple products such as groceries, fresh produce, healthcare, and household products.
While such products have a lower margin, the company has managed to demonstrate the competitive advantages of its business model. In many cases, JD was the only major platform that could fulfill such orders. At the same time, the company has implemented strict policies to prohibit price increase during this time. The upside of this is that more old customers have been returning to their platform and inactive users are becoming more active. Due to the pandemic, more customers are beginning to pay more attention to the significance of e-commerce and the company is in prime position to benefit from this.
Prospects
Investors would be happy to know that the company has also issued guidance that Q1 2020 revenue will grow at least 10% despite the COVID-19 situation, which has hit China badly. While the higher-margin large staple items demand is expected to drop, the company is confident that their margin trend will continue to be upwards once the COVID-19 situation stabilizes.
With businesses starting to resume in China as the number of new cases appears to be stabilizing, JD is in a good position to resume their growth momentum. As mentioned earlier, because of the lockdown, the company has managed to gain more consumer mindshare and making huge progress in lower-tier regions. With the middle-class booming in China, JD may have a competitive advantage over its competitor Pinduoduo and Alibaba (BABA) with its higher quality product control and own logistic network.
Conclusion
JD reported another strong quarter and demonstrated its business model can have competitive advantages and scaled up to profitability. With the rape allegation of its founder and CEO, Richard Liu, cleared, the company is poised for greater growth in the years ahead, with partnerships with leading players such as Tencent, Google (GOOGL) and Walmart (WMT). The rumored spin-off of JD Logistics should also unlock more value for the company.
While JD has limited exposure outside of China, the COVID-19 situation has resulted in a global pandemic with several countries and cities implementing lockdown and travel restrictions. The economic uncertainly has resulted in a stock market crashing and into a bear market and JD is also susceptible to the market-wide correction.
Despite the risks, I believe that JD has a sustainable business model that is well-poised to capture the booming e-commerce market among the middle-class in China. I hold a medium-sized position on JD and intend to hold my position for the long term. As always, readers should conduct their own due diligence and consider their risk appetite and time horizon before taking up any positions.
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Disclosure: I am/we are long JD. 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.
