Article / 27 February 2015 at 6:32 GMT

Earnings Preview: JD.com to target market share over profit

China Watcher / Shanghai
China
  • JD.com is announcing its fourth-quarter results on March 3
  • Investors will be seeking similar trends to that of its biggest rival – Alibaba
  • Two key focuses will be mobile monetisation and the growth of its product range

By Neil Flynn

Chinese online retail giant JD.com will report its fourth-quarter earnings on Tuesday March 3, before the opening of the markets. As Alibaba has already announced its results, investors will be looking for similar trends from its biggest rival. Here are the four key points to focus on in the earnings reports and subsequent conference call.

Return to net loss

JD.com posted positive non-GAAP net income in the third quarter, but management was quick to state that the firm doesn’t target profit at this stage, because it is focusing on growing market share throughout China. Therefore investors shouldn’t expect continued profit in the coming quarters. 

In addition, the fourth quarter tends to see lower gross margins because of the higher marketing expenses related to heavy promotional activities, such as the Single’s Day and 12.12 shopping events. While this is in contrast to great rival Alibaba, investors shouldn’t be disappointed by negative profit margins. Management has stated that by building market share and developing its business model during 2014 and 2015, the firm will be in a strong position to target profit within a few years. 


bnb
 
JD.com's gross margins are likely to be lower in the fourth quarter because of the higher marketing expenses related to events such as Single's Day. Photo: iStock

Has Alibaba and Baidu mitigated the monetisation effect from mobile?

The key theme from the earnings of China’s tech giants is that as mobile becomes a growing component of total revenues, the overall monetisation rate has been decreasing. The reason for this is because PC is an established platform, and effective monetisation strategies have been developed over several years. 

However, the migration of mobile essentially began in 2013, and firms focused heavily on mobile during 2014. Therefore monetisation strategies have yet to be optimised, meaning that the monetisation rate for mobile is lower than that of PC. Hence as the proportion of revenues from mobile increases, the overall monetisation rate decreases.

In the third quarter, 29.6% of orders fulfilled came from mobile, and during the Single’s Day festival on November 11, mobile contributed to 40% of orders. In addition, JD.com is becoming more integrated into the Tencent social media network, and the direct links from QQ and WeChat should continue to drive mobile user growth. 

CEO Richard Liu commented that the firm is seeing growing conversion rates from these Tencent social media platforms, and this should continue in 2015. I expect to see overall mobile contribution for the fourth quarter reach 36%, but this will likely contribute to lower profit margins. However, I don’t think that the market’s reaction will be as great as we saw from Alibaba and Baidu, because these two firms have eliminated the surprise factor. 

Investors will be expecting higher mobile contribution to revenues and lower profit margins, and they understand that this is a necessary stage of China’s transition from PC-centric to mobile-centric strategy.

Growth of marketplace to complement merchandise in 2015

While JD.com is known as China’s biggest online direct retailer, it has been expanding its third-party business, known as Marketplace. This is where JD.com acts as a retail platform for third-party suppliers to sell their products to consumers. As JD.com has been expanding the marketplace business, investors should expect to see much stronger growth than from its established direct selling merchandise business.

It should be noted that the marketplace business has a higher risk of counterfeit products than the merchandise business, because the products come from third-party suppliers. Therefore while JD.com has built its reputation on the back of product quality, emphasising the contrast to Alibaba, the growth of GMV from third-party suppliers will likely see the risk of counterfeit products increase. 

JD.com is notorious for taking every opportunity to criticise Alibaba, and the fourth-quarter conference call should see many references to product quality, particularly after the SAIC report that targeted Alibaba's lapses on anti-counterfeit controls. I expect that management will discuss its warehousing and logistics services for third-party merchants, which allows suppliers to use JD.com’s infrastructure in order to improve delivery times. 

Not only does this generate revenue for JD.com, but it allows the firm to test product quality from third-party suppliers. By the end of the third quarter, JD.com’s proprietary logistics network delivered about 30% of parcels for third-party sellers, and this is expected to increase throughout 2015. JD.com has been developing high-quality warehousing infrastructure, and the first of which was opened in Shanghai prior to the Single’s Day festival in November. Three more are under construction, and should be online in 2015.

JD.com Asian No. 1 Warehouse
 














JD.com’s state-of-the-art warehousing infrastructure. Photo: JD.com

Could VIPshop finally see genuine competition?

JD.com has always been known as a consumer electronics retail platform, but it has been growing its product line-up. Non-electronic merchandise has seen strong growth over the past few quarters, and Richard Liu stated that GMV from non-electronic merchandise will exceed that of electronic merchandise in 2015.

The firm sees the apparel and shoes product category as very promising. While a substantial part of this revenue comes from the third-party marketplace business, JD.com is looking at expanding the direct selling merchandise business through flash sales, putting it in direct competition with flash sales leader VIPshop. 

This is a very interesting strategy by JD.com, because VIPshop has consistently shown that the flash sales model is a very profitable business. VIPshop’s management recently discussed how its position in the market allows it to essentially have first refusal on inventory from many brands, which should help it to stave off competition from the likes of JD.com.

Nevertheless, JD.com should be able to provide strong competition for VIPshop, because it is a much bigger firm. In the third quarter, VIPshop had 9.5 million active customer accounts, while JD.com had 46 million, and even despite VIPshop’s fourth-quarter active customer accounts growing 28.4% to 12.2 million, JD.com should see strong growth from the fourth quarter, due to the seasonal promotions. 

While I wouldn’t expect significant revenues from its flash sales model over the coming quarters, continued growth in flash sales would put serious pressure on VIPshop in 2015.

– Edited by Gayle Bryant

Neil Flynn is portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail