Article / 04 August 2015 at 23:45 GMT

Earnings Preview: Logistics strategy to deliver strong Q2 for JD.com

China Watcher / Shanghai
China
  • JD.com's Q2 earnings are released on Friday, prior to the opening of US markets 
  • Investors will be keen to learn how it's expanding its logistics infrastructure
  • Its O2O app, Daojia is set to be a long-term revenue driver

By Neil Flynn

Chinese online retailer JD.com will release its second-quarter earnings on Friday before the opening of the US markets, with investors eager to see how well the firm will recover from the seasonally slow first quarter that affected all Chinese firms. 

In addition, there has been a marked shift towards O2O (online to offline) investment within the industry, and investors will be expecting management commentary on the initial progress of the new "JD.com At Home" app. Here are the four key points that investors should focus on.

Continued growth in non-electronic retail


Despite originally being an electronics retailer, JD.com has since expanded its product range to become a general retailer that can actively compete with Alibaba's Taobao and Tmall platforms. During the first quarter, management announced that non-electronic goods accounted for more than 49% of GMV (transactions), and this proportion should continue to grow throughout the rest of the year.

The firm announced that it had come to an agreement with Uniqlo to close its flagship store on JD.com, despite only announcing its opening three months ago. The related press release stated that there was an "e-commerce strategic restructuring", and management won’t comment further in the conference call. However, it is likely that Uniqlo has felt pressure from JD.com’s biggest rival Alibaba, whose Tmall and Taobao platforms have hosted Uniqlo’s store since 2009.

Nevertheless, JD.com launched flagship stores for Unilever and Sephora, as well as an exclusive deal with singer Taylor Swift to sell her merchandise. As I have discussed over the past few months, the firm has been quickly expanding its cross-border e-commerce platforms, and now has six country specific stores: France, South Korea, Japan, Canada, Australia and the US. This will allow Chinese shoppers to order products imported from their respective country. 

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 O2O is key to JD.com's future revenue and it's in a strong position with
the backing of tech giant Tencent. Photo: iStock

Leveraging Tencent’s network for O2O growth

As I discussed in July, JD.com has entered the O2O industry with its new app JD Daojia (京东到家 lit. JD At Home), which allows users to purchase food from restaurants, convenience stores and other services that can be sent directly to their home or office within the hour. This is a major structural trend in the industry that has now seen Baidu commit to spending RMB 20 billion on building out its own service. 

However, JD.com is in a strong position because it has the backing of tech giant Tencent, which owns both the two most popular social networking apps – WeChat and QQ – and the most popular O2O app Dianping.  

O2O is set to be a long-term revenue driver and the next stage of tech industry evolution. It is essential that JD.com builds a presence in the industry, and although the recent release of JD Daojia can be seen as late, given that large platforms have already taken a commanding market share, I expect that JD.com and Tencent will work together in the industry to stave off competition from Baidu and Alibaba. 

The second quarter was the first full quarter with JD Daojia revenue and operating metrics, so management should discuss the platform and its prospects.  

Investment in logistics


Logistics is a key investment strategy for online retailers, and will inevitably dictate market share. This is because firms have become so broad in terms of product range that there is often very little to differentiate between the platforms, as the products are the same, and so are the prices.

However, from a personal point of view, and an opinion shared by many throughout Shanghai, JD.com is the best online retail platform in China because of its delivery service. Quite often, if a product is bought on JD.com, it will arrive before the same product purchased on Alibaba, and although a few hours may not seem like a huge difference, it has a large effect on user loyalty and preference, as there is very little else to choose between the two platforms.

Alibaba has been investing heavily in its logistics subsidiary Cainiao to correct this, and investors should expect to see a continued response from JD.com. I have previously discussed how online retailers are targeting the central and western provinces of China in order to gain access to hundreds of millions of new potential customers, but the wealthy eastern coast also has a large opportunity that firms want to exploit. 

With the troubles at the Wal-Mart-backed online grocery store Yihaodian (一号店 lit. No. 1 Store), Alibaba announced a one-week trial of its same-day grocery delivery service in Beijing at the end of July. This shows a clear indication of a major future revenue driver for online retailers, and I fully expect that firms will continue to invest heavily in their logistics infrastructure in large cities such as Shanghai and Beijing in order to provide same-day grocery delivery.

I believe that this ties in nicely with JD.com’s O2O app, because it is more focused on convenience store purchases than its major rivals. It makes the idea of online grocery shopping more appealing and more common by encouraging people to purchase small items such as soft drink or milk through the app and wait an hour for it to be delivered, instead of actually going to the store. 

Internet financing after stricter government regulations

Earlier this year, Chinese equities were rallying heavily and consumer credit was easy to obtain. However, with the subsequent market correction, the Chinese government has been quick to crack down on investment margin and credit, in order to reduce the margin levels in financial markets. 

This will affect JD.com because it has been focusing on its consumer credit business, which is an industry that has been growing exponentially. Previous regulations of the industry were relatively lapse, but investors should expect the government to announce strict rules to govern the industry.

The issue for management is that new regulations will likely stunt the growth of JD.com’s credit business, but in the long run, it is necessary, because consumers need regulatory protection. Management should comment on the ongoing regulatory action in the industry, and how investors can expect this to affect the consumer credit business.

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 The Chinese government's crackdown on financial markets will likely stunt the growth of JD.com’s credit business. Photo: iStock

Earnings history


Since its IPO last year, JD.com has released four earnings reports, and they have almost always beaten consensus. The only anomaly was Q115’s earnings, which missed by $0.02, however the firm has repeatedly stated that it currently isn’t targeting profitability, as building market is much more important. 

With current analyst earnings consensus of -$0.11, investors should expect to see an increase in costs as the firm builds out its O2O platforms and subsidised promotions for its anniversary sale in June.

JD.com Earnings History
Source: JD.com investor relations

– Edited by Gayle Bryant

Neil Flynn is a China watcher based in Shanghai. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.

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