JD Q1 FY2021 Results - Followed with Q&A

Publish date: Thu, 20 May 2021, 10:35 AM

JD.com Inc. announced its first quarter results yesterday evening for FY2021 which is followed by a Q&A conference call which I attended at 7.30pm in the evening.

For those of you who missed my earlier article a few weeks ago on JD, you may refer to them here.

Q1 FY2021 Results

Net Revenues for the first quarter of 2021 were at an impressive 39% increase year on year to RMB 203.2 billion (US$31 billion). Net service revenues for the first quarter of 2021 were at RMB 27.9 billion (US$4.3 billion), an increase of 73.1% from the first quarter of last year.

Net Income attributed to ordinary shareholders for the first quarter of 2021 also improved from RMB 1.1 billion the same period last year to RMB 3.6 billion (US$ 600m). You can see that they are not just growing topline at the expense of bottomline but they are balancing between the two.

Key operating metrics such as annual active customer accounts increased by 29% from 387 million last year to 500 million, signaling that they are still growing their market share within the customer base.

Working capital remained great for such business model, as it is evident that it takes on average 2-3 days for them to collect their money and 45-50 days to pay their merchants and suppliers.

Operating margin also increased during this period as they started to leverage through stronger logistics and supply chain network and beginning to show in their bottomline. We'll cover more on that when we get to the Q&A section which was addressed by Richard (CEO) and Sandy (CFO).

Free cash flow in the first quarter was negative as the company continues to pile on investment in its logistics and supply chain network and spend on marketing initiatives to boost organic traffic into the platform.

There were some other highlights that were worth mentioning in the first quarter:

JD.com and Louis Vuitton launched an innovative collaboration in April this year, bringing luxury brands and new shopping experience for the higher retail market. Other key notable luxury brands they have secured for collaboration also includes John Lobb (luxury shoes and boot brands under Hermes).
JD Home entered into strategic cooperation with Honor, Xiaomi, OPPO, OnePlus, and other cellphone brands to collaborate under an omni-channel strategy.
JD Health announced the launch of the Rare Disease Care Project - which creates a comprehensive healthcare offerings to create a one-stop solution for ongoing diagnosis and treatment.
JD Logistics and Tencent Smart Retail jointly announced the launch of JD-Tencent Cloud Warehouse. JD Logistics now operate over 1,000 warehouses nationwide, which covered under an aggregate gross floor area of over 21 million square meters.

Q&A Session

I took some time to listen to the 1-hour long conference call which the management covered some key Q&A in the call.

Let me summarize here what I have.

The first analyst posed a question regarding JD's omni-channel strategies and collaboration with brands and the differentiation and unique selling point for JD's platform to attract these key merchants.

Management replied by first reiterating the de-centralized trend of merchants moving from offline to online, especially since the Covid days. By moving into the online channels, it does not cannibalize the sales of their offline stores but rather enhance and increase the overall brand awareness of the merchants through the marketing initiatives they run.

Management went on by providing specific examples in the space of FMCG - where baby and maternal products consumption channel are starting to penetrate the market. Sales of alcohol products are also increasing and JD has become the number one platform for alcohol brands to go to. These were some of the penetrations they attract in order to meet the rising needs of their younger population users.

In the electronic products category, they are currently focusing to help merchants move from offline into online channel. However, the management also reiterated the overall chip shortage issue might dampen the increased sales in this segment as globally it seems to be a bottleneck across.

Another analyst asked about the focus growth of large ticket items vs smaller ticket items.

Management reiterated the importance of gaining market share through the lower-tiered cities where there are bigger opportunities ahead and JD's competence and advantage in their wide chain of supply chain network and logistics infrastructure makes it a compelling case for them to reach out nationwide to the lower-tiered cities. Management then cited an example where they have local supply chain for lower tiered cities where they can transport freshly produced products with competitive pricing and these wouldn't be possible without their extensive network distribution.

One other analyst asked about the balance between growing topline via investment in logistics and new businesses versus spending that will impact profitability.

Management replied that at this stage they are very clear that topline growth and market share is their number one priority as they are still in the growth phase. While retail business will maintain a strong growth momentum, net margin has actually increased due to better economies of scale. Net margin are currently about 5% higher for online versus offline customers so while they convert more into online there will be net margin improvement that will show in the future.

Having said that, JD logistics are currently in the hyper growth stage and more investment will be focused on this segment. Logistics also have higher fixed costs so this might pull down the entire blended margins.

Lastly, there was one analyst who questioned about the guidance for the second quarter, given such a strong performance in Q1 and this is where I think it's worth a caution if you can read between the line of what was said.

Management guided for a growth somewhere between the past 2 year CAGR and a similar first half year on year growth. Given that this quarter they have registered a strong 39% topline growth - which the management has reiterated that it is due to the lower base first quarter last year due to Covid situation (China started their Covid earlier than most of the other countries), this means that working backwards, it is implying for a slower second quarter growth which will only be in the likes of 20% second quarter year on year growth.

Final Thoughts

JD.com has an impressive first quarter which I think surpassed many of the analyst' prediction. However, I get the feeling that market may be pricing in the extrapolated 39% increase for full-year on year growth which is not going to happen.

If you read between the lines of what management has replied, it is indirectly guiding for a slower second quarter growth year on year of around 20% and management wants to caution ahead that it's not all rosy just because they have a blow-out first quarter earnings.

If you look at the valuation in my previous article, 20% growth will still be impressive and likely to fall under the base scenario where JD today is still very much trading below their fair valuation.

Given that I was just recently being assigned JD shares at $70, and had another option that will expire in Jun for a strike price of also $70, I will defer my purchase for now and will let nature takes its course first.

Over the long run however, I think it is still a great company trading under the fair value so it might be worthwhile looking at them closely after the second quarter to get a better overall picture.

Thanks for reading.

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