JD.com's concerns outweigh sales beat despite good earning report


After China's Double 11 shopping festival this year, Alibaba and Pinduoduo, the two Chinese e-commerce giants have given out unexpected earnings data. Under the influence of the two earnings data, the market is increasingly looking forward to JD.com's third quarter earnings report. On November 16, 2020, JD.com released its third quarter earnings report, before the U.S. market opens.

But after the release of the earnings report, JD.com's share price in the U.S. stock market has been repeatedly shaken, closing down 7.41% on that day. In the Hong Kong stock market, the same downward momentum, as of the close of November 17, JD.com's shares fell 7.12% to HK$341.8, with a market capitalization of about 1.06 trillion Hong Kong dollars.

Since its listing in Hong Kong in April this year, JD.com's share price has generally maintained its upward trend. Although the results in the third quarter were relatively good, the market seems to not satisfy about the results. So, let's look at the report.


Good performance but the growth has slowed


According to the financial data, JD.com's net revenues for the third quarter of 2020 were RMB174.2 billion (US$125.7 billion), an increase of 29.2% from the third quarter of 2019.

Revenue performance of major businesses:

In the retail segment, revenue for the third quarter of 2020 was RMB163.2 billion, an increase of 26.9% year-on-year. Revenue from electronic products and household appliances reached RMB93.3 billion, an increase of 23% year-on-year, and revenue from general merchandise reached RMB58.1 billion, an increase of 34.8% year-on-year.

In the new business segment, revenue for the third quarter was RMB10.96 billion, an increase of 86.4% from the third quarter of 2019. Thanks to the continuous expansion of JD Logistics, the establishment of an intelligent logistics system and the continuous improvement of the supply chain, revenue from logistics and other services reached RMB 10.4 billion in the third quarter, up 73.3% from RMB 6.0 billion in the third quarter of 2019.

As such, JD.com's revenue figures for the third quarter were undoubtedly positive, although there was a significant decline from the previous quarter, which was partly due to seasonal and epidemic influences. In fact, it has already exceeded institutional expectations. In addition to revenue, net income for the quarter also performed well.

• Under GAAP, net income attributable to ordinary shareholders for the third quarter of 2020 was RMB7.6 billion (US$1.1 billion), up 12.6 times year-on-year.

• Non-GAAP net income attributable to ordinary shareholders for the third quarter of 2020 increased by 80.1% to RMB5.6 billion (US$0.8 billion) from RMB3.1 billion for the same period last year.

Overall, JD.com's net income continued to increase year-on-year, but still showed a significant decline from the previous quarter.

The decline was mainly due to significant increases in fulfillment, marketing, and technical content costs. With net income up 80%, fulfillment expenses increased 32.4% to RMB11.6 billion, R&D expenses increased 13.9% to RMB4.1 billion, and marketing expenses increased 22.8% to RMB5.5 billion.

Under GAAP, net profit declined sharply from the second quarter, due in part to three major expense increases, especially in fulfillment expenses and revenue expenses, which in turn weighed on the overall net profit increase.

In general, JD.com still gave a good performance in this quarter. The fact that it was able to maintain its upward trend despite rising expenses deserves recognition. However, it should also be noted that revenue may be affected by the off-season and the epidemic on consumer purchasing power, and when both revenue and active user growth are trending downward, it means that JD.com may be hampered in its development.


Great pressure from user growth


In the third quarter, JD.com's annual active customer accounts increased by 32.1% to 441.6 million in the twelve months ended September 30, 2020 from 334.4 million in the twelve months ended September 30, 2019, a three-year high.

Compared with the past six quarters, it can be seen that JD.com's new active users has maintained a steady growth trend, which shows that JD.com's competitiveness is improving. It's worth noting that this number has slowed down when compared to the previous quarter's growth.

The reason that it was able to continue to attract new active users in the third quarter, is mainly due to the continued expansion in the sinking market. During the conference call, JD.com CFO Xu Ran said that 80% of JD.com's new user came from the sinking market.

The sinking market is rising. According to the data, between January and July 2020, urban retail sales reached RMB17.7 trillion, down 10.0% year-on-year, while rural retail sales was RMB2.7 trillion, down 9.5%. The rural consumer market recovered 0.5% faster than the urban market.

The sinking market represented by the rural consumer market, is rapidly catching up with the urban market and has become a new traffic pool for e-commerce platforms.
How to dig out more user resources to expand their own user dividend ceiling has become an important market for e-commerce platforms to fight with.

Nowadays, competing for the sinking market has become the direction in which e-commerce platforms must compete. Even Alibaba has launched "Taobao Special Offer Edition" to tap into the huge potential of the sinking market. Therefore, it is imperative to increase its penetration in the sinking market for JD.com if it wants to continue to attract active users.

In this quarter, Jingxi and JD Special Edition are the main products that JD.com serves the sinking market. The two products focus on different directions for the sinking market development.

Unlike Jingxi, which is independent of JD.com's supply chain, JD Special Edition relies on JD.com's own large supply chain, which pushes products suitable for the sinking market to JD Special Express. At the same time, because it is backed by JD.com supply chain, it can enjoy JD.com's powerful logistics service in terms of logistics delivery, thus providing better shopping experience for the sinking market in terms of price, quality and logistics service. 

In this way, the move still has a certain degree of effectiveness. However, it should also be noted that although new users are still able to keep rising steadily, JD.com's user growth anxiety has not been fully resolved.

In contrast to the last quarter, the growth of new users in this quarter has slowed, down 5.7% from the previous quarter. In the sinking market, JD.com's current situation is undoubtedly extremely difficult in the face of the powerful rival Pinduoduo. Combined with the third quarter performance of Pinduoduo, the number of active users in the third quarter reached 731.3 million, very close to that of Alibaba's, and JD.com is still far behind Alibaba and Pinduoduo.

With the powerful growth of Pinduoduo, especially in the sinking market, JD.com's pressure is increasing. Even a loss in the sinking market will affect its growth. Therefore, how to compete with Pinduoduo in the sinking market, is a problem that need JD.com to think about.

The slowdown in the user growth is a wake-up call for JD.com, which has become the biggest threat to its e-commerce business. Behind the rapid catch-up of Pinduoduo is its strong penetration in the sinking market. However, Alibaba and JD.com pay little attention to the sinking market at the beginning. This is the main reason why Pinduoduo is a threat to both in the sinking market.

For quite some time, competition in the sinking market will be the biggest obstacle for JD.com, meanwhile, the sinking market will also be the key whether JD.com can seek a breakthrough in market value and performance together.

This is an article from WeChat official accounts Gangguyanjiushe (ID: ganggushe), translated by Chris Yuan.