Andrew Burton
Elevator Pitch
My investment rating for JD.com, Inc.’s (NASDAQ:JD) [9618:HK] stock is a Buy.
Previously, I evaluated JD’s five-year or intermediate-term outlook in an earlier article for the company written on September 3, 2021. My latest update for JD.com focuses on the preview of the stock’s upcoming quarterly earnings.
My view is that it is highly probable that JD.com’s actual Q2 2022 earnings can beat expectations. If investors watch JD’s 618 Shopping Festival GMV growth and its commentary on costs at its Q1 2022 earnings briefing, they should see positive signs related to the company’s Q2 2022 earnings expectations. Also, I am positive on JD’s special dividend payment earlier in the year and its decision to increase its share repurchase authorization in end-2021. This explains my decision to raise my rating for JD from a Hold to a Buy.
JD.com Q2 2022 Earnings Announcement Date
In a press release published on August 10, 2022, JD revealed that its financial results for the second quarter of the current year will be announced on August 23, 2022, prior to trading hours.
The Consensus Financial Forecasts For JD
JD.com is expected to have experienced slower top line expansion in Q2 2022, and it should have seen a decrease in its bottom line for the same quarter, according to consensus numbers.
Based on the sell-side’s consensus financial forecasts obtained from S&P Capital IQ, JD’s revenue growth (in RMB terms) is projected to slow from +26.2% YoY in Q2 2021 and +18.0% YoY in Q1 2022 to a mere +3.1% YoY for Q2 2022.
The market’s expectations of a moderation in the top line growth rate for JD.com in the second quarter of this year appears to be reasonable. China probably saw the worst of COVID-related lockdowns in April 2022, which affected key cities including Shanghai. There was a progressive easing of pandemic restrictions in the country in June 2022, but it is fair to assume that COVID-19 lockdowns in China hurt the country’s economy and affected JD’s business operations for a significant part of Q2 2022.
On the other hand, analysts see JD.com reversing from a +2.4% YoY increase in its normalized earnings per share for Q1 2022 to a -4.7% YoY decline in its adjusted EPS for Q2 2022, in RMB terms.
Apart from negative operating leverage, it is likely that the sell-side analysts considered the probability of higher expenses and an unfavorable revenue mix in determining their profit estimates for JD. The company had earlier highlighted at its Q1 2022 results briefing on May 17, 2022 that its near-term profitability will be negatively impacted by “additional COVID-related costs” and “product mix shift due to the uneven performance of our different product categories.” As such, an expected contraction in JD’s earnings for Q2 2022 seems fairly realistic.
Spotlight On 618 Shopping Festival
It is important to review JD.com’s performance for the 618 Shopping Festival, before I assess whether a Q2 2022 earnings beat or miss for JD is more likely. A Chinese data analytics company, Syntun, describes the 618 Shopping Festival as “the second-largest e-commerce shopping festival in China” which is “second only to ‘Single’s Day’ (November 11)” in a press release dated June 19, 2022.
In a blog post published on June 19, 2022, JD revealed that its gross merchandise volume or GMV increased by +10.3% YoY from RMB343.8 billion during the 618 Shopping Festival in 2021 to RMB379.3 billion for this year’s 618 Shopping Festival.
It is worthy of note that JD.com’s prior second-quarter top line expansion has approximated its GMV growth for the 618 Shopping Festival to a large extent. As an illustration, JD’s revenue rose by +33.8% YoY in Q2 2020 and this was just slightly higher than the company’s +33.2% YoY increase in GMV for the 618 Shopping Festival in 2020. Similarly, JD delivered a +27.8% YoY growth in GMV for the 2021 618 Shopping Festival, and its Q2 2021 sales increase wasn’t that far off at +26.2% YoY.
In summary, JD’s performance at the 618 Shopping Festival for 2022 wasn’t as good as that for prior years, but this was to be expected considering the negative effects of COVID-19 lockdowns on the economy and consumer confidence. More significantly, there is a gap between JD’s GMV growth (+10.3%) for this year’s 618 Shopping Festival and the market’s consensus Q2 2022 revenue expansion estimate (+3.1%), and I discuss the implications of this in the subsequent section.
JD Should Deliver A Q2 2022 Earnings Beat
I hold the view that there is a high probability of an earnings beat for JD when it reports Q2 2022 financial results on August 23, 2022.
As I highlighted in the prior section of this article, the sell-side’s consensus revenue growth projection for JD.com in Q2 2022 seems to be a tad too low compared with the company’s GMV growth for this year’s 618 Shopping Festival. Even after considering the COVID-19 lockdowns and related logistical challenges in delivering products, I think JD could possibly achieve a YoY revenue growth in the +4%-5% range for Q2 2022, which implies that its second-quarter top line will surpass market expectations.
My expectations of a Q2 2022 earnings beat for JD.com are supported by both higher-than-expected revenue and lower-than-expected costs for JD in the quarter. Although I discussed about pandemic-related expenses which will be a drag on JD’s profitability in an earlier section of this article, it is likely that JD.com can offset these additional costs with other cost optimization initiatives.
JD.com disclosed at its Q1 2022 earnings call in the middle of May 2022 that it has been implementing “strict cost and expense control measures to step up financial discipline” starting in “mid-March”, and noted that “we will continue that (cost control measures) in Q2.” At the first-quarter investor call, JD also noted that it “adjusted the investment pace and further focused on fewer selected regions” for its new businesses (typically faster-growing businesses on revenue which are either loss making or boast low profitability). Therefore, I think that JD’s costs and profitability for Q2 2022 could be better than what investors expect.
In a nutshell, I expect a Q2 2022 bottom line beat for JD.com. My forecast is that JD’s normalized EPS growth on a YoY basis in the second quarter will be a milder low-single digit decline as compared to the sell-side’s consensus expectations of a -4.7% decrease in adjusted EPS.
Focus On Shareholder Capital Return
Putting near-term results aside, JD’s improved shareholder capital return is a key investment merit for the stock.
On May 4, 2022, JD.com announced “a special cash dividend of US$0.63 per ordinary share, or US$1.26 per ADS ($2 billion in absolute dollar terms)” which was subsequently paid on June 14, 2022. JD also didn’t rule out similar special dividend payments in the future. In the May 4, 2022 announcement, JD.com stressed that “in the long run, we will also consider measures including paying dividends as appropriate from time to time.”
At the end of last year, JD expanded its share buyback authorization from $2 billion to $3 billion and its current share repurchase program will last till mid-2024. This allows JD.com to be opportunistic and return excess capital to shareholders in a value-accretive manner via share buybacks, and this is especially true at a time when JD’s valuations are low relative to historical averages. According to valuation data taken from S&P Capital IQ, JD.com currently trades at a consensus forward next twelve months’ normalized P/E multiple of 27.1 times which is much lower than its five-year average forward P/E of 44.4 times.
Closing Thoughts For JD
JD is a Buy. In the near-term, an earnings beat for Q2 2022 could be a positive re-rating catalyst. Separately, JD has shown a willingness to return capital to its shareholders in a more aggressive manner in recent times, and this should be positive for the stock in the medium-to-long term.
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