JD.Com Gains on Alibaba as Spending Jumps, Profit Estimates Drop

  • Investment in new business lines crimp profitability, margins
  • JD analysts cut EPS ests by 56% in the past four weeks

JD.com Inc. has been slowly nibbling away at Alibaba Group Holding Inc.’s dominant share of China’s burgeoning online shopping market. And the costs are adding up.

Analysts in the past four weeks have lowered their average profit forecast for JD.com this year to 34 cents per share from 78 cents, data compiled by Bloomberg show. The 56 percent reduction was the biggest in that period among U.S.-traded Chinese companies with a market capitalization of more than $3 billion.

The lower profit projections come as JD.com, which received backing from Tencent Holdings Ltd. and entered the online-to-offline market in 2014, boosts spending on its financing arm and services aimed at drawing customers to brick-and-mortar stores. Fourth-quarter marketing expenses surged 81 percent to 2.7 billion yuan ($415 million), while its adjusted loss was 48 cents per share, compared with an average estimate of an 18 cents loss, according to company filings and data compiled by Bloomberg. Sales beat forecasts, increasing 57 percent to 54.6 billion yuan from a year ago.

“There’s a little bit of disconnect between its top line and bottom line growth,” Brendan Ahern, a New York-based managing director at Krane Fund Advisors who invests in Chinese Internet companies, said by phone. “JD is really keyed up to the challenge of giving Alibaba a run for its money.”

JD.com’s share of China’s online shopping market increased to 20 percent in 2015 from about 17 percent the prior year, according to data from Euromonitor International. Alibaba’s grew less than 1 percent to 47 percent.

The Beijing-based company ranks second to Alibaba. Analysts covering JD forecast the company to post a 43 percent increase in sales for 2016 from a year earlier, compared with an estimated 32 percent for its larger rival. China’s e-commerce market will grow at about 23 percent per year on average to reach $1.5 trillion in 2020, according to market research firm IBISWorld. That compares with a government target of gross domestic product expansion of 6.5 percent to 7 percent.

JD.com’s efforts to diversify from its core electronics business resulted in a net margin of negative 1.3 percent in the fourth-quarter, according to its earnings statement. The firm’s net margin will range between negative 0.5 percent and positive 0.5 percent for 2016, Chief Financial Officer Xuande Huang said on a March 1 conference call, explaining that the wide range in guidance was so that the company could remain “flexible” in terms of the extent of investments in new areas.

Two-Hour Delivery

Last August, JD bought a 10 percent stake at hypermarket chain Yonghui Superstores Co Ltd. to provide two-hour delivery services. The company will remove third-party merchants from its supermarket site and probably partner with more supermarket chains to focus on rural areas, according to Shanghai-based research firm Red Pulse.

“JD is constantly expanding logistics capabilities and trying to strengthen its non-core areas, which boosts revenue but earnings will be relatively muted,” said Junheng Li, founder of JL Warren Capital, a New York-based research firm that focuses on Chinese equities.

“None of the e-commerce players would be immune to the macro slowdown in China, so the pace of deceleration may surprise people on the downside,” said Li said, who prefers JD.

JD.com has rebounded more than 20 percent from its 2015 low in September. Alibaba gained about 15 percent during the same period.

Buy Ratings

While analysts have lowered their profit forecasts for JD.com, they remain bullish on the share price. Twenty-nine of them advise clients to buy the stock, while six say hold and one rates it sell. On a scale from 1 to 5, the recommendation consensus is 4.53, compared with an average of 4.27 among among seven comparable e-commerce companies globally, data compiled by Bloomberg show.

“We are focused on providing the best e-commerce experience, which is why we’ve won market share, the trust of brands and more than 155 million users,” Josh Gartner, Beijing-based spokesman for JD, said in an e-mailed response to questions.

Before it's here, it's on the Bloomberg Terminal.