JD.com Posts First Profit as Chinese Online Shopping Surges

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  • Alibaba’s closest rival records a surprise quarterly profit
  • Wal-Mart’s partner sees online transactions climb over 42%

JD.com Posts First Profit Since IPO

JD.com Inc. posted its first quarterly profit as a public company, with the integration of Wal-Mart Stores Inc.’s Chinese web business and strong consumer spending driving a surge in sales.

China’s largest e-commerce company after Alibaba Group Holding Ltd. has benefited from the rise of online shopping in a country with patchy retail infrastructure. JD, which bought Wal-Mart’s Yihaodian local shopping platform in 2016, reported net income of 239 million yuan ($35 million) for the three months ended March -- its first time in the black since listing in 2014 -- surpassing estimates for an 851 million yuan loss. Sales rose 41 percent to 76.2 billion yuan, also topping the 73.6 billion yuan projected.

JD said a plan to spin off its online payments and finance division in a multi billion-dollar deal may close this quarter. That raises cash to bankroll the warehouses and drone delivery networks it’s building to become one of Asia’s dominant e-commerce players. Yet that race to build logistics networks and attract customers could still weigh on margins in 2017.

“This doesn’t mean we should expect them to have positive operating profit all year," Kirk Boodry, an analyst with New Street Research, said regarding the surprise profit. But “with the first quarter beat we feel more comfortable with them getting there” by 2018 or 2019, on an operating basis.

The company’s American depositary receipts rose 5.4 percent in premarket trading to $37.70 Monday.

JD.Com Chief Financial Officer Sidney Huang called the quarter a “milestone” for the company that reinforced management’s long-term vision. But he cautioned that looming investments in new businesses and the expansion of its logistics network could hurt profits in the coming year. The construction of warehouses, for example, would “significantly increase” capital expenditure resulting in falling free cash flow.

“Our quarterly earnings will likely be lower in one or more of the next few quarters,” he warned. “The Chinese e-commerce market remains highly competitive and we remain committed to returning a meaningful portion of our incremental gains from scaled economies onto our customers.”

JD said it expects revenue to grow 35 to 39 percent to between 88 billion yuan and 90.5 billion yuan this quarter, compared with the 89 billion yuan analysts estimated. 

The company founded by billionaire Richard Liu is investing heavily on delivery logistics and new markets from groceries to women’s fashion, aiming to dredge up new sources of revenue. Its strategy is to focus on better service to improve the loyalty of customers and their willingness to spend. But rivals such as Alibaba have fought back.

Groceries are “a key category for JD to attract female customers, improve purchase frequency and margin profile,” analysts at Credit Suisse Group AG led by Evan Zhou wrote in a note to clients before the earnings. “It still takes time to educate the market and to grow user stickiness so subsidy is still needed to maintain JD’s price attractiveness for fast-moving consumer good offerings.”

Its running battle with Alibaba may now start to spread to Indonesia and other Southeast Asian countries. JD’s said to be in talks to invest hundreds of millions of dollars into Indonesian e-commerce platform Tokopedia, which could form the basis of a bigger push into the region. But it faces competition from Alibaba’s Lazada Group SA, which has a headstart in key countries such as Singapore.

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For the first quarter, active annual customers rose to 236.5 million, compared with 169.1 million a year earlier. Gross merchandise volume, the total value of goods sold across JD’s platforms, rose 42 percent to 184.1 billion yuan, from 129.1 billion yuan a year ago.

— With assistance by David Ramli

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