JD.com Posts Surprise Profit as New Products Draw Shoppers

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A customer stands for a facial recognition device while scanning his smartphone at an entrance to a JD.com Inc. Unmanned Convenience Store inside the company's headquarters in Beijing.

Photographer: Qilai Shen/Bloomberg

JD.com Inc., the operator of China’s second-biggest online mall, reported a surprise quarterly profit as investments in logistics and new arenas such as fashion attracted shoppers.

Net income was 1.01 billion yuan ($152 million) in the three months ended September, the Beijing-based company said Monday. That compares with the 114.1 million yuan loss expected by analysts. Sales for the quarter rose 39 percent to 83.7 billion yuan, slightly above estimates.

The result is a boon for JD.com, which is rapidly broadening its portfolio beyond its traditional strength in consumer electronics as it pursues an asset-heavy vision for online retail. While platforms like Alibaba Group Holding Ltd.’s Taobao act as marketplaces for merchants, more than 90 percent of JD’s revenue typically comes from direct online sales. It owns a fleet of vehicles and warehouses across the country, a network it says enhances customer satisfaction.

“This quarter, because there’s no sales campaigns, they’re able to pull back on marketing and that’s essentially what’s happened,” said Kirk Boodry, an analyst at New Street Research. “But that doesn’t shape our opinion - for us it’s that the revenue was growing quite nicely and the guidance is quite reasonable.

JD expects revenue in the December quarter of 107 billion yuan to 110 billion yuan, compared with the 108 billion yuan projected.

The American depositary receipts jumped the most in six months, rising as much as 7 percent, to $42.77 in New York.

Supermarket Stakes

The company is buying stakes in supermarket chains and working with U.S. retail giant Wal-Mart Stores Inc. to broaden its network. These moves are designed to source more desirable products and create delivery hubs that can slash waiting times. It’s also branching into new businesses, from groceries to luxury goods. JD Finance, a division that offers short-term loans and wealth management products, was recently spun out but is controlled by JD-founder Richard Liu.

JD handled handled more than 127 billion yuan of orders during the first 11 days of November, a rise of 50 percent from a year earlier in the lead up to its Nov. 11 Singles’ Day promotion.

S&P estimates China’s online retailers could rack up total sales of nearly $1 trillion in 2017 although heightened competition with Alibaba and smaller industry players is compressing profitability. The ratings agency estimates margins on JD’s adjusted earnings before interest, taxes, depreciation and amortization to slip to 1.8 percent to 2.3 percent over the next one to two years, from 2.5 percent in 2016.

“Intense competition may weigh on profitability for online retailers over the next 12-24 months,” S&P Global Ratings credit analyst Shalynn Teo wrote in a report Monday. “Margins will slip because of pricing power in addition to rising marketing and fulfillment expenses. But higher growth and improving operating leverage should temper the risks.”

— With assistance by David Ramli

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