JD.com sacrifices profits for long-term investments


JD.com announced its first full year profit as a public company on Friday, but its Q4 results failed to impress some investors.

Net income from continuing operations attributable to ordinary shareholders totalled CNY116.8m ($18.0m) in 2017 versus a net loss of CNY2.0bn ($307.5m) in 2016. JD had a particularly strong Q1 and Q3, but in Q4, its net loss (on the same basis) was CNY909.2m ($139.7m), which was down 27.9% from the year before.

Top line growth was broadly consistent with expectations. Net revenues totalled CNY362.3bn ($55.7bn) for the year, an increase of 40.3% from the year before. However, cost of revenues and fulfilment expenses increased by 39.7% and 39.4% respectively, suppressing the positive impact of revenue growth. In Q4, the year-over-year increases were 39.7% and 45.7% respectively.

The key reason for JD’s low profitability is its investments. As well as its continued focus on bricks-and-mortar, finance and technology, the company is spending huge sums on developing its logistics capabilities.

Unlike rival, Alibaba, JD runs and operates its own nationwide fulfilment and last-mile delivery infrastructure. As of December 31, 2017, JD.com operated 486 warehouses covering an aggregate gross floor area of approximately 10 m sq m in China. This compares to 256 warehouses and 5.6m sq m at the end of 2016.

Total gross merchandise value (GMV) (the value of all orders for products and services placed in the company’s online direct sales business) was CNY1,294.4bn ($199bn) in 2017, which was nearly twice as high as in 2016. Such growth shows the additional strains being put on its infrastructure and the increased investments needed to run it efficiently.

The company also recently announced expansion plans abroad. It anticipates spending $1bn on a logistics network in France over two years. It hopes to launch in the US in the second half of 2018.

The company spun off its logistics division as a separate subsidiary in April 2017. It said this would help it offer services to third party customers, enable it to speed up the development of its infrastructure and give it more flexibility to explore business opportunities. Furthermore, in February 2018, JD Logistics raised around $2.5bn after its parent company reduced its stake to 81.4%.

CEO Richard Liu said in January: “We can confirm our logistics unit is currently raising money for a future independent listing. We hope it can list in Hong Kong or in China. But it is still too early to say when or where.”

Investors looking for short-term profit are likely to be disappointed, as confirmed by CFO Sidney Huang during the investor call. Those sticking around should expect to see vast sums spent as Chinese e-commerce continues to grow at a remarkable pace.

Source: Transport Intelligence, March 6, 2018

Author: Andy Ralls

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