Replay of my Long JD/Short TCEHY pair trade HERE
For the first time in a while, JD impressed me. I am fortunate to be Long (via a pair trade with Tencent (TCEHY)). I thought the COVID-19 lockdowns in March would result in a revenue miss. Didn't happen. I was expecting another negative EBIT quarter. Didn't happen.
JD's ability to control costs amid a tough operating environment was a critical part of my Long thesis. And they blew margin and profitability expectations away despite increased relief measures for their merchants during COVID-19 and an one-time sponsorship fee for the Spring Festival Gala. JD retail margins fell only 40bps YoY. Profitability (EBITDA) estimates remain too low for the rest of the year. As long as JD's profitability is back on track, the stock will work.
As expected, 3P outperformed 1P revenue growth in Q1 2022 given the impact from the lockdowns. And I mentioned in my E-commerce note last week, JD was the relative outperformer in April E-commerce GMV, among the Big 3 players. I continue to model 3P > 1P growth. Advertising was also a bright spot at 30% growth in Q1 2022. And JD's on-demand retail product, Shop Now, grew triple digits in Q1.
With the downsizing and optimization of Jingxi businesses, AAC expanded 11m QoQ - JD's smallest quarterly gain since Q1 2019. New business revenues only grew 12% YoY but segment losses there widened by only 5%. JD will now focus on reducing Jingxi's losses and driving new "quality" users.
Marketing costs as % of active buyers grew for the sixth consecutive Q but it was less than expected - a critical point in my presentation which I attribute to lower cost of customer acquisition from social goodwill stemming from JD's "death squad" mobilization to Shanghai during the COVID-19 lockdowns. I also think Q2 2022 could end that growth streak - which should further support JD's profitability.
Tough hurdles from the Shanghai/Beijing lockdowns will emerge in Q2 2022, as JD has higher exposure to the tier 1 cities than other peers, bigger supply chain disruptions in 2022 vs 2020/2021 and lower consumer consumption in April/May. But I'm relieved to see Shanghai moving in the right direction with 3 consecutive days of zero community COVID-19, which will set in motion the easing of lockdown restrictions. Shanghai is expected to return to normal by mid-late June. Thus, recovery is in progress, and JD should be able to overcome the COVID-19 obstacles and may even have a normal 618 shopping festival if they're lucky.
