HSBC have raised their target price for JD.com to USD45 a share. This implies a 17% upside for JD.com.
In addition, HSBC has maintained its buy rating on JD.com.
JD.com’s roadmap to profitability is determined by scale. And the online retailer that has invested heavily in warehouse and fulfilment capabilities. Furthermore, their ability to gain market share is enabling it to capture larger supplier rebates. As a result, lower procurement costs are driving 100bps y-o-y improvement in direct sale (1P) gross margins. Further, higher basket sizes (as buyers increase purchases of general merchandise), are yielding better leverage on fulfilment expenses. All-in, 1Q gross margin was 16%, up 160bps y-o-y. Furthermore, GAAP operating margins were 1%. The company reached positive operating margins for the first time.
Most noteworthy, JD.com’s margins should continue to rise if it can continue to execute on its strategy.
Consequently, net revenue grew 41% y-o-y to RMB76 billion. This was 3% above forecast. And adjusted operating profit margin (OPM) was 2.2%. And online direct sales revenue increased 40% y-o-y.
Finally, HSBC raised their estimates and for 2017/2018. They expect net revenue to grow 38/26%. For 2017/2018, we expect adjusted net margins to be 1.4/1.8%, versus 0.8/1.6% previously. JD Finance is deconsolidated from our model as of 3Q17. We now expect adjusted EPS of RMB3.37/5.69 for 2017/2018, versus RMB1.94/4.82 previously.