Founded in 2004, JD.com Inc (“JD.com” or “JD”) (HKG:9618) is China’s second-largest e-commerce platform. 

The e-commerce giant just reported a blowout second quarter for 2021. Revenue hit a record RMB253.8 billion, an increase of 26.2% from the second quarter of 2020. 

The company also added 32 million net new annual active customers – the most ever in a single quarter – bringing its user base to 532 million names.  

However, JD.com is more than a traditional e-commerce platform. In fact, the company has three business segments – Retail, Logistics and New Business. 

We will delve further into the company’s business model and discuss its operational performance, as well as offer insights into what could lie ahead for the company. 

JD Retail

The largest segment is JD Retail segment, which consist of its online retail, online marketplace and marketing services in China. It recorded 2Q 2021 revenue of RMB232.6 billion, up 23% from the second quarter of the preceding year. 

The company operates through a combination of first-party (1P) and third-party marketplace model (3P).

For the 1P model, JD purchases inventory wholesale from merchants, and manages the inventory, from distribution and to sales process, taking on the inventory risk and storing it in their warehouses.

While for the 3P model, merchants sell direct to customers through JD’s e-commerce platform and pay a percentage fee of the transaction. In this model, JD does not manage the inventory and distribution process.

JD earns most of its revenue from first-party online sales. The direct e-commerce model gives it greater control over the end-to-end shopping experience, as it allows the e-retailer to sell only quality products on its platform. However, direct selling is capital-intensive and comes with high fixed costs ranging from warehousing to staff salaries. 

As a result of those costs, JD Retail operated at a loss for most of its history. But as it grew, it benefitted from ever-expanding economies of scale and increasing operating leverage. Out of the three business segments, only JD Retail is making an operating profit in 2Q 2021, as the other two segments are still in investment stage.

With the growing maturity of its e-commerce business, JD has morphed into a cash-flow machine. In the 12-month period ended 30 June 2021, JD generated free cash flows of RMB31.9 billion – up from RMB13.5 billion in 2016. This gives it the fuel it needs to power-fast growing new businesses such as JD Logistics and its other new businesses mentioned below.

JD Logistics

JD Logistics includes both internal and external logistics businesses and is the second largest business segment. It recorded 2Q 2021 revenue of RMB 26.1 billion, up 46% from the second quarter of 2020.

JD Logistics generates its revenue by providing supply chain solutions and logistics services, including warehousing and distribution services, express and freight delivery services, bulky item logistics services, cold chain logistics services, and cross-border logistics services.

The company has invested heavily in its logistics business over the years to build up its extensive supply chain network and is a pioneer challenging the boundaries in China in “New Infrastructure”, implementing industrial internet-of-things (IoT), factory automation, and artificial intelligence (AI) to their warehouse and logistic chains.

Across 28 cities, the company operates an extensive network of 38 “Asia No.1 smart mega warehouses”, which ranks among the top in scale and automation, in Asia. JD also operates the first globally fully unmanned B2C warehouse in Shanghai and has established the first 5G smart logistics park in China. 

New Business

The New Business segment consists of Jingxi, JD Property, overseas businesses and technology initiatives. It recorded 2Q 2021 revenue of RMB7.0 billion, up 60% from the second quarter of the preceding year.

While JD.com focuses on providing high-quality, branded goods for consumers in Tier 1-2 cities, Jingxi is JD’s social e-commerce marketplace that targets price-sensitive customers in smaller Tier 3-6 cities and rural areas. 

Group buying works because consumers in lower-tier cities tend to act more on social prompts from friends that they trust, and make impulse purchases when products and promotions are shared with them. But these consumers are also price-sensitive, meaning that deep discounts are necessary to facilitate these impulse purchases.  

Meanwhile, JD Property is JD’s real estate unit and manages the company’s infrastructure assets and real estate, supporting the development of the integrated smart supply chain. 

Last month, JD Property offered to buy a 26.38% stake in China Logistics Property Holdings (HKG:1589) from its top shareholder, Yupei International Investment Management, in a HK$3.99 billion deal that will trigger a takeover offer. 

The deal reflects the increasing completion to dominate e-commerce in China, with assets like warehouses in high demand from firms vying to capitalise on the rising prosperity of the country’s consumers. 

Further room for growth – but regulatory challenges remain

The last few months have been a painful ride for investors as China’s government has launched a sweeping crackdown on a wide range of industries, citing – among other things – data security and antitrust concerns. 

While JD has not been singled out by regulators over any of these issues, investors are still nervous – and shares have been sold down as Chinese authorities seem to have aimed their guns on the nation’s largest tech companies. 

Nevertheless, the company’s executives expect it to emerge relatively unscathed. Speaking to analysts on August 23, JD Retail CEO Xu Lei said China’s new regulations are not “intended to restrict or suppress the internet and relevant industries.” Instead, China aims to create “a fair and orderly business environment and to promote long-term and sustainable development of these industries,” Lei said. 

Unlike most tech-drive platforms that mainly act as middlemen between buyers and sellers, JD has a tangible presence in many parts of China’s economy. It operates tens of thousands of brick-and-mortar stores across the country, and has 23 million square meters of warehouse space. Moreover, it directly employs 400,000 people across its many business units. 

These “social value” and “real economy” traits set JD apart from the pure platform operators that “reap ultra-high profits out of traffic and transaction flow”. Therefore, if JD is able to align itself with the Chinese government’s long term goals, there is much to suggest that JD has plenty of room for further growth. And its online retail business will continue to generate plenty of cash flow giving it the ammunition it needs to feed that growth. 

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