The results in the first half of 2021 are in line with our expectations.

JD Logistics, Inc. announced results for the first half of 2021: 1H21 revenue rose 53.7 per cent year-on-year to 48.5 billion yuan, mainly driven by 110 per cent year-on-year revenue from external customers (169 per cent year-on-year growth from JD.com Group). The company recorded a net loss of RMB 15.4 billion, mainly due to changes in the fair value of convertible preferred shares. The adjusted net loss is 1.5 billion yuan (compared with the company's net profit of 1.98 billion yuan in the first half of 2020), corresponding to a net loss of 0.24 yuan per share, which is in line with our expectations. Revenue: external revenue accounts for 55% of the company's total revenue (40% in the first half of 2020), and the company's revenue from externally integrated supply chain services increased by 66% year-on-year. This growth is mainly due to a 59% year-on-year increase in the number of external customers and a 4.4% year-on-year increase in average revenue per customer. Due to the increase in the number of customers and the contribution of acquisitions across Express in August 2020, the company's other revenue from standardized products such as express delivery soared 165% year-on-year. Cost: the company further expanded the warehouse area and increased long-distance transportation lines, resulting in a year-on-year increase of 69.9%. The company's gross profit margin fell to 3.7% in the first half of 2021 (12.9% in the first half of 2020, mainly because the company received government subsidies during the epidemic). Development trend-integrated supply chain logistics industry is expected to flourish. Zhenshi Investment Consulting predicts that the size of the industry is expected to grow from Rmb2tn in 2020 to Rmb3.2 trillion by 2025. The concentration of the industry is relatively low (CR10 is 996). Although it currently has only 2.7% of the market share, we believe that JD Logistics, Inc. has more room for development in the future. The company is improving its integrated supply chain capacity and using its understanding of FMCG, clothing, 3C and other industries to provide services to small and medium-sized customers. Management believes that with the improvement of asset utilization brought about by the scale effect, the company's net profit margin will reach a medium-high single-digit level in the long run.

Profit forecast and valuation

We lowered our profit forecast for 2021 from 1.21 billion yuan to 1.73 billion yuan, and lowered our profit forecast for 2022 from 533 million yuan to 441 million yuan, mainly because the company continues to focus on promoting growth by expanding its network and market investment. At present, the company's share price corresponds to 1.2 times the 2021 price-to-sales ratio and 0.9 times the 2022 price-to-sales ratio. We maintain an outperforming industry rating. Taking into account the decline in the valuations of Internet-related enterprises and logistics enterprises, we have lowered the company's target price by 42.9% 6 to HK $32.30 (corresponding to 1.6 times the 2021 price-to-sales ratio), which is 29.5% higher than the current stock price.

Risk

External customers and profit margins are not growing as expected.