JD Logistics announced strong results in 2023 and management's outlook for 2024, which aroused strong market reactions; current valuations are attractive.
We believe that integrated supply chain logistics customer restructuring and continued cost reduction will further boost profit margins.
Reiterating the “Buy” rating, the DCF target price was lowered to HK$13.20 (previously using P/S valuation).
The stock price of JD Logistics rose 5.5% (down 1.3% compared to the Hang Seng Index) in one day after the announcement of the 2023 results, indicating that investors' confidence in the company's prospects increased. We think the main surprise in the results announcement came from a 91 basis point increase in non-IFRS net interest rates. Management confirmed that JD Logistics will continue to focus on increasing profit margins while maintaining a high year-on-year increase in revenue in 2024. Therefore, we believe that the company's 2024 PEG ratio of 1 times is attractive.
Focus on high-quality customers to drive revenue and profit margins. The management of JD Logistics began a review and clean-up of logistics customers in the external integrated supply chain in early 2023, and decided to focus on high-contributing customers that can have a long-term and continuous effect on the company's revenue and profit margins, while abandoning customers that contribute less and bear some short-term revenue losses. The number of quarterly customers in JD Logistics's external integrated supply chain logistics business declined from 60,859 in 4Q22 to a valley of 52,063 in 2Q23, then recovered to 55,391 in 4Q23. The quarterly ARPU also increased, from RMB 140,000 in 4Q22 to RMB 156,000 in 4Q23. Management believes that after basically completing the clean-up of integrated supply chain logistics customers in 2023, the number of related customers and ARPU will continue to grow year-on-year in 2024.
There is potential for cost reduction in many areas. We believe that although the guideline for revenue growth in 2024 is a reasonable level, the net profit growth of JD Logistics still needs to rely on cost savings. Management proposed several factors that it believes will help drive higher gross margins and control operating costs in the future. First, the increase in scale should help JD Logistics negotiate lower prices with outsourcing contractors. Second, shifting the package structure to lighter packages can make better use of JD Logistics's highly automated equipment to reduce processing costs. Furthermore, the continued integration of JD Logistics and Debon shares (code: 603056 CH, not covered) will create greater synergy effects, especially in long-distance transportation. The above cost reduction measures will also help reduce administrative costs.
The “buy” rating was reaffirmed; the target price was lowered to HK$13.20 by switching to the DCF valuation method. We lowered our 2024/25 adjusted net profit forecast by 11.7%/11.6% to reflect China's slower than expected macroeconomic recovery; we also introduced a 2026 performance forecast. We believe that JD Logistics is normalizing growth, and DCF can better capture the value of the company's future cash flow, so the valuation method was changed from P/S to DCF; the P/S valuation method is generally applicable to companies in the very early stages. Assuming a sustainable growth rate of 2% and WACC of 11.7%, we get a target price of HK$13.20. Risk warning: macroeconomic slowdown; excessive concentration of transactions with related parties; growth of integrated supply chain logistics business after restructuring is slower than expected.