JD Logistics's 1Q24 profit margin increased significantly, so we raised our 2024-26 earnings forecast per share by 4.7%-18.4%.
The parent company's strategy may have an impact on the financial performance of JD Logistics.
The “Buy” rating was reaffirmed; the DCF target price was raised to HK$14.23 (WACC: 11.7%; sustainable growth rate: 2%).
The English version of this Hong Kong Stock Connect report was released by Huaxing Securities (Hong Kong) at 6 a.m. on May 28, 2024. The Chinese version was reviewed by Jiang Xuefeng (Securities Analyst Registration Number: S1680519070001) of Huaxing Securities. If you would like to further discuss the views expressed in this report, please contact your sales representative at Huaxing Securities.
Based on the significant increase in 1Q24 profit margins and the company's latest guidelines, we have revised our profit forecast for JD Logistics. After JD Logistics announced its first quarter profit in 1Q24, we raised our adjusted net profit forecast for 2024-26 by 4.7% - 18.4% based on improved gross profit margin and general stability in operating expenses. In our view, the increase in JD Logistics's gross profit margin is mainly due to higher labor efficiency brought about by improved automation, the integration of Debon shares (stock code: 603056 CH, not covered) to achieve cost savings, and improvements in economies of scale. We now forecast that the share of revenue for all major cost of sales items other than labor will decline year over year in 2024, driving the gross profit margin to increase from 7.6% in 2023 to 8.3% in 2024.
The operating expense ratio remains generally stable; sales and marketing expenses may increase slightly. Management said in a conference call after the 1Q24 results announcement that JD Logistics may consider increasing sales and marketing investment to obtain more high-quality customers, while other projects, such as administrative and R&D expenses, should generally remain stable as a share of revenue. We raised the operating cost ratio slightly from 7.2% in 2023 to 7.3% in 2024, but a 0.7 percent increase in JD Logistics's gross profit margin should be enough to offset the slight increase in operating costs and push its operating margin from 0.9% in 2023 to 1.3% in 2024.
JD Logistics's dependence on the parent company is still significant, and its financial performance may still be affected by the parent company's strategy. In 1Q24, JD Logistics's revenue from related parties was still as high as 31%, which is the same as 1Q23. We believe that the revenue contribution of JD Logistics partners is still large enough to have a significant impact on its financial performance. For example, JD Group (stock code: JD US, covered by Ji Diying) decided to lower the free delivery threshold in August 2023, which should help JD Logistics accelerate its delivery volume to double digits in the past two quarters. On the negative side, if the JD Group decides to raise the free delivery threshold or renegotiate delivery prices with JD Logistics, then the financial performance of JD Logistics may be affected.
Reiterating the “Buy” rating, the DCF target price was raised to HK$14.23. Given 1Q24's strong performance, we expect the stock price to continue to be supported at the current level (corresponding to 19.7 times the 2024 P/E), particularly from the company's strong profit growth prospects. Our new target price of HK$14.23 is still based on the DCF model, where the 2% sustainable growth rate and 11.7% WACC remain unchanged. Risk warning: The macroeconomy continues to weaken; related customers are concentrated; the integrated supply chain logistics business growth rate after restructuring is slower than expected.