1Q24 profit beat our and market expectations

JD Logistics announced its 1Q24 results: Revenue rose 15% YoY and fell 11% QoQ to Rmb42.137bn, slightly beating our expectations. Non- IFRS net profit was Rmb663mn, turning around compared with a net loss of Rmb712mn in 1Q23. This is the highest quarterly non-IFRS net profit since the firm's IPO, implying a non-IFRS net margin of 1.6%. The firm's non-IFRS net profit beat our and market expectations, mainly due to stronger-than-expected performance in cost reduction and efficiency enhancement.

1Q24 revenue: Revenue from integrated supply chain customers rose 11.1% YoY to Rmb20.501bn, with revenue from JD.com Inc rising 14.9% YoY to Rmb12.883bn, mainly driven by marked increase in retail order volume driven by improved services (free shipping for PLUS users and Rmb59 threshold for ordinary users) on JD.com's retail platform. Revenue from external customers rose 5.3% YoY to around Rmb7.619bn, and average revenue per customer grew 2.8% YoY to about Rmb136,600. We attribute the sound results to the firm's focus on providing high-quality integrated supply chain services to strengthen target customer stickiness.

Revenue from other clients grew 18.4% YoY to Rmb21.636bn, mainly due to parcel volume growth driven by improved delivery network efficiency and enhanced customer experience. Overall, the firm's external revenue accounted for 69.4% of its total revenue in 1Q24 (down 0.1ppt YoY).

The proportion of external revenue fell 0.1ppt YoY to 69.4%, staying high at about 70%. Costs: Operating cost rose 10.9% YoY and gross margin rose 3.2ppt YoY to 7.7%, mainly due to: 1) Economies of scale brought by growing economies of scale; 2) Gross profit improved thanks to rising proportion of light and small parcels (Rmb59/sh) and free mail delivery. 3) Efficiency improved thanks to refined business management, business structure adjustment, cost reduction and efficiency improvement.

Trends to watch

We expect the firm to continue benefiting from domestic order growth in 2024; watch the recovery of demand from external integrated supply chain clients.We expect the firm's revenue from JD.com and businesses with third-party (3P) merchants to maintain growth momentum, thanks to the upgrading of the customer experience on JD.com's retail platform. In addition, we believe the number of external integrated supply chain customers and per-customer revenue will both resume growth this year, and revenue contribution from external customers will remain high.

With the orderly integration of multiple resources, the firm may continue to see improvement in its core products and service capabilities. Its non-IFRS net margin may be close to 2% in 2024. We expect the firm to benefit from: 1) Organizational restructuring; 2) Cost reduction and efficiency improvement driven by streamlined and automated logistics network operations; 3) Improvement in profit margin of the express delivery business after the integration with Deppon's express delivery network; 4) Optimization of delivery and logistics services amid synergies between JD Logistics and JD Logistics Airlines. We expect the firm's profit margin to continue to ramp up while the growth momentum of revenue remains. We expect its non-IFRS net profit marign may be close to 2% in 2024.

Financials and valuation

We keep our 2024 and 2025 earnings forecasts unchanged, and the stock is trading at 17.1x and 14.1x 2024e and 2025e non-IFRS P/E. Given the clearer growth trend of the firm's profit margin, we raise our TP 25% to HK$13.7, implying 23.0x 2024e and 18.9x 2025e non-IFRS P/E, offering 34% upside. We maintain an OUTPERFORM rating.

Risks

Disappointing logistics demand; surging costs.