Why did JD.com’s share price soar to a 2.5-year high despite lower earnings?

An analyst's take on why Chinese e-commerce company JD.com’s shares rallied nearly 3% post-Q1 financial results.

Chinese e-commerce giant JD.com reported net revenues of 146.2 billion Chinese yuan (US$20.6 billion) in the first quarter of 2020, marking an increase of 20.7% from the same period in 2019.

Following the earnings release, JD.com’s shares – listed on US stock benchmark Nasdaq 100, rallied 2.5% to a 2.5-year high price of US$51.65 per share on Friday 15 May 2020.

It also rose to become one of the top five most traded equity counters on IG’s trading platform.

JD.com’s earnings down year-on-year

Income from operations for this quarter came in at 2.3 billion yuan (US$0.3 billion), compared to 1.2 billion yuan for the same period last year. Non-GAAP income from operations was 3.3 billion yuan, versus 2.0 billion yuan a year ago.

However, non-GAAP earnings per share for this quarter at US$0.28 beat analyst consensus estimates of US$0.11 per share. However, this is down from Q1 2019’s US$0.31.

Also down from a year ago was net income attributable to ordinary shareholders at 1.1 billion yuan (US$0.2 billion), compared to 7.3 billion yuan for the same period last year. Non-GAAP net income attributable to ordinary shareholders for Q1 2020 was 3.0 billion yuan (US$0.4 billion), compared to 3.3 billion yuan in Q1 2019.

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Lower profits not a cause for concern: analyst

According to IG analyst Reo Liao, the decline in earnings is not a cause for concern, as it is less a reflection of the company’s operating health – which in fact increased 91.7% year-on-year, than weakness in its non-operating components.

Liao pointed out that non-operating income in Q1 was significantly affected by the global financial market slump, the company’s long-term investments, and the lack of disposable assets. Moreover, net profits were also higher in the first quarter of 2019 due to a boost in non-operating income, which only accentuated the difference.

On the contrary, he said the firm’s Q1 overall performance was ‘good’, citing merchandising goods’ revenue 38.2% year-on-year surge to over 50 billion yuan in 2020.

Another key indicator - annual active customer accounts – increased by 24.8% to 387.4 million in the twelve months ended 31 March 2020, up from 310.5 million in the twelve months ended 31 March 2019. Mobile daily active users in March 2020 also increased by 46% as compared to March 2019.

Meanwhile, net service revenues for the first quarter of 2020 were 16.1 billion yuan (US$2.3 billion), an increase of 29.6% from the first quarter of 2019.

JD.com’s PE ratio on the high side

JD.com’s share price has dropped slightly since Friday’s high, but remains in bullish territory. As at 14:50 HKT on Monday 18 May 2020, stocks are trading at US$50.62 apiece, based on live IG data.

With regards to the stock’s price, Liao said that the stock’s price-to-earnings ratio is on the high side at over 43.00, over double of Alibaba’s American Depository Shares. However, he noted that if Alibaba’s upcoming earnings – to be released on Friday 22 May – turn out well, then JD.com’s share value could potentially benefit as well.

For now, JD.com forecasts that net revenues for the second quarter of 2020 to be between 180 billion yuan and 195 billion yuan, assuming that the Covid-19 pandemic does not cause ‘any significant unexpected disruption to its operations. If realised, this would represent a growth rate between 20% and 30% compared with the second quarter of 2019.

Richard Liu, Chairman and Chief Executive Officer of JD.com, remarked on the results: ‘Strong user growth during the first quarter reflects consumers’ increasing reliance on JD.com to support every aspect of their lives’.

How to trade Chinese tech stocks with IG

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