Shares rally nearly 13%, adds $5 billion in value

Several boxes of goods, bought from JD.com, are stacked on the floor.

Zhang Peng | LightRocket | Getty Images

JD.com’s shares surged nearly 13% after the company delivered second quarter numbers showing exactly what the market wanted — profitability.

On Tuesday, the Chinese e-commerce giant reported these results for the June quarter:

  • Net revenue of 150.3 billion yuan ($21.9 billion), a 22.9% year-on-year rise
  • Net income attributable to ordinary shareholders of 618.8 million yuan ($90.1 million), compared to a net loss in the same period last year.

Importantly, JD.com’s margin ticked up sharply and management raised adjusted net income guidance to between 8 billion yuan and 9.6 billion yuan for the full year. JD has reported full year losses for the past three years. That improving profitability picture helped propelled shares higher in U.S. trade on Tuesday, with the company adding about $5 billion to its market capitalization.

“The street didn’t expect them to do well on the bottom line … this is not (just) going to be the first time, it’s going to be the beginning of a new trend,” Tian Hou, founder and CEO of T.H. Capital, told CNBC’s “Street Signs” on Wednesday.

Shares of JD are up over 46% year-to-date versus just under 20% for rival Alibaba.

JD’s business model looks a lot more like Amazon than Alibaba, however. It owns more of the inventory it sells in addition to operating a marketplace. Alibaba platforms such as Taobao, meanwhile, are more marketplace models. JD has invested heavily in its logistics business in the past few years, trying to get the edge on competitors through quicker delivery.

That’s weighed on profits, but the company revealed that its logistics business broke even from an operating income perspective.

“In the beginning, the cost of our logistics was relatively high. And through years of investment and increasing our fulfillment and opening strategy, our fulfillment expense costs continue to decline,” Richard Liu, CEO of JD.com, said on an earnings call on Tuesday.

Fulfillment costs, which pertain to the company’s logistics business, did rise, but they fell as a percentage of overall revenues, highlighting improvement in the division.

“Profits in the long-run will continue to grow,” Liu said of the entire JD.com business.

Investment in smaller cities

Liu said the company would look to invest more heavily in growing in smaller Chinese cities. Its growing logistics network could help it serve that market, according to Hou.

“I think the logistics is actually JD’s strength. And logistics of JD can actually reach out to the really lower-tier cities … if you can reach out to the really sixth-tier cities … because of the difficulty of developing, that is your moat, your strength,” she said.

Lower-tier cities have become something of a battleground for Chinese e-commerce players Alibaba and newer rival Pinduoduo (PDD). Such cities often feature less infrastructure and consumers that are more price sensitive. Pinduoduo, through its mobile-focused social shopping product offering heavy discounts, has made some headway there. That’s where JD could face some stiff competition as it looks to expand.

James Lee, U.S. and China internet analyst at Mizuho Americas, has kept a neutral rating on JD’s stock despite raising the price target, saying the company needs to do more to win in lower-tier cities.

“We want to see the company be more aggressive in tier-three and tier-four markets, PDD is super aggressive in those markets, and what we want, would like JD to do is more heavily market in those markets … by giving deeper discount … to attract those consumer in order to win the market share. We haven’t seen that yet,” Lee told CNBC’s “Street Signs.”

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