JDL Earnings: Strong Profitability, but We See Some Integrated Supply Chain Sales Headwinds

JD Logistics' second-quarter revenue growth of 8% is tracking toward our full-year estimate of 9%. Nonetheless, non-international financial reporting standards profit margin in the quarter was at a record 5.6%, markedly higher than our previous 2.3% full-year estimate and the 2.0% in the year-ago quarter. The higher margin was the result of economies of scale (which lower outsourcing and rental cost), warehouse network optimization (reduced transporting distance for goods), integration of logistics sites, and technology enhancement (investment in automation and algorithms to allocate resources more efficiently). We therefore raised the 2024 non-IFRS profit margin to 2.6%, although it is still lower than the first half’s 3.6%. This is because we expect JDL to reinvest some of its profit in the second half to drive business growth. For instance, JDL wants to invest in its transit centers and pick-up services. In addition, JDL will increase incentives for sales and front-line employees and reduce prices to attract customers. We maintain our fair value estimate of HKD 10.70 per share, as our longer-term assumptions are largely unchanged. We only expect non-IFRS profit margins to grow to 3.5% by 2028 versus 3.4% previously. We think JDL is undervalued. In the long term, we believe JDL will continue to consolidate the fragmented integrated supply chain market, supported by the data insights from JD.com.