In just two years, why can Jingdong Logistics turn losses into profits?

At the beginning of 2019, Liu Qiangdong released an "internal letter" to Jingdong logistics distribution employees, revealing that Jingdong logistics lost more than 2 billion yuan in 2018, mainly because of "too little external single volume", and said that "cancel the base salary but greatly increase the package commission".

At the beginning of 2021, JD Logistics submitted its prospectus in the Hong Kong Stock Exchange, and the pre-tax loss in 2018 was indeed as high as 2.76 billion yuan, but in the first three quarters of 2020, if the loss factors of convertible preferred shares were excluded (after the IPO, this part of the loss no longer exists), the pre-tax profit has exceeded 1.5 billion yuan.

In just two years, what happened to Jingdong Logistics, and what is the reason for the turnaround of the business situation? For Jingdong Logistics, where is the basic logic of its market value management?

Let's answer the profitability question first.

Jingdong Logistics originated from the support department of Jingdong Mall, announced its independence in April 2017, and began to provide solutions and services to external customers at the same time, focusing on supply chain empowerment.

At the beginning of JD Logistics' independence, external orders accounted for a very low proportion, which made it difficult to hedge the high cost of the logistics industry. In 2018, the gross profit margin was only 2.9%, while the gross profit of SF Express was as high as 17.84%, which was probably attributed to:

In order to protect the core interests of Jingdong's retail business and reduce the cost of fulfillment, Jingdong Logistics is unlikely to have too much bargaining space in the mall. In other words, at the beginning of independence, the relationship between Jingdong Logistics and the mall is not based on a pure market-oriented relationship, which is quite different from SF Express's self-adjustment of prices and costs through market-oriented mechanisms.

However, when we look at the data of the first three quarters of 2020, we find some strange things, SF Express gross profit is roughly maintained at around 15%, logistics and express industry after years of development and continuous injection of capital into the industry, the upward space of market price has been severely compressed, affecting the profit space of the industry, simply put, this is still an extremely competitive price industry. Industry practitioners have not found a way to continuously improve gross profit margins. However, in the same period, Jingdong Logistics' gross margin was as high as 10.9%, an increase of 8 percentage points from 2018.

Although Jingdong Logistics has also reduced the growth of some expenses during the period (such as administrative expenses, research and development expenses), the improvement of gross profit margin is still the main reason for the rapid turnaround of business conditions (not one of them).

After the independence of Jingdong Logistics, it is natural to pursue the profitability of independent companies and bring higher returns to investors, but whether this conflicts with the interests of Jingdong Group: will the profit of Jingdong Logistics bring the soaring cost of fulfillment of Jingdong Group, or whether the growth of gross profit margin of Jingdong Logistics is based on the premise of profit yield of the group?

In theory, if Jingdong Logistics continues to be suppressed by the group's profitability, the above two curves will roughly show a synchronous trend: Jingdong Group's performance cost growth is sluggish, then the gross profit margin of the logistics business will not be much improved. Obviously, the figure above does not conform to this law: when the gross profit margin of Jingdong logistics soared, the proportion of the group's fulfillment was roughly maintained in the same range.

Jingdong Logistics maintains a constant pricing for the group, and the improvement of gross profit margin can only be found from cost savings. We have found the cost structure of Jingdong Logistics, combined with Liu Qiangdong's "internal letter", whether to reduce costs through staff cost compression?

After comparison, the ratio of employee service expenditure to income has been compressed to a certain extent in the past three years, and the compression degree of labor cost is greater than the improvement space of gross profit margin. It is not difficult to find that after the "internal letter", Jingdong Logistics has readjust the performance standard of salary settlement for couriers, cancelled the base salary, improved the package commission, and stimulate the subjective initiative of employees. Great contribution to the later profit.

However, this has led to a new problem: labor cost compression always has a boundary, especially in the labor market supply continues to be tight, blue-collar income continues to rise under the premise of the channel, if Jingdong logistics to attract enough labor, it is inevitable to improve or maintain the existing welfare, after which, personnel expenditure will be balanced at some point.

So, where is the next profit enhancement point of Jingdong logistics?

In fact, the answer to this question can be divided into long-term and short-term, the former obviously in the continuous investment in research and development costs, through technical means to improve the efficiency of hedging labor costs, but its continuous driving force is the continuous improvement of profitability, in addition to research and development, there should be another way: Pushing JD logistics to the market as far as possible can, on the one hand, reduce the dependence on JD Group and dilute the pressure of JD's e-commerce business slowing down; on the other hand, in the fact that the group cannot fully increase prices in accordance with the law of the market (which will affect the group's profitability), seek new markets outside JD, which is conducive to improving the market pricing ability.

Jingdong logistics prospectus to "integrated supply chain customers" and "other customers" as the caliber of the total revenue is divided, and the former can be divided into: Jingdong self-operated and Jingdong open platform customers, as well as Jingdong system of foreign services revenue, at this stage, the last category is still quite low.

According to the information in the prospectus, the revenue from Jingdong Group has decreased from 77% to 71.6% of the integrated supply chain revenue, and in the past three years, Jingdong has strengthened the expansion speed of the open platform, and Jingdong Logistics has extended its tentacles to merchants to provide integrated supply chain management services for the latter.

In recent years, Jingdong has been quarreling with some express delivery companies, such as removing Suning's daily Express from the service list for the reason of "ensuring service quality". However, in the context of the independent development of logistics, Jingdong will inevitably continue to erode the market of the original express delivery companies in the Jingdong ecosystem. For Jingdong Logistics, the business of opening merchants is like the meat on the lips. When the service capabilities arrive, the use of group and logistics data and customer management capabilities are readily available.

We also estimate that the cost of logistics expenditure roughly accounts for Jingdong's self-operated GMV in the range of 3%-4%, if the open platform has trillion yuan GMV for Jingdong logistics services, then its potential market will be in the range of 30-40 billion yuan, in 2019, we judge that the income brought by open platform merchants to Jingdong logistics is about 10 billion yuan, obviously, Jd Logistics has mined less than 30% of merchants on the open platform.

Even if some merchants that are difficult to completely have a relationship with Jingdong logistics in the short term are excluded (such as small scale, inappropriate categories, etc.), Jingdong Logistics still has considerable space here at this stage.

However, this has caused a new problem: if you want to cover the vast majority of merchants in the Jingdong system, it is necessary to consider whether the management and operation capabilities of the enterprise will be synchronized after the asset expansion, after all, the upward pressure on the ROE (return on equity) of the enterprise is very large.

Calculated by operating profit margin, SF's ROE in the first three quarters of 2020 is roughly 7%, excluding the losses caused by convertible bonds, Jingdong Logistics operating profit of 1.55 billion yuan during the same period, ROE is 2.7%, SF's total assets are twice that of Jingdong, operating profit is more than 5 times, considering that the two enterprises are relatively close to the business service, which can be explained:

First, the market pricing system of Jingdong Logistics is indeed suppressed by the group, but it also proves that once it is pushed to the market, Jingdong Logistics can open the ceiling of pursuing profits with pricing power to a certain extent;

Second, considering that Jingdong is unlikely to give logistics sufficient room to raise prices in the short and medium term, which is different from SF Express, if measured in the previous three quarters, we believe that ROE may be around 5%.

In other words, if Jingdong Logistics is properly managed and everything goes smoothly, compared with SF's management ability, when the assets expand with the expansion of the business, the return on assets will be maintained in a relatively reasonable range.

Before this, we have judged: Jingdong logistics independence is built on the premise of slowing growth of e-commerce, when the latter becomes the Red Sea, how can there be much hope for the ecology attached to the Red Sea? However, after a few days of deliberation, we have to admit that the above has been one-sided: the growth rate of e-commerce is slowing down, but the current pursuit of Jingdong Logistics is to digest the stock market in the group's ecology, and it is not yet time to consider changes in the broader market.

When the outside world will focus on the Jingdong logistics section of the package, we still tend TO think that the medium term focus is still TO B business, the package can be used as a sign of brand growth, can not be completely bet on this, although to improve the package as a reason to cancel the base salary, but the goal is to reduce expenses, which is accurate.

So, how to value Jingdong logistics? In the market, there are measures based on the price-to-sales ratio (compared with SF Express), and there are measures based on the price-to-earnings ratio.

Personally, I prefer to compare the price to earnings ratio, but we should first estimate the future operating profit expectations. Previously, we have judged that the potential contribution of open platform to logistics revenue in the short and medium term is about 30-40 billion yuan, and now it is 10 billion yuan, and there will be 20-30 billion yuan of growth space. Since this part is fully market-oriented, We can take SF Express's operating profit margin of around 6% as a reference, which will bring about an operating profit margin of around 2 billion yuan for the whole year.

Excluding the loss of convertible bonds in the first three quarters of 2020, Jingdong Logistics' operating profit totaled 1.55 billion yuan, which is about 2 billion yuan for the whole year. Combining the two sets of data, the annual operating profit of Jingdong Logistics will be about 4 billion yuan in the medium term. If SF Express takes 60 times the price-earnings ratio, it will be about 240 billion yuan in market value.

This is also our more objective judgment of Jingdong logistics, neither too derogatory nor blindly optimistic, and did not incorporate the growth of new personal pieces and separate trunk logistics into thinking, the data is not completely accurate, but the general trend should not have too much error.

Is Jingdong Logistics a good investment target, or what is the prospect of Jingdong logistics? The above views are summarized as follows: 1. This is a company that can have rapid growth in the short term; 2. This is another company that needs to open market-oriented channels and solve the market pricing ability in the medium term, and it is quite urgent. Brand independence and IPO will help to some extent, but in the long run, it still needs the ability to operate, and the quality cannot be diluted in the growth. 3. The above market value judgment is only for reference, excluding the overvaluation or undervaluation of the industry P/E ratio due to the turbulence of the capital market, and does not make investment reference.