Research report: re-understanding Jingdong

01 Company Profile

The first self-operated e-commerce, fine operation, quality growth

1. Supply chain is king, authentic products + logistics lead online quality consumption

Looking back at the development history of Jingdong e-commerce, unlike the platform e-commerce led by Alibaba, Jingdong insisted on the full-link self-support from goods to logistics to after-sales service at the beginning of its establishment, and built low-cost genuine products and fast logistics as labels.

Establish a benchmark of e-commerce industry experience, and lead the upgrading of domestic e-commerce "brand goods and quality services" together with Tmall.

1) Genuine product control: Jingdong has long been based on 1P self-management, and 3P platform merchants are strictly admitted. Internal quality control from the "purchasing and marketing - quality control - warehousing - distribution - service" and other key links to focus on control, combined with external industry and government supervision system to ensure the quality of the brand.

2) Transaction payment: JD has long supported cash on delivery service (up to 2018, JD's orders still accounted for 6%), which is an important and differentiated service for early online shopping to solve the trust problem in addition to Alipay's third-party guarantee model.

3) Logistics and distribution: Logistics experience is the core advantage of Jingdong. Since its establishment, many rounds of financing have been used for the construction and upgrading of the distribution system.

In 2007, Jingdong began to build its own distribution system, and launched the "211" logistics time service in 2010 - same-day delivery of orders before 11 a.m. and next-day delivery of orders before 11 p.m., becoming the benchmark of e-commerce logistics services, and constantly upgrading the launch of "Beijing Zhunda" (designated time delivery), "Beijing Shiunda" (one-hour delivery) and other multi-level distribution time services.

By 2019Q3, Jingdong operated a warehouse area of 16 million square meters in the country, and same-day/next-day delivery services covered 2,146 districts and counties (2018), and the proportion of same-day/next-day orders during the 618 promotion period in 2019 was also maintained at more than 91%.

4) After-sales service: Different from platform e-commerce, which is responsible for after-sales service by merchants themselves, Jingdong self-operated products are all provided by Jingdong customer service, providing services such as 7-day return without reason and door-to-door pick-up.

2. Hand in hand with Tencent & Walmart, join forces to move towards comprehensive e-commerce

Timely and appropriate alliance, so that Jingdong from the 3C electrical appliances based vertical platform truly transformed into a full category of integrated e-commerce.

In particular, the introduction of two strategic partners, Tencent and Walmart, has greatly made up for the shortcomings of Jingdong's front-end traffic and back-end supermarket supply chain, quickly opened the gap with rivals, and become the undisputed second largest B2C e-commerce outside Ali (market share in 2016 has reached 24.7%).

As of 2019Q3, Tencent and Walmart held 18% and 9.9% of JD's equity, respectively, the first and second largest external shareholders.

Review Jingdong's development after listing in 2014:

1) Traffic side: Alliance with Tencent to expand the front-end user traffic pool. In 2013, JD.com's annual purchasing users (AAU) reached 47 million, and the growth rate has slowed to 61.8%. In March 2014, Tencent took a strategic stake in Jingdong, and injected its two major e-commerce companies, B2C Easy network and C2C Paipai Network, into Jingdong simultaneously, and the "Jingteng" alliance was formed.

Jingdong has become the leader of Tencent's e-commerce layout, obtained the mobile QQ and wechat two super app level entry, access to Tencent users' social traffic pool, and obtained Tencent promotion support.

In 2014, the growth rate of Jingdong's active users rebounded to 97.5%, and the proportion of 3P platform GMV increased from 28.6% in Q4 2013 to 43.6% in Q4 2014.

2) Supply chain side: marriage with Walmart, trade beyond the supply chain. In 2016, Walmart bought a strategic stake of 5% in Jingdong and injected Yihaodian into Jingdong at a price of 9.5 billion yuan. Subsequently, Walmart continued to increase its stake in JD in the secondary market, becoming JD's third largest shareholder.

After the cooperation between the two parties, Jingdong has become the core e-commerce partner of Walmart in China, Jingdong absorbs the original Yihaodian supermarket supply chain and user resources, Walmart opens Jingdong online flagship store and connects its stores to Jingdong Home, opening up the back-end supply chain of both sides and improving the efficiency of purchasing and marketing.

The development of Jingdong FMCG category has reached a higher level. In 2018, the GMV proportion of Jingdong Food, Ribai and other FMCG category platforms was about 20%, and the share of most subcategories exceeded Tmall.

3) Build strategic cooperation in vertical fields based on the investment layout of main industries. In addition to its own business construction, JD has also actively invested in vertical leading companies after listing, leveraging partners to extend business tentacles.

For example, invest in Vipshop and Farfech to expand the operation capacity of women's categories such as clothing and luxury goods; Shares of Tuniu and e-car extended tourism, automobile and other travel service products; Merger and acquisition of Dada, investment in offline supermarkets (Yonghui, Bubugao, etc.) to develop O2O business.

4) Improve supporting services such as logistics and finance, and expand innovative businesses beyond e-commerce. After the listing, Jingdong began to build its own warehouses (previously mainly rented warehouses, as of 2019Q3, 23 of Jingdong's 29 urban distribution centers were built after the IPO), to improve the degree of logistics automation, reduce costs and increase efficiency.

In terms of finance, Jingdong has successively launched supply chain financial services for suppliers, launched white ribbon consumption staging, and bound merchants and consumers to use scenarios. In addition to consolidating the main business experience of e-commerce, logistics and finance have begun to provide social services, and have respectively established sub-groups for independent financing and development.

3. The adjustment and sorting is completed, and the quality growth starts again

Intensive adjustment and sorting, reunion of organizational combat effectiveness. After the slowdown in business growth since 2018 and the founder's "Mingzhou incident", Jingdong has been combing and adjusting in multiple aspects such as organization, personnel and business since the end of 2018. With the resignation of some senior executives in April 2019 as a sign, Jingdong's internal combing and adjustment has basically been completed.

1) Organizational structure adjustment: reorganize the business structure and reorganize the main business of the mall. Founder Mr. Liu Qiangdong is the Chairman and CEO of Jingdong Group, and directly manages Jingdong Retail (formerly Jingdong Mall), Jingdong Digital (formerly Jingdong Finance Upgrade), Jingdong Logistics, and Jingdong Health (newly established in May 2019) under Jingdong Group. Integrate the four business sub-groups of Jingdong Pharmacy, Yaojingcai, Jingdong Internet Hospital and other core products of the Group, and the Jingdong Cloud and AI business division (newly independent in December 2019, integrating the structure and responsibilities of the original Jingdong Cloud, artificial intelligence, and IoT three business divisions).

The core retail sub-group broke the original business group system and was reorganized into the large and middle Taiwan business structure. The heads of the front, middle and back office business departments report directly to Mr. Xu Lei, CEO of Jingdong Retail Group, among which: the front office department aims to establish a flexible, innovative and responsive mechanism around C-end and B-end customers.

Integrate and set up 5 business departments including platform operation, purchase, 7 frseh, New channel and Paipai Second-hand; The middle desk department aims to over-precipitate, iterate and componentize the output of common capabilities that can serve different scenarios in the front end and constantly adapt to the front end.

The middle Taiwan business group is adjusted according to the business model and business scenario, and three business groups are set up: 3C electronics and consumer goods retail, fashion home platform and life service, and three support departments: technology and data center, Mall user Experience Design department and Mall Marketing Department.

The backstage department aims to provide guarantee and professional support for the front desk, and set up three departments: CEO Office, Finance Department and Human resources Department of the mall.

2) Business line adjustment: fitness slimming, emphasizing quality growth. The Group's business lines are re-evaluated on the basis of "durability, profitability and sustainability", emphasizing "quality growth", and closing or adjusting and merging businesses that have no hope of turning around for a long time.

Typical examples: the merger of Jingdong fresh and 7 fresh business division, the opening of offline 7 fresh stores has slowed down significantly, the format has been re-planned, and the three formats strategy of seven fresh supermarkets (boutique supermarkets), seven fresh life (community fresh stores, the first store opened in December 2019) and seven Fan (for office white-collar workers, the first store opened in 2019.12) have been established.

Strategically led the investment in Love Recycling, and injected the original Paipai second-hand business into Love Recycling (the transaction is similar to 2016 Jingdong led the investment in Dada with cash + Jingdong Home business package).

Led the strategic investment in Five Star (46%), the offline electrical store business and Five Star strategic cooperation, jointly explore the offline experience store, sinking market and supply chain construction.

3) Personnel adjustment: strict assessment, performance-oriented reset incentive mechanism. Top-down strict performance assessment and elimination of the bottom, and the incentive mechanism is adjusted to strong performance orientation.

From March to April 2019, with the resignation of Chief Technology Officer (CTO) Zhang Chen, Chief Legal officer (CLO) Long Yu, Chief Public Affairs officer (CPO) LAN Ye, and the transfer of Wang Xiaosong, president of DFMCG business group, and Hu Shengli, president of Fashion Life business Group, as a sign, Jingdong vice president and above senior executives intensive adjustment.

With Jingdong Logistics as the representative, adjust the original "base salary + commission" model to a more incentive business commission model (increase the commission), and adjust the proportion of employees' provident fund contributions within the scope permitted by the policy.

The internal adjustment came to an end, and Jingdong returned to the ranks of high growth. In Q3 2019, JD AAU (annual purchasing users) reached 334 million people, an increase of 9.6% (VS 2.9%/2.4% in 2019Q1/Q2); Single-quarter revenue of 134.8 billion yuan, an increase of 28.7% (VS 2019Q1/Q2 +20.9%/22.9%).

In the first three quarters, the cumulative Non-GAAP net profit was RMB9.94 billion and the net profit rate was 2.45% (VS the Non-GAAP net profit of RMB3.46 billion and the net profit rate was 0.75% for the whole year of 2018); Owned cash flow (TTM) reached 15.6 billion yuan, recovering to the highest level since 2017Q4; New full-time employees in a single quarter of about 21,000 to 200,000 people (Q4, 2018 - Q2, 2019 for three consecutive quarters of about 179,000 people), Jingdong fully restarted expansion.

We believe that Jingdong is a retail company with Internet attributes, and it is the marginal improvement cycle of the company's retail main business to realize large-scale profits and rapid expansion of innovative business.

1) Since its establishment, Jingdong has maintained strong retail attributes. 1P self-operated business is the company's foundation and traffic source, and 3P platform business is the company's cash tool.

In Q3 2019, Jingdong's 1P business revenue increased by 26.6% year-on-year to 118.85 billion yuan, accounting for 88.1% of total revenue; Platform advertising and commission revenue increased 28.8% year-on-year to RMB9.99 billion, accounting for 49.6% of the total consolidated gross profit.

2) The main retail industry has realized large-scale profits and entered the cycle of steady improvement of profit margins.

The retail business of Jingdong Mall is a representative of domestic brand quality online shopping, and the efficient shopping experience advantages brought by full-link self-support and asset-heavy logistics investment are still attractive to specific groups: the average number of old users registered in Jingdong in 2008 has reached 31.5 in 2018, and the number of paying members of Jingdong plus has exceeded 15 million.

In addition, the scale effect of the main retail business of Jingdong Mall is prominent, and the profit rate is steadily improving: In 2018, the non-GAAP operating profit of Jingdong Mall is 7.05 billion yuan, and the operating profit rate is 1.58%; The cumulative operating profit in the first three quarters of 2019 was 11.48 billion yuan, and the profit margin further increased to 2.95%.

3) Logistics outsourcing services to open up the second growth curve.

With logistics outsourcing service as the core, Jingdong's innovative business scale has grown rapidly. Cumulative revenue in the first three quarters of 2019 increased 70.6% year-on-year to 16.49 billion yuan, and absolute loss (Non-GAAP operating loss) narrowed by 640 million yuan year-on-year to 3.32 billion yuan.

It is expected that the overall revenue of the logistics sub-group in 2019 will reach 59.8 billion yuan, of which the foreign single income will reach 23 billion yuan.

4) Focusing on the incubation of retail ecology, the independent business value of the sub-group is gradually highlighted.

In addition to Jingdong Logistics and Jingdong Number, Jingdong has created two "unicorns" under the instant delivery platform Dada Group (completed $500 million financing in 2018.8, timely delivery system) and integrated medical and health platform Jingdong Health Group (completed $1 billion financing in 2019.5, Internet medical).

At the same time, its technology sector (Jingdong Cloud and AI division) will be independent, and the independent external financing of the sub-group will further thicken the value connotation of the listed company.

02 E-commerce industry

The leading advantage is stable, and the low line is upgraded at the right time

1. Total volume: growth track, low line upgrade will be the new driving force of the industry

E-commerce has become the core channel of consumption, accounting for 19.7% of social zero stock/increase /50.2%.

According to the data of the National Bureau of Statistics, from January to November 2019, from the perspective of the stock proportion, the scale of domestic physical e-commerce transactions reached 760 million yuan, accounting for 19.7% of the total social zero.

From the perspective of incremental contribution, the cumulative growth of physical e-commerce was 19.7% (VS social zero overall growth rate was 8.0%), and the incremental contribution of physical e-commerce to the social zero overall reached 50.2%. E-commerce is a retail growth track and has become a "systemically important" terminal channel for the domestic consumer market.

Three rounds of user dividends to promote the popularity of e-commerce, the industry is expected to enter a new era of low-line upgrading and consumption differentiation.

Observing the 20-year history of domestic e-commerce from the perspective of e-commerce users, we believe that the industry has roughly experienced three rounds of user dividends, the current popularity of e-commerce users is basically completed, and the upgrading of low-line users and consumption differentiation will be the new keywords of the industry.

1) PC Internet user dividend (1999-2010).

PC Internet era is the first round of absolute user dividend era of e-commerce, 2007-2010, online shopping users increased from 46 million to 161 million, CAGR+51.2%. The industry has gone through a rough era from scratch, and infrastructure such as third-party payment, e-commerce logistics, and online IT systems have been initially built in this period.

With the listing of Dangdang in 2010 as a symbol, early e-commerce moved to the front after years of rapid development, and truly triggered the attention of offline retail.

2) Mobile Internet user dividend (2011-2015).

The mobile Internet era is the era of relative user dividends of e-commerce, and the absolute user growth rate has dropped (2011-2015 online shopping user growth CAGR+20.8%), and more user dividends come from the migration of users from PC to mobile online shopping brought by the popularity of 4G: from 2011 to 2016, the proportion of mobile e-commerce increased from 1.5% to 76.7%.

During this period, offline retail companies began the first round of online counterattack (Suning & Gome fought Jingdong in 2011, RT-Fat launched the Finiu network), but due to the wrong judgment of the trend (still dominated by the PC), left and right hand mutual communication (difficult to balance their own offline channel interests) and the loss of the absolute user dividend period, the first round of online counterattack of offline retail quickly lost momentum.

In 2014, Alibaba, Jingdong, Jumei and other listed successively, and the mainstream e-commerce pattern of the Highline market was basically established.

3) High Line upgrade & Low line user bonus (2015-2018).

After the completion of the popularization of users in the high-line market, the development path of e-commerce differentiation: the mainstream listed e-commerce seeks to upgrade the consumption of the high-line market, represented by Ali's "new retail" and Jingdong's "no-boundary retail", the mainstream e-commerce began to actively seek cooperation with the offline line, and promote the improvement of arpu with category extension, in order to break through the "high-frequency and low price" category that is the core of FMCG.