Business context and reporting period
JD.com, Inc.’s Form 20-F reports the fiscal year ended December 31, 2018, under U.S. GAAP; it was filed April 15, 2019. This is an annual filing, not a standalone 2018 Q4 report. The provided filing text does not give clear Q4-only financial results.
JD.com operates online direct retail, a third-party marketplace, advertising and logistics services, primarily in China. Its finance business, JD Digits, was deconsolidated in June 2017 and is presented as discontinued operations for applicable historical periods. Financial amounts below are RMB unless stated otherwise.
Financial and operating highlights
| Metric | 2018 | Prior comparable period |
|---|---|---|
| Total net revenue | RMB462.0bn | RMB362.3bn in 2017; +27.5% |
| Product revenue | RMB416.1bn | RMB331.8bn in 2017; +25.4% |
| Service revenue | RMB45.9bn | RMB30.5bn in 2017; +50.5% |
| Operating loss | RMB2.6bn | RMB0.8bn in 2017 |
| Net loss from continuing operations | RMB2.8bn | RMB19m in 2017 |
| Net loss attributable to ordinary shareholders | RMB2.5bn | RMB152m in 2017 |
| Net loss per share / ADS | RMB0.87 per share; RMB1.73 per ADS | RMB0.05 per share; RMB0.11 per ADS in 2017 |
| Operating cash flow | RMB20.9bn | RMB29.3bn in 2017 |
| Investing cash flow | Outflow of RMB26.1bn | Outflow of RMB21.9bn in 2017 |
| Capital expenditures | RMB21.4bn | RMB11.4bn in 2017 |
Derived gross profit was approximately RMB66.0bn, or a 14.3% gross margin, compared with approximately RMB50.8bn and 14.0% in 2017. The operating margin was approximately -0.6%, versus -0.2% in 2017. These margins are calculated from reported revenue and cost of revenues.
- Service revenue reached 9.9% of total revenue, up from 8.4% in 2017; product revenue remained the large majority at 90.1%.
- JD Retail reported operating income of RMB7.0bn, while New Businesses reported an operating loss of RMB5.1bn. Unallocated items of RMB4.5bn contributed to the consolidated operating loss.
- Annual active customer accounts rose to 305.3m from 292.5m. GMV was RMB1,676.9bn; the filing cautions that GMV is not a financial metric.
- Technology and content expense grew 82.6% to RMB12.1bn; marketing expense increased 28.9% to RMB19.2bn. Fulfillment expense rose 23.8% to RMB32.0bn, but declined to 6.9% of revenue from 7.1%.
Balance sheet, debt and liquidity
- At December 31, 2018, cash and cash equivalents were RMB34.3bn, restricted cash RMB3.2bn and short-term investments RMB2.0bn, totaling about RMB39.5bn. Total assets were RMB209.2bn and total liabilities RMB132.3bn.
- Current assets were RMB104.9bn versus current liabilities of RMB120.9bn, a net current liability position of RMB16.0bn. Management said available cash and expected operating cash flow should cover anticipated needs for the next 12 months.
- Unsecured senior notes had a carrying value of RMB6.8bn, with principal of US$1bn due in 2021 and 2026. Short- and long-term borrowings totaled approximately RMB3.2bn. Nonrecourse securitization debt was RMB4.4bn at year-end; it is payable from underlying collateral collections.
- The company had RMB60.9bn of revolving bank lines, with RMB19.0bn used. A separate US$1bn term and revolving facility had US$450m drawn and US$550m undrawn at year-end.
- Inventories increased to RMB44.0bn from RMB41.7bn; inventory turnover days improved to 37.3 from 38.1. Accounts payable increased to RMB80.0bn from RMB74.3bn.
- Operating cash flow fell by RMB8.5bn year over year. Management attributed 2018 cash generation partly to growth in payables and accrued liabilities and a decrease in receivables; the increase in payables was much smaller than in 2017.
Material changes, outlook and unusual items
- Revenue growth moderated to 27.5% from 40.3% in 2017, while the net loss from continuing operations widened from RMB19m to RMB2.8bn.
- New accounting standards were adopted in 2018 for revenue recognition and financial instruments; prior-year revenue figures were not restated. The filing records a RMB1.5bn loss from fair-value changes in long-term investments. This affects year-over-year comparability and earnings volatility.
- Other net income was RMB95m, down from RMB1.3bn in 2017. In 2018 it included a RMB1.5bn fair-value loss on long-term investments, RMB593m of investment impairments, RMB615m of government incentives and RMB1.3bn of gains from business and investment disposals.
- Share-based compensation rose to RMB3.7bn from RMB2.8bn. JD Logistics also raised US$2.5bn from outside investors for approximately 19% of its fully diluted equity; the preferred shares are classified as mezzanine equity.
- Management expects continued investment in fulfillment infrastructure and technology, and said capital expenditures are likely to remain significant. It acknowledged that the company may continue to incur losses while investing for growth; no specific earnings or revenue guidance is provided in the filing text.
- Subsequent to year-end, JD.com agreed to sell certain logistics facilities to a fund backed 80% by GIC, at a stated gross asset value of RMB10.9bn, subject to conditions including financing availability. The company expected most of the transaction to close in 2019 and planned to lease the facilities back; completion was not reported as assured.
- The filing reports no material legal or administrative proceedings and no material off-balance-sheet financing arrangements. It reports RMB10.0bn of capital commitments and RMB10.0bn of operating lease commitments at year-end.
Principal risks and contingencies
- JD.com relies on contractual arrangements with PRC variable interest entities (VIEs) for certain restricted businesses. Changes in law, adverse regulatory interpretation or failure to enforce the contracts could impair control, consolidation or operations.
- The E-Commerce Law took effect January 1, 2019, and the filing describes uncertainty over implementation. It also discusses the Foreign Investment Law, promulgated in March 2019 and scheduled to take effect in 2020, with unresolved implications for VIE structures.
- Intense competition, price pressure, rising labor and fulfillment costs, substantial investment needs, inventory obsolescence and reliance on suppliers and third-party sellers could weigh on margins and cash flow.
- Data privacy, cybersecurity, product authenticity and safety, delivery reliability, licensing and other PRC regulatory requirements may create operating, legal and reputational exposure. JD.com states it does not maintain product liability or general business interruption insurance.
- Cash is subject to PRC currency-conversion and remittance controls. PRC subsidiaries had not paid dividends, and RMB25.9bn of paid-in capital and statutory reserves was restricted from distribution as of year-end.
- The company’s dual-class structure gives Class B shares 20 votes each. As of February 28, 2019, Richard Qiangdong Liu was reported to control 79.0% of aggregate voting power.
Investor facts to verify
- Whether subsequent quarterly filings show stabilization in operating profitability and operating cash flow, given the 2018 loss and cash-flow decline.
- How much of revenue growth and margin performance comes from higher-margin marketplace, advertising and third-party logistics services versus direct product sales.
- The quality and liquidity of the RMB39.5bn cash, restricted cash and short-term investment pool, as well as the company’s net current liability position and debt maturities.
- Whether the proposed RMB10.9bn logistics-property transaction closed, how much cash was realized, and the resulting lease obligations and financing effects.
- Progress in monetizing JD Logistics and managing its losses, labor costs, capital requirements and outside-investor rights.
- Developments in VIE enforceability, PRC e-commerce regulation, data protection requirements and the company’s ability to transfer funds out of China.
- The continuing effects of investment fair-value changes, impairments, share-based compensation and accounting-policy changes on reported earnings.