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JD Logistics (Part 2): Financials and Future

In Part 1 of our JD Logistics series, we introduced the history and business model of JD Logistics (Chinese: 京东物流) (HKEX: 2618), e-commerce giant JD Group's logistics unit that was spun-off and listed on the Hong Kong Stock Exchange in May 2021.

In this continuation of the series, we examine JD Logistics' financial and business metrics, as well as discuss management's plans and important trends that can shape the company's progress going forward.

JD Logistics Series

JD Series


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Financial and Business Metrics

We first examine JD Logistics' financial and business metrics through some stylized facts and observations.

#1: JD Logistics' Business Performance is Characterized By A Growing Revenue Stream, Very Low Gross Profit Margins, and Negative Earnings Before Taxes

JD Logistics recorded growing annual total revenues of RMB49.8 billion, RMB73.4 billion, and RMB104.7 billion in 2019, 2020, and 2021 respectively. However, less than 10% of the revenue earned in each year was captured as gross profit, while the company also recorded negative earnings before taxes (EBT) throughout this time period.

JD Logistics Key Financial Metrics
Data Source: Company Prospectus and Financial Reports

Note: we include an adjusted EBT metric for 2020 and 2021 which offsets the relatively large fair value changes in convertible redeemable preferred shares recorded in the two periods (RMB4.86 billion in 2020 and RMB12.8 billion in 2021). Since this accounting item is non-recurring and does not pertain to the company's core operations, we think it would be more accurate to omit the item from analysis.

#2: The Company's Low Gross Margins Are Driven By High Employee Benefit Expenses and Rising Outsourcing Costs

JD Logistics' gross profit margin is in the single-digit range each year, with a noticeable drop the most recent year due to a reduction in benefits from COVID-19 related government support as well as the company's own expansion efforts which require greater operational personnel headcount and continued logistics infrastructure investments.

JD Logistics Gross Profit Margin
Data Source: Company Prospectus and Financial Reports

Turning to a breakdown of JD Logistics' cost of revenue, we see that employee benefit expenses comprise a decreasing 45% to 34% of total revenue, while outsourcing costs account for an increasing 28% to nearly 40% of total revenue.

JD Logistics Cost of Revenue Breakdown
Data Source: Company Prospectus and Financial Reports

Note: other costs of revenue refer to fuel costs, costs of maintenance services, as well as costs of packaging and other consumable materials.

Management explains that outsourcing costs have been increasing primarily due to a rise in the number of external (i.e. non-JD) customers which requires greater outsourcing capacity, as well as the growth of JD Logistics' express delivery and freight delivery services which the company outsources to third-party transportation services providers.

#3: Integrated Supply Chain Customers Contributed to Nearly 70% of JD Logistics' Revenue in 1H2021

JD Logistics classifies each customer based on whether or not the customer makes use of the company's integrated logistics services. Customers who do use JD Logistics' integrated logistics services are referred to as "integrated supply chain customers", while customers who only use the company's regular logistics services are referred to as "other customers".

JD Logistics Revenue Breakdown By Category
Data Source: Company Prospectus and Financial Reports (click to enlarge)

Although management has been heavily promoting JD Logistics' integrated logistics services, and indeed revenue from such services is growing each year, from a holistic perspective, the share of revenue contributed by integrated supply chain customers versus other customers is gradually balancing out with a near 70/30 split in 2021. Management explains that revenue from other customers has increased as a result of the company's customer pool expansion, particularly from standard (i.e. non-integrated) services such as express and freight deliveries.

#4: JD Logistics Is Gradually Diversifying Its Customer Exposure, With JD Group And Other Significant Related Parties Accounting for 43.5% of Total Revenue in 2021

Naturally, since JD Logistics was founded as a logistics arm to supplement JD Group's core e-commerce business, the Group and its related parties (referred to as "JD Group and Other Significant Related Parties", as opposed to "external customers") contribute to a significant proportion of JD Logistics' revenue. However, JD Logistics has been gradually diversifying its customer base over time, with external customers accounting for more than half of total revenue for the first time in 2021.

JD Logistics Revenue Breakdown By Customer Type
Data Source: Company Prospectus and Financial Reports (click to enlarge)

#5: In 2021, JD Logistics Served 74,602 External Integrated Supply Chain Customers Who Contributed RMB25.5 Billion in Revenue

#6: External Customers Only Accounted For 36% of Revenue From Integrated Supply Chain Services in 2021

In 2021, JD Logistics' external integrated supply chain customers contributed RMB25.5 billion in revenue, equivalent to 35.9% of revenue from integrated supply chain services and 24.4% of total revenue. Consequently, it seems that while the company has been able to diversify its customer exposure quite rapidly as a whole, revenue from external customers is predominantly being generated by standard rather than integrated logistics services. This perhaps explains why one of management's stated main goals is to further promote and introduce integrated logistics services to the company's standard logistics external customers (discussed further in the section below).

#7: The Average External Integrated Supply Chain Customer Spent RMB341,424 on JD Logistics' Services in 2021

The average revenue per external integrated supply chain customer (ARPC) increased nearly 1.5.times from RMB234,057 in 2018 to RMB341,424 in 2021.

JD Logistics Average Revenue Per Customer
Data Source: Company Prospectus and Financial Reports

The Future of JD Logistics

We conclude the series with management's plans for the future, as well as several trends and factors that can influence the company's ultimate success.

#1: Management Is Prioritizing Growth Over Profitability In The Short To Medium Run

Management states that they will continue to prioritize business growth and expansion of market share in the short to medium run, meaning that potentially significant fluctuations in profitability are possible during this time period. Apart from the obvious additional capital investments in expanding the company's logistics infrastructure, management also plans on making continued marketing investments to further promote JD Logistics' services and deepen the company's customer pool penetration (i.e. attract existing customers who aren't currently doing so to use their integrated logistics services). We also think that it is possible JD Logistics may acquire other logistics companies to further strenghten its market position as a continuation of what the company has done over the past two years.

#2: JD Logistics Hopes to Benefit Particularly From The Increased Geographical Penetration of E-Commerce

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