JD.com Alert:Margin beat in 3Q;operating disclosure changed

What we liked: strong margin improvement.The surprising 15.5% gross margin and 2.7% net margin (less surprising 1.8%operating margin) have proved JD’s capability to improve margin by increasingleverage in 1P business and increasing general merchandise in a relativelycompetitive quarter. Although management indicated Q4margin willsequentially decline to Q2level due to price competition and full year netmargin will be in the range of 1.2-1.5%, (vs. comparing 9M17’s 1.8%), the CEOmeanwhile confidently estimated that JD’s full year margin will continue to goup YoY going forward to reach the 2-4% LT margin target.What we had concerns about: less disclosure and more competition.The company have decided to change the definition of GMV and stoppeddisclosing number of fulfilled orders and category details from this quarter.This change left us fewer clues to track and estimate the revenue growthdrivers with going forward. Given Alibaba’s competition in selective categorieslike Apparel, we are more concerned about revenue growth in this specificcategory in next couple of quarters.Result snapshot:

    JD 3Q revenue of RMB83.7bn was up by 39% YoY, slightly above consensus.Gross margin of 15.5% strongly beat DBe/street estimates by 90bps/70bps,due to the improved 1P margin from increasing procurement scale. In additionto the strong operation drivers, the government subsidy, FX gain andinvestment income (484mn in total) also helped to deliver the 2.7% non-GAAPnet margin in 3Q. The company guided 4Q revenue of RMB107-111bn (+35%-39% YoY), the mid-point of which is in line with consensus.Maintaining Buy rating and target price of USD52.We lift FY18/19E revenue by 2%/2% respectively and largely maintain our non-GAAP net margin forecast for FY17-19E. Our TP is based on an unchangedequal weighting of DCF and 1.1x on FY18E EV/Sales. We adopt a 12.3%discount rate and 2% terminal growth. Risks: higher O2O losses, sloweruser/GMV expansion.