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JD.com to invest in lower-tier cities after logistics breaks even

Chinese e-commerce retailer JD.com Inc. is planning to boost investment into lower-tier cities and its logistics business after the company delivered a strong second-quarter results and boosted its full-year adjusted net income expectations, executives said Aug. 13.

CFO Sidney Huang said during a post-earnings call that the company's 2019 full-year non-GAAP net income guidance would be revised to be between 8 billion yuan and 9.6 billion yuan. The revision is due to the retailer's reinvestment of the 1.8 billion yuan it gained from a tax cut and other items for the second half of 2019. Huang said the reinvestment would mainly focus on growing JD.com's user base in the lower-tier cities.

Shares of the Chinese e-commerce retailer rose more than 12% in afternoon trading Aug. 13 after the company posted earnings before the market opened.

Overall, JD.com saw a 22.9% net revenue growth in the second quarter to 150.28 billion yuan. The Chinese e-commerce retailer's adjusted diluted earnings per American depositary share was 2.30 yuan, up from 33 fen in the year-ago period.

The company said it projected net revenue in the third quarter ending Sept. 30 to be between 126 billion yuan and 130 billion yuan, a 20% to 24% increase compared to the prior-year period. Huang expects the company to perform well in the third quarter with the introduction of a new WeChat platform.

Huang added during the call that the JD Logistics unit, which was spun off in 2017, "broke even with a slight profit" for the first time with the lowest fulfillment ratio since 2014. Revenue from its logistics and other services was up 95% to 9.97 billion yuan in the six months ended June 30, 2019, compared to 5.11 billion yuan in the six months ended June 30, 2018.

Huang said the logistics division saw further improvement in its gross margin for its third-party businesses. Unlike its rival Alibaba Group Holding Ltd., JD.com runs its own inventory and logistics besides taking external delivery order.

"Clearly, we still have room to further improve because JD Logistics is still in investment phase," Huang said during the call. "Obviously, it will — going forward, as it completes its investment cycle, the business should be much more profitable, which will in turn also drive further operating leverage on the JD Retail side," he added.

He mentioned that the logistics division would receive fund injections from the 1.8 billion yuan reinvestment to allow better penetration into the lower-tier cities.

The reversal in the logistics division came after JD.com went on a cost-cutting measure for its logistics business by replacing the base salary of its deliverymen with a commission-based payment in April. Chinese financial media said JD Logistics suffered losses of up to 2.3 billion yuan in 2018, quoting an internal email sent by CEO Richard Liu in April.

JD.com said the percentage of its fulfillment expenses to net revenues decreased to 6.1% in the second quarter of 2019, compared to 6.7% in the same period last year.

On its retail business, Huang said the 34% revenue growth in the platform's general merchandise categories was driven by fast-moving consumer goods. He said the electronics and home appliances category recorded double-digit growth in the second quarter, but the electronics saw some slowdown starting the second half of the year.

Huang noted that JD.com needs to introduce suitable product offerings on its platform to cater to consumers from lower-tier cities.

Huang acknowledged that products on JD.com were better fitted for consumers in first- and second-tier cities. "And so this year, we have stepped up efforts to select products that fit better to the lower-tier cities. We are working with other brand partners to build up the supplies of our products, for example, the OEM and more cost-effective products and also work with the industrial factory producers to produce the most effective product to sell to our lower-tier cities," he said.

The pivot toward lower-tier cities among Chinese e-commerce players came following the strong popularity of group buying platform Pinduoduo Inc. beyond the major Chinese metropolises over the past year. Alibaba had likewise said it would invest into lower-tier cities.

Huang revealed that the new user growth rate on the JD.com platform from the third-to sixth-tier cities was higher than the second-tier cities.

As of Aug. 12, US$1 was equivalent to 7.06 yuan.