JD Is Seriously Undervalued? DCF, PE, P/GMV Valuations Tell You the Answer.

GMV: We believe that the promotion of JD's full category will bring continuous growth of GMV, which is mainly driven by both users and ARPU. It is estimated that JD's GMV will be 37,042 /42798/4718 billion Yuan respectively from 2022 to 2024.

1) Number of users: We judge that the user growth of Jingdong mainly depends on the penetration of second - and third-tier users and the improvement of the penetration of high-line female users. From 2018 to 2021, JD.com added an average of 69.3 million net active users per year. Due to the contraction of Kyo's business and the slowing exploration of sinking markets, we expect the annual net user additions to decrease in the future, and maintain the level of 35-40 million users. The estimated number of active users from 2022 to 2024 is 6.1/6.46/685 million respectively.

2) ARPU: We judge that the growth driver of ARPU is due to the high ARPU users brought by the growth of JD Plus members and the increase in the purchase frequency of users. The compound growth rate of ARPU from 2018 to 2021 was 1.75% (decreased in 2020 due to pandemic interference), and the higher user growth rate diluted the ARPU value. We expect ARPU growth to accelerate slightly and remain at 4-10% in the future due to JD's strategic focus on tapping existing users, the high growth rate of JD Plus members, and the future slowdown in the growth rate of JD's overall users to reduce the impact of dilution. The estimated ARPU value from 2022 to 2024 is 6077/6623/6888 yuan, respectively.

Revenue side: We believe the main drivers of revenue are solid growth in sales of proprietary goods and more rapid growth in advertising and logistics services. The company is expected to generate revenue of 106,94/12661/1456.4 billion in 2022-2024, respectively.

Gross margin: We believe that procurement costs will increase with the scale of proprietary goods, and gross margin robust recovery. Referring to the cost situation before the epidemic, the growth trend of cost is consistent with the growth trend of revenue, and the growth rate is slightly lower than the growth level of revenue. From 2018 to 2021, the company's gross profit margin level was at 14.28% central fluctuation, and in 2021, the gross profit margin decreased significantly due to the impact of the epidemic. We believe that gross margin will improve in the future under the scale effect, high gross margin commodities, and high gross margin business share, and will slowly recover to pre-pandemic level under the impact of pandemic costs. The gross margin is expected to be 14%/14.4%/14.6% in 2022-2024, respectively.

Expense: We believe that the performance expense ratio, R&D expense ratio and management expense ratio will slightly decrease due to scale effect. We estimate that the performance expense ratio will be 6.2%, 6.0% and 5.8% respectively, the R&D expense ratio will be 1.6%, 1.6% and 1.6% respectively, and the management expense ratio will be 1%, 1% and 0.9% respectively from 2022 to 2024. The marketing expense ratio is expected to decrease with the contraction of new business, which is estimated to be 3.8%/3.8%/3.7% in 2022-2024.

Alibaba, Pinduoduo and Vipshop are selected as comparable companies for valuation. As self-run e-commerce, the profit margin of Jingdong is lower than that of platform e-commerce Alibaba and Pinduoduo. If the P/E method is used to estimate the value of Jingdong according to the industry average P/E (because the self-run mode has a low-profit margin but deeper barriers), the company's value will be underestimated (because the self-run mode has a low-profit margin but deeper barriers). Considering the company's more stable growth during the epidemic and the higher growth space compared with the industry leaders in the future, We give Jingdong Group 22 years 22xPE, corresponding to the market value of 481.3 billion yuan, corresponding to the price of HK $167 / share.

As a self-run e-commerce company, Jingdong's ability to transform GMV into profits is lower than that of platform e-commerce companies Ali and Pinduoduo. If the P/GMV method is used for valuation, the company's value will be overestimated according to the industry average P/GMV. Considering the company's competitiveness and development space, the company is given 0.14xP/GMV for 22 years, corresponding to a market value of 518.6 billion yuan. The corresponding price is HK $180 per share.

Jingdong has stable growth and healthy cash flow with small fluctuations. We use FCFF model for valuation. The risk-free interest rate of 2.72% is given by referring to the 10-year Treasury bond interest rate, the income tax rate β of Jingdong is excluded by referring to "Wind Stock Index" in a recent year, assuming that the company β is 1.96, and the expected market rate of return of 7.5% is given by referring to the overall long-term rate of return of the market, the cost of equity capital Ke is calculated to be 12.09%. Combined with the company's capital structure, the weighted average cost of capital WACC is calculated to be 11.74%. 1) 2021-2024 is the first stage, and the present value of the first stage is calculated according to the cash flow obtained from the performance forecast, and the present value of the first stage is estimated to be 59 billion yuan; 2) The second stage is from 2025-2031, when the scale effect of each category of Jingdong retail takes shape and Jingdong logistics and Jingdong technology grow rapidly. Given the compound growth rate of 12% in the second stage, the present value of the second stage is estimated to be 141.1 billion yuan. 3) After 2031, the company's operating condition will become mature and stable, and a sustainable growth rate of 2.5% will be given to calculate the present value of the third stage of 225.1 billion. Finally, FCFF calculates that the equity value of the company is 590.8 billion yuan, corresponding to the stock price of HK $206 / share.

In conclusion, we believe that JD has strong supply chain barriers, and with fast and good service, there is still room for improvement in user penetration and ARPU under the background of long-term consumption upgrading. We expect the company's revenue in 2022-2024 to be 106,944/12661/1456.4 billion respectively, and Non-GAAP net profit to be 218.8/303.5/42.96 billion Yuan respectively. The first coverage gives JD a "buy" rating. The target price of HK $185 (average in valuations) represents a 27% upside from the current share price.