JD’s (JD) third-quarter results beat our expectations, and with the firm on track to achieve profitability this year, we increase our fair value estimate to $39 per share from $37.50. Shares remain fairly valued. Management retains full-year guidance of non-GAAP net profit margins of 1%-1.5% and guided to 35%-39% year-over-year growth in the fourth quarter. We still forecast 2017 revenue of CNY 359 billion and have raised our forecast for GAAP net income to CNY 1 billion (versus a loss of CNY 1.2 billion previously) as we forecast net income margin to increase from negative 1.5% in 2016 to 5.1% by 2026.Management noted that net margin will increase every year, but return exceeding management’s expectations will be reinvested, and half of that excess return will go to technology. Logistics, fast-moving consumer goods, and the firm's overseas expansion (currently focusing on Southeast Asia) will also be areas for reinvestment.
Year-over-year direct sales growth of 39% was driven by home appliance, food and beverage, cosmetics, home furnishing, and baby products. Gross margin was 15.5%, an increase from 14.4% in the year-ago quarter, helped by economies of scale in procurement cost and improved monetization through better user and brand engagement. Fulfillment expenses were up 40% year over year, slightly more than net revenue of 39.2% as the group continued to expand its warehouse network. As of the end of September, JD boasted 405 warehouses comprising approximately 9 million square meters, up over 50% from a year ago. Net income from continuing operations in the quarter swung to the black at CNY 1 billion.
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Chelsey Tam does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.