We maintain our Market perform recommendation on JD. JD’s 1Q23 revenues were up 1.4% YoY and beat expectations thanks to continued strength of its net services revenues. JD’s EBITDA margins also improved but it incurred a net operating cash outflow in 1Q23 due to higher working capital investments.

We expect JD’s topline growth to gradually recover and achieve mid-to-high single digit growth for FY23. We expect JD’s EBITDA margin to edge lower in FY23 compared to FY22 due to the subsidy program and upcoming large promotional events in 2Q23 (6.18), offset in part by its continued improvement in fulfillment efficiency and economies of scale. We expect JD to continue to generate strong operating cash flow in FY23, and marginally reduce its total debt and Total debt/EBITDA.

Chinese tech companies have been facing increasing scrutiny by the Chinese government. Any regulatory clampdowns may adversely affect the business of JD (e.g. antitrust rules, data security & personal data protection laws).

A prolonged economic slowdown in China would weigh on consumption and JD’s business outlook.

There are regulatory risks involving the use of variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs). Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.

JD may be subject to lawsuits for items listed on its marketplaces, which may be pirated, counterfeit or illegal. JD cooperates with 3rd party logistics cos to help deliver products to buyers. Failure to provide reliable delivery services or unexpected logistics bottleneck may materially affect the business.