JD's Boardroom Shuffle Ignites Talk Of Founder's Return

Key Takeaways:

• The founder of JD.com, Richard Liu, stepped down as CEO last April. His successor, Xu Lei, has said that the boss never really left, suggesting the CEO title conferred limited power
• JD.com’s first-quarter adjusted net profit rose 88% to 7.59 billion yuan, and some analysts are upbeat about the outlook  

By Ken Lo

It’s all change again in the boardroom at Chinese e-commerce giant JD.com Inc. JD, barely a year after founder Richard Liu stepped down from the top job.

Liu’s successor, Xu Lei, has resigned as CEO and is moving to a non-executive position on the advisory board, the online retailer announced last week, citing what were described as “personal reasons” for the decision. The vacated CEO post is to be filled by the current CFO, Sandy Xu, who becomes its third occupant in just over a year.

The executive shake-up, coming on the heels of a retail business overhaul, has sparked speculation that Liu may be planning an official comeback after continuing to pull strings behind the scenes.

In its unexpected announcement, which coincided with quarterly earnings, the company quoted the outgoing CEO as wanting to devote more time to his family. The position of CFO at the e-commerce group would be filled by Ian Shan, currently CFO of JD Logistics, Inc. (2618.HK).

JD.com has been reorganizing its main business unit, JD Retail, in what media reports have called the biggest transformation in five years, with changes in the business structure and platform. It would likely take at least six months for the restructuring to bed in. 

Up to this point Xu Lei had been in charge of the retail business and had previously served as CEO of JD Retail. Therefore, the timing of his departure from the top spot is puzzling the market.

Step Forward Richard Liu?

Some observers are wondering whether the stage is being set for Liu’s return as executive chairman.  The company founder has been busy in the wings since stepping out of the spotlight a year ago amid China’s crackdown on powerful tech companies. He steered several waves of the reorganization, identified a low-price strategy as the way forward for JD Retail for the next three years, and accused some colleagues of underperforming. All this points to deep and ongoing involvement in the day-to-day running of the company. JD’s share price jumped 7.3% the day after the management changes were made public, perhaps reflecting hopes of an official comeback for the JD.com founder.

A closer look at the company’s quarterly results, also announced last Thursday, may offer clues to the reasons behind Xu Lei’s departure.

JD’s first-quarter revenue rose just 1.4% year on year to 243 billion yuan ($35.2 billion), dragged down by a 4.3% drop in product revenue to 195.6 billion yuan. Revenue from services fared better, jumping 34.5% to 47.4 billion yuan. During the same period, JD’s operating profit more than doubled to 6.4 billion yuan, from 2.4 billion yuan in the first quarter of last year. As for the bottom line, the company made a net profit of 6.26 billion yuan, reversing a year-earlier loss. Its non-GAAP adjusted profit, which reflects actual business performance, rose around 88% to 7.59 billion yuan.

Looking at the economic context, official figures show Chinese sales of consumer goods rose 10.6% in the first quarter from the year-earlier period, but some segments bucked the brighter trend. Household appliances sagged 1.7%, while audio-visual and communication equipment fell 5.1%. JD has traditionally been strong in the home appliance business. With that in mind, Liu may have wanted to put the flagging core of the retail business into the hands of a finance expert in the hopes of engineering a quick turnaround.

In a conference call after the results, Xu Lei said that the lifting of Covid controls had helped to revive consumer demand, but momentum was still lacking, leading to divergent recoveries across retail categories.

He said JD Retail was flattening its management structure to improve agility and efficiency, leaving only three levels between the CEO and ground-level employees in procurement and sales.

Sandy Xu, who will be promoted to CEO next month, also outlined planned changes to the business structure of JD Retail, whose procurement and sales teams would be divided by product category, delegating more decision-making and management power and linking individual performance assessments within teams.

JD’s gross merchandise volume (GMV) and revenue have both accelerated since the start of the second quarter, Sandy Xu told the meeting. Under its low-price strategy, the company has invested heavily in subsidy programs to support third-party merchants, hoping to shift shopping habits and boost sales. As a result, the transaction volume at active merchants, user traffic and repurchase rates are all steadily increasing.

While the low-price strategy is starting to pay off, the e-commerce business is still grappling with weak Chinese consumption and domestic demand. But services such as health and logistics have been outperforming sales of goods.

Services On The Rise

Service revenue grew to 20% of total sales in the first quarter, Sandy Xu said, contributing to healthy profit margins. The promotion efforts also attracted a record number of third-party merchants to the JD platform.

The main drivers of service revenue were JD Health (6618.HK) and JD Logistics. First-quarter revenue from the health division rose 54% from a year earlier while adjusted operating profit surged 108%. Over at logistics, revenue jumped just over 34% and the unit’s adjusted loss shrank 29% to 710 million yuan.

Despite the decent report card for the first quarter, JD.com’s retail performance was still weak, which does not bode well for the next few quarters. The company’s forward price-to-earnings (P/E) ratio is about 13 times, falling between the 9.3 times for Alibaba BABA and 16.7 times for Pinduoduo (PDD. US, indicating a neutral stance among investors.

However, some analysts are upbeat about the outlook after the latest JD earnings beat some expectations. A Macquarie report said the figure for adjusted revenue had been far stronger than anticipated, lifted by the business overhaul and efforts to streamline operations. The investment bank duly raised its forecast for the firm’s adjusted profit by 8% for 2023 and 5% for next year. Macquarie also raised its target price from HK$205 to HK$207, while maintaining an “overweight” rating.