tech

Last week was an intense earnings season, and we selected the financial reports of Alibaba, Tencent, and JD.com, which we have been following for a long time, to briefly analyze the current turning point where e-commerce development has entered a low-price slowdown, and the gaming market is welcoming a small harvest period. What are the main contradictions of the three companies at present or the core issues they need to solve in the next stage?

Alibaba Group's main e-commerce business achieved high single-digit and double-digit growth in transaction scale and order volume, respectively. Alibaba Cloud and Cainiao both demonstrated strong profitability. The losses in segments including international e-commerce business (AIDC), local life, and entertainment have been significantly reduced, and they have begun to show signs of healthy operation.

Advertisement

The market's core concern remains when the commercial income of the e-commerce segment will return to a high-growth track.

In the case where low prices have already caused some disturbances to its e-commerce market and commercial income, how to make good use of the full-site push, how to coordinate with Tao Factory and 1688 to enhance the competitiveness and coverage depth of cost-effective goods, and how to use billions of subsidies and 88VIP subsidies more finely are all related to this.

In addition, the progress of projects including the overseas expansion of Taobao women's fashion is also worth paying attention to.

The highlight of Tencent's financial report lies in gaming, but in our view, beyond gaming, the full-field hope of Video Account is still worth watching and looking forward to, especially a Video Account that is further integrated into the WeChat ecosystem. It will continue to gain growth in user scale and time, as well as bring in revenue from advertising and technical service fees, and may generate new business imagination based on deeper ecological connections. And it is more challenging for Tencent.

The highlight of JD.com's financial report is profit growth, which mainly comes from JD Logistics. However, apart from profits, in fact, the revenue growth of JD and JD Retail is only about 1%. The POP and low-price strategy has indeed increased the user scale and purchase frequency that JD has always wanted, and the growth of daily consumption revenue is a manifestation. But at the same time, it should be noted that the revenue of JD's core home appliance category is declining. How to achieve both growth and profit will be the focus of JD's work.

Here is a detailed analysis:

Alibaba: How to make CMR grow with GMVRegarding the basic situation of Alibaba Group's Q1 2025 financial report, the market has already discussed it relatively thoroughly.

The core highlights are:

1. In the domestic e-commerce sector, Taobao's GMV and order volume have achieved mid-to-high single-digit and double-digit growth, respectively;

2. The growth and profitability of Cainiao and Alibaba Cloud are also quite considerable. The former's revenue was 26.8 billion yuan, with a year-on-year growth rate of 15.7%, slightly slowing down, but in sync with the growth rate of the synergistic business, International E-commerce (AIDC), and has turned a profit, reaching 620 million yuan; Alibaba Cloud's revenue was 26.5 billion yuan, with a year-on-year growth rate of 5.7%, and the profit reached 2.3 billion yuan, with a sequential growth of 60%;

3. The loss margins of other businesses have significantly narrowed, including AIDC, Hema, local services (AutoNavi + Ele.me), and entertainment businesses, all of which have reduced their loss margins. The latter two are close to breaking even, and even Southeast Asian e-commerce platform Lazada achieved monthly profitability in July.

The main concern is when the commercial income of the domestic e-commerce sector, which accounts for more than half of Alibaba's revenue, can rebound in sync - compared to the high growth of both GMV and order numbers (DAC), the corresponding domestic retail customer management revenue (CMR, including commission and advertising revenue) only grew by 0.6% year-on-year.

The high growth of GMV and order numbers indicates that Taobao's past year's inclination towards low-priced goods and the effectiveness of heavily subsidizing 88VIP.

Among them, the low-price approach includes both the low-price orientation in traffic distribution strategy and the direct involvement of large stores like Tao Factory and 1688 Selection in offering low-priced goods.

Data released by Taobao shows that the To C product 1688 Selection, defined as the 'online Costco,' had sales exceeding 30 billion yuan in 2023 and is currently experiencing nearly triple-digit growth. Tao Factory, which evolved from Taobao Special, has now grown into a Taobao store with over 300 million consumers. As of June, there are already 57 industrial belts with monthly orders reaching a million levels, and these industrial belts are still maintaining a triple-digit growth trend. These are Alibaba's unique advantages in offering low-priced goods.As for 88VIP, the user base has reached 42 million by the end of the second quarter. Data obtained by "Narrow Broadcasting" shows that the transaction volume of 88VIP users in a single month of the first half of this year has accounted for a quarter of the overall market.

It is the high investment and the sole focus on low prices that directly affect the commercial revenue of Taotian, especially since Taotian's overall advertising market is still dominated by search advertising, and low prices are not conducive to the growth of this part of the revenue.

A brand merchant told us that e-commerce platforms, especially comprehensive platforms like Taotian, are overly focused on low prices, which can lead to a more chaotic assortment of goods and less efficient consumer choices. When the order volume brought by low prices is not enough to offset the loss caused by the decline in the average order value, the platform's sales and revenue may even show a negative growth. At the same time, if the proportion of low-quality goods at low prices is too high, it will lead to the phenomenon of bad money driving out good money, and brands will reduce their overall investment and operational activities.

How to make CMR grow along with GMV?

On the one hand, Taotian has recently announced a clear shift from low prices to GMV and AAC (Average Consumption Amount), and the traffic allocation indicators will also take into account price, experience, and stores comprehensively. We believe this will further unleash the structural advantages of Taotian's supply chain.

Of course, the consumption trend has not changed, and the platform competition is still fierce, with low prices still being one of the core competitive tools. It's just that Taotian needs to use the low-price tool more finely, such as focusing more on the hundred billion subsidies to maximize the price power of standard products, instead of subsidizing all goods indiscriminately; for example, further improving the cost-effectiveness and penetration space of self-operated goods like Taobao Factory and 1688.

On the other hand, in addition to platforms like Xianyu and Taobao starting to adjust the commission ratio to charge merchants, the management has repeatedly emphasized their hope that the advertising product - "Full Site Push" - which is expected to be fully launched in the second half of the year, will significantly drive the growth of commercial revenue within the next six months to a year. In layman's terms, it means packaging free and paid traffic within the station and optimizing the algorithm to make it more suitable for small and medium-sized merchants. Pinduoduo and Kuaishou e-commerce have similar products, which have directly driven the increase in commercial revenue.

It is also worth noting that Taobao Live, which was said to add an additional investment of ten billion yuan in cash at the beginning of the year, is reportedly divided into two parts, one belonging to Alimama, and the other to Tmall for store broadcasting. This once again confirms the limitations of e-commerce platforms in doing live broadcasting.

At the same time, Alimama has actually further strengthened its ability to connect traffic with platforms such as WeChat, Xiaohongshu, and Bilibili. Behind this, it should be Alimama adjusting its system to obtain traffic and the advertising products required to allocate traffic to support the traffic needs of small and medium-sized merchants, as well as the traffic path for brand new launches.

As for 88VIP, which is essentially a marketing tool, it has proven its effectiveness in recalling users. However, in addition to the platform's huge investment in subsidies and customer experience, how to grow into a more sustainable business model is also a subsequent challenge.Overall, the domestic e-commerce sector has reached a turning point with the end of the "lowest price only" mentality, and the future lies in the specialization of different models. The progress of Tao Tian in e-commerce traffic, supply chain, and the advertising products that link the two will jointly determine its share in the shelf e-commerce market under e-commerce, as well as the amount of commercial revenue it can obtain.

From a group level perspective, Alibaba's future value highlights also include incremental businesses such as youth-oriented services, AI, and global narratives.

For instance, the innovative businesses Xianyu and 1688 are of interest due to their high proportion of young users, basic profitability, and their leading positions in the idle goods and B2B tracks, respectively. This aligns with the current trend of young people pursuing cost-effectiveness and interest-driven consumption.

The group's development signals for these businesses are also relatively clear: there are no demands for large-scale profitability, but there are stricter requirements for scale growth and return on investment. For example, Xianyu is required to double its user base within three years, and 1688, after increasing its GMV from 600 billion in 2022 to 800 billion in 2023, is accelerating its integration into Tao Tian and enhancing the To C experience this year. In this quarter's financial report, 1688's revenue grew by 16.1% year-on-year.

The latest embodiment of the global narrative is the Taobao women's fashion export project. Although the share has declined due to the competition from platforms like Douyin live commerce, Pinduoduo's standard product explosions, and Xiaohongshu's buyer e-commerce, it remains the absolute leader in the market and is a core profit category for Taobao. It is said that the women's fashion export project, which synergizes AIDC and Cainiao resources, is a top-level project that has been warmly welcomed by merchants. In a sense, it is somewhat similar to the 10 billion subsidy launched by AIDC in the first half of the year in collaboration with domestic brand merchants, both being models of domestic supply chains serving the global market, and leveraging Alibaba's e-commerce supply chain advantages in advance.

Of course, within Alibaba, where AI-first has become politically correct, as mentioned above, the "full-site push" advertising products that combine AI capabilities, as well as AIDC and 1688, which are already fully deploying AI capabilities, are also worth paying attention to.

Tencent: How to Further Stimulate the Ecological Nature of Video Accounts

Despite an increase in management and sales expenses and the addition of 89 new employees, Tencent still achieved double growth in revenue and profit.The Q2 2024 financial report indicates that Tencent's total revenue reached 161.117 billion yuan, a year-on-year increase of 8%; gross profit was 169.765 billion yuan, a year-on-year increase of 22%. Specifically:

1. The online advertising business grew by 19% to 29.9 billion yuan, primarily driven by the revenue increase from Video Account and long video, with a positive impact from AI technology.

2. Value-added services revenue was 78.8 billion yuan, a year-on-year increase of 6%, of which gaming business revenue totaled 48.5 billion yuan; social networking revenue (music + long video membership revenue, as well as paid live streaming, etc.) was 30.3 billion yuan.

3. Financial technology and enterprise services grew by 4% to a revenue of 50.4 billion yuan, with a deceleration in sequential growth. The financial technology and enterprise services were affected by the overall consumer environment, which is related to the slow growth in overall social consumer expenditure.

Particularly drawing market attention is the recovery in the gaming business within value-added services, even overshadowing the "hope of the entire venue" Video Account. Established games like "Honor of Kings" and "Peacekeeper Elite," as well as the newly launched "Dungeon & Fighter: Origin," have all performed impressively.

Hit games have always been a revenue weapon for internet companies, with high gross margins. Tencent has become quite adept at the gaming business. However, the success of a game being a hit is very unpredictable, and it involves long development times and high costs, which have also been affected by the tightening of game licenses in the past. Therefore, Tencent places great emphasis on long-term investment in game development and the exploration of more evergreen games with potential.

Thus, in our view, the next step for Tencent may be more challenging not in gaming, but in how to continue to develop the potential of the Video Account and stimulate its ecosystem. The Video Account remains the hope for Tencent.

Data-wise, the Video Account, which is further integrating into the WeChat ecosystem, is also taking on more responsibilities.

Although specific figures were not disclosed, the financial report shows that the Video Account continues to "grow" in terms of user scale, user time spent, and advertising contribution.

For example: The growth in Tencent's advertising revenue is mainly driven by the increase in revenue from Video Account and long video, thanks to the increase in localized content, as well as upgrades in algorithms and advertising technology platforms. Moreover, the growth in Video Account advertising has to some extent offset the reduction in advertising budgets for internet companies and the decline in mobile advertising alliance revenue.Tencent's Chief Strategy Officer, James Mitchell, also said that the advertising revenue of Video Account has increased by more than 80% year-on-year, with major category clients such as gaming, e-commerce, and education increasing their advertising spending.

According to estimates by third-party research institution Dolphin Research, the total of external circulation + e-commerce advertising of Video Account in this quarter is 6-7 billion, a year-on-year increase of 105%.

In the future, Tencent's ecological investment in AI will also drive the growth of Video Account's duration, because "AI can drive better targeting and recommendations"; and the improvement of AI advertising recommendation capabilities will lead to an increase in conversion rates.

Another reason we are optimistic about Video Account is that the increasingly mature Video Account is further integrated into the WeChat ecosystem (including before June 18th, Video Account stores can directly jump to Moments, Official Accounts, etc.; and this month, Video Account stores have been upgraded to WeChat stores), and Video Account with ecological capabilities will be more worth looking forward to in both advertising and e-commerce related revenues.

From the e-commerce perspective, in Q2, while the live e-commerce GMV of competitors slowed down, Video Account e-commerce GMV is also growing, although it is "because the base scale is too small".

In terms of the model, the adjusted WeChat e-commerce can also have a richer imagination space than pure live e-commerce.

Tencent President Martin Lau mentioned: WeChat e-commerce "is not just based on Video Account and live broadcasting", but "establishes a cargo e-commerce ecosystem in a systematic way within WeChat".

At the same time, in his view, the live broadcast model "has a natural upper limit", and WeChat e-commerce that "utilizes all the forces within WeChat" hopes to "establish a larger, more meaningful, and higher upper limit of the cargo e-commerce ecosystem".

This can be seen as a summary and summary of the core characteristics of WeChat e-commerce, its core difference from live e-commerce, and future imagination, and it is also the basis for our understanding of WeChat e-commerce.

From the advertising perspective, the management has made it clear that Tencent's advertising growth is not only due to the improvement of advertising inventory click-through rate brought by AI; it is also "benefiting from the changes in the composition of advertising within WeChat, more and more advertisements show the characteristics of pan-internal circulation advertising".They believe that, "All other conditions being equal, compared to non-pan-internal-loop advertising, this type of advertising tends to achieve higher CPM and higher click-through rates."

One of the foundations for the efficient and precise circulation of pan-internal-loop advertising is its ecological and systematic nature.

Therefore, we are inclined to think that the revival of gaming is good news, but the Video Account remains a very promising and worthwhile business for Tencent to invest in for the foreseeable future, especially as it further integrates into WeChat. On another level, this also implies that the importance of WeChat is becoming increasingly evident.

Despite some investors' views on Tencent's financial reports as being "very stable, but lacking imagination," because "the user scale of social and entertainment has reached its peak." After all, the user scale of WeChat (MAU) has already reached 1.371 billion.

JD.com: How to achieve both user growth and profit

JD.com also had a financial reporting season with a significant increase in profits, mainly contributed by JD Logistics.

In this quarter, JD.com achieved a total operating revenue of 291.4 billion yuan, a year-on-year increase of 1.2%, of which JD Retail's revenue was 257.1 billion yuan, a year-on-year increase of 1.5%; JD Logistics' revenue increased by 7.7% year-on-year; the revenue of new businesses (Dada, Jingxi, etc.) decreased by 35% year-on-year, mainly due to the adjustment of Jingxi business and other businesses.

What is even more impressive is the profit margin.This quarter, JD.com's gross margin increased year-over-year to a historical high of 15.8%, marking the ninth consecutive quarter of year-on-year growth in gross margin. Notably, JD Logistics' gross margin increased from 6.5% in the same period last year to 98%, playing a prominent role in the growth.

"Profit" is one of the key words emphasized by JD.com's senior management during the earnings call.

The management believes that there is still significant room for improvement in JD.com's profitability, including the increase in the proportion of POP (Platform Open Plan), category changes, and profit enhancement through efficiency improvements in categories. "Overall, JD.com's medium to long-term gross margin target will be in the high single digits, representing a stable increase in profit."

However, it is important to note that in the core JD Retail business, the income from core electronic products and home appliances decreased by 4.6% year-over-year.

Home appliances are a core category for JD, forming the foundation for attracting the most core high-net-worth users and are the categories that can most attract brands, have the most supply chain advantages, and bring the most GMV (Gross Merchandise Volume), which in turn brings advertising revenue. In other words, they may be one of the categories that can most contribute to the profits JD desires.

However, in recent years, first, due to the impact of the overall environment, and second, due to the impact of platforms like Pinduoduo's billion-yuan subsidies, JD's unique mindset in home appliances has been challenged. The official reason given for this decline is the high base last year.

Daily necessities continue to maintain strong growth, with revenue increasing by 8.7% year-over-year, further accelerating compared to the previous quarter. The supermarket category's revenue even saw double-digit growth year-over-year.

The earnings report mentioned that the growth in the supermarket category is due to the increase in order volume and user stickiness. Throughout Q2, JD's order volume and purchase frequency also achieved double-digit year-over-year growth, with the entire daily necessities category, including supermarkets, contributing as well. It can be observed that supermarkets are among the core categories of JD's live broadcast rooms and Super 18, which are also one of the core categories for JD to offer low prices.

JD's financial report predicts that "the supermarket category will continue to be an important growth driver."

Indeed, in terms of market share, there is still a lot of room for the online penetration rate of supermarkets and home goods. During this earnings season, not only JD but also Walmart's online penetration rate is increasing. In contrast, Tmall Supermarket did not convey particularly impressive data during this acceleration of daily necessities online.JD.com is a retailer with a self-operated core and a supply chain as its core advantage. Its model dictates that increasing user scale and user activity will always be its pursuit and challenge. Supporting POP merchants and adopting a low-price strategy are essentially aimed at addressing this issue.

Looking at the financial reports, the results of user growth are evident. "The platform's shipping frequency and order volume achieved double-digit growth in Q2," and "strong user growth momentum was observed in both high-tier and low-tier cities, with active users achieving double-digit growth for three consecutive quarters," are all evidence of this.

The challenge lies in how to maintain profit growth while increasing users. Currently, after the consolidation, JD Logistics' high gross margin has driven JD.com's high gross margin. According to the financial report, JD Logistics' high gross margin is brought about by "economies of scale" and "technological improvements."

However, some industry insiders believe that JD Logistics "cannot match the scale effect of the express delivery industry." Looking at the data from Goldman Sachs' research report, "the growth rate of (JD) logistics is not fast." Therefore, there is a view that the high profit growth of JD Logistics may have other factors in addition to those mentioned in the financial report.

In the long run, user growth and profit improvement should also seek methods beyond logistics. The senior management mentioned that JD will continue to adhere to a low-price strategy. This includes leveraging its strong supply chain capabilities in its self-operated business to continuously provide daily low prices for users, "which is the cornerstone of JD's low prices"; in the POP business, enriching cost-effective products to meet the needs of a broader range of users.

At the same time, they also have to emphasize that JD will "take a more comprehensive view of GMV, profit, and cash flow performance," pursuing user growth, user experience and engagement, competitiveness, and the healthy growth of the platform ecosystem.