Confidence in annual margin improvement despite greater seasonal fluctuation。    The company in discussions at our conference today reiterated strongconfidence in its prospects for further annual margin improvement. Quarterlyearnings however should see larger seasonal variation, we believe due to risingcompetition, which should persist given Alibaba’s repeated messages aroundreclaiming B2C market share (please see our September 6th Alibaba note titled“Excellent Databank feedback; committed to B2C share reclamation.”)。    BU KPI’s: key drivers to P&L results; weightings occasionally rebalanced。    We believe that JD generally assigns a 50% weighting to GMV growth, 25% toprofitability and 25% to cash flow in the KPI’s that leadership hands to thebusiness units. BU heads meanwhile have significant discretion around whenexactly to utilize investment budget. JD seems to manage profitability on moreof an annual basis, while acknowledging that seasonality between quarters willbecome more marked than in past years as competition during events such as6/18(2Q) and Singles Day (4Q) grows. We maintain our FY17full year non-GAAP net margin of 1.2% vs recently increased guidance of 0.5-1.5%.。    Competition in locking in brands during Singles Day。    Competition with peers, particularly for the pure online apparel brands (e.g.Tao brands), seems to continue to rise. JD.com however sounded increasinglyconfident in keeping the inventories of its growing number of internationaloffline brands. The company acknowledges the need to develop further theexperience for its marketplace brands vs leader Tmall, and has redoubledefforts to leverage platform data into better ad targeting and new programs forits-storefronts. We expect JD to take at least 1-2years to close the gap withAlibaba. We expect R&D expense to rise to support this effort.。    Please join our global summary call, Mon Sep 11th 10am ET/10PM HK time。    Dial in details: Conference ID: 82278820. US Toll-Free Dial-In Number: (800)309-8606; US International Dial-In Number: +1(706) 679-0645; France:    0800909322; Germany: 08001815287; United Kingdom: 08000288438; HongKong: 800966253; China: 4006828609。    Incorporating fulfilment reclassification, Finance spin-out. Maintain US$52PT。    We cut 3Q GM by 80bps and 4Q GM by 20bps as a reflection of competitionand the recent reclassification. These reductions are offset by reducedfulfilment and technology expenses, and increased interest income from JDFinance. We lift FY18/19E revenue by 1%/1% on faster JD Logistics growthand largely maintain FY17/18/19non-GAAP net margins. Our TP is based on anequal weighting of DCF and 1.1x on FY18E EV/Sales. We adopt a 12.3%discount rate and 2% terminal growth. Risks: higher O2O losses, sloweruser/GMV expansion.。

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