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E-commerce is the new normal in retail sales worldwide.
Several giants are competing for the leadership of sales in Mainland China.
There is however a big winner. And no, it isn’t Alibaba!
Jack Ma’s company is a portal focused on matching buyers and sellers, rather than a marketplace. Moreover, Alibaba doesn’t own inventories or fulfill orders: it makes money through advertisements that charge higher fees for better positioning on the platform.
JD.com instead is the company that we are referring to: it’s an e-commerce marketplace that is focused mainly on B2C sales.
In Greater China, JD.com is the absolute revenue leader and doesn’t fear the competition of Alibaba‘s Tmall or Suning.com.
During 2020, JD.com reached the stunning figure of $ 116 billion in sales, beating even Suning.com by almost three folds.
Are you curious to discover why JD.com is the favourite e-commerce marketplace in China and if it constitutes a buy for your portfolio?
1. The Company
What is JD.com?
JD is a Chinese group that started in 2004 as an e-commerce marketplace under jdlaser.com, after a “need-driven” idea of the founder and current CEO, Richard Qiangdong Liu.
Richard had a small store in Shanghai, and the SARS outbreak made him reason about other ways of conducting his business.
Today, JD.com is a multi-business group, even though it keeps a strong focus on e-commerce and logistics.
As a vision, the company aims to “become the most trusted company in the world” and as a mission “powered by technology for a more productive and sustainable world”.
Both are challenging and aspiring goals. JD is already on its way, equipped with the following core values:
- All in
The three most important sectors of the business are E-commerce, Logistics and Technology.
JD.com is China’s leading one-stop e-commerce platform, with 441+ million active customers. The critical values are the vast selection of products from any category and JD’s logistics network that, together with data-driven technologies, make every purchase smooth and reliable.
It’s not for a chance that JD.com is the go-to e-commerce platform for the Chinese population.
The second pillar of the group reinforces the first one: JD Logistics delivers its products using automated fulfilment centres and capillary coverage of Greater China.
Most products’ delivery happens through this system either the same day or only a day after.
The third pillar of the group structure is the technology part.
Despite being a China-centered company, has opened a Silicon Valley Tech hub in Santa Clara, CA, to research intensely with the best human resources available over the groundbreaking technologies.
JD.com, through this research centre, innovates towards smart logistics and supply chain, as well as Artificial Intelligence and VR Technology.
Ultimately, this hub is also involved in providing a safe e-commerce experience to everyone on the platform: data storage and protection from fraud happen here.
In the next paragraph, we will go through the relevant points of JD.com’s history.
History repeats: SARS as the primer of innovation
- 18 June 1998 – Richard Liu commits RMB 12,000 of savings to lease a four sqm retail unit in Beijing’s technology hub of Zhongguancun. He chooses the name JD Multimedia for this venture.
- 2003 – In light of the SARS outbreak in China, Richard sees an opportunity to shift his business online. He foresees, earlier than most, the potentials of the internet.
- January 2004 – Following the idea nurtured during the outbreak, Richard closes his brick-and-mortar store and moves everything online. This year, he launches the website www.jdlaser.com: the earliest predecessor of JD.com.
- 2007 – The pivot point. JD begins to build the proprietary logistics network, giving birth to an impeccable supply chain that ensures a better customer experience.
- December 2010 – 360buy.com, a domain name in use since June 2007, is an online bookstore.
- Between 2011 and 2013 – JD goes through relevant evolutions: after going internationally, the website of 360buy.com changes its name to the current JD.com.
Strategic Acquisitions Phase
- 2014 – Tencent acquires a 15% stake in JD.com by paying cash and handing over several e-commerce businesses, such as Paipai, QQ Wanggou and a stake in Yixun. All these efforts are towards a simple objective: build a stronger competitor to the Alibaba Group. This partnership gives JD.com exclusive access to Tencent’s WeChat and Mobile QQ platforms.
- In May of the same year, JD becomes China’s first e-commerce platform to offer its shares on the NASDAQ stock exchange, under the ticker “JD”.
- July sets another strategic stone for the future of JD: its “Finance” spinoff, China’s largest crowdfunding platform, is created.
- In the same year, JD.com launches a new Silicon Valley R&D centre.
- In August 2015, JD enters into definitive agreements with Yonghui Superstores Co., Ltd., for newly issued ordinary shares of Yonghui for a value of RMB 4.23 billion. The group now holds 13% of Yonghui’s issued and outstanding shares, as of 31st of December 2021.
- In April 2016, JD completed a transaction with Dada Group, a leading platform of local on-demand retail and delivery in China, contributing with JD Daojia and $ 200 million. Several rounds of financing went by during the years, and currently, JD owns approximately 46% of the issued and outstanding shares of Dada Group.
- June 2016 – JD.com buys from Walmart the Chinese e-commerce business Yihaodian. The transaction concludes with an exchange of a 5.9% equity stake valued at $1.5 billion. This sale is the start of a strategic alliance, with Walmart reaching a 12.1% stake in JD.com quickly.
- December 2017 sees JD entering into a share subscription agreement with Vipshop, regarding newly issued Class A ordinary shares of Vipshop Holdings Limited, a NYSE-listed online discount retailer for brands in China. In the years, JD has accumulatively invested approximately USD$ 600 million in cash to purchase class A ordinary shares and ADSs of Vipshop.
- JD Property is established in 2018. The company has the objective of managing the assets (real estate and integrated service platforms) for other subsidiaries of the group.
Spinoff and Listing Season
- 2017-2019 – JD.com performs several strategic acquisitions. In 2019 the group spun off JD Finance, raising $2.1 billion.
- In January 2018, JD.com entered, along with Tencent, a strategic partnership with Dalian Wanda Commercial Properties Co., Ltd., a leading developer, owner and operator of commercial properties in China. In the contest of the agreement, JD invested RMB 5 billion to purchase the shares of Wanda Commercial Properties from its existing shareholders.
- 2019 – JD.com is the 3rd largest internet company globally.
- Between February 2019 and September 2020, JD Property established a partnership with GIC (Singapore’s sovereign fund) to invest in the management and further development of logistic sites.
- In April 2019, JD completed an investment in Jiangsu Five Star Appliance Co., Ltd., one of the leading offline retailers of home appliances and consumer electronics in China. After having acquired 46% of the company for RMB 1.27 billion, JD fully consolidated Jiangsu Five Star in the second quarter of 2020.
- In June 2019, the group invested RMB 3.38 billion in AiHuiShou International Co. Ltd., an online second-hand consumer electronics trading platform. In the context of this deal, JD merged PaiPai Secondhand business with and into AiHuiShou.
- In November 2019, JD Health completed the non-redeemable series A preference share financing with a group of third-party investors. The total amount raised was $ 931 million, representing 13.5% of JD Health.
- In June 2020, the ADSs of Dada Group commenced trading on the Nasdaq Global Select Market under the symbol “DADA”.
- In August 2020, JD Health completed the non-redeemable series B preference share financing. The total amount of the financing was $ 914 million, representing 4.5% of the ownership of JD Health on a fully diluted basis.
- During the month of August 2020, the group invested in Kuayue Express, a renowned modern integrated express transportation enterprise specializing in “limited-time express service” in China, for a total consideration of RMB 3 billion.
- On December 8, 2020, shares of JD Health commenced trading on the Main Board of the Hong Kong Stock Exchange, under the stock code “6618”. With this procedure, JD Health raised the equivalent of $ 3.9 billion in net proceedings.
- In December 2020, the group invested approximately $ 700 million to purchase preferred shares of Xingsheng Preference Electronic Business Limited, a leading community group buying e-commerce platform that serves community families with fresh foods and daily necessities.
This year’s updates
- On February 16, 2021, JD Logistics submitted the listing application form to the Hong Kong Stock Exchange. There is no set date for the actual moment in which the firm will be offered to investors yet.
- On March 10, 2021, JD Property entered into definitive agreements for the non-redeemable series A preference share financing with co-lead investors Hillhouse Capital and Warburg Pincus. The total amount expected to be raised is approximately $ 700 million. The group will remain the majority shareholder after the completion of the transaction.
- On March 22, 2021, JD entered into a share purchase agreement with Dada Group. With an investment of $ 800 million, the group reaches 51% of Dada Group’s issued and outstanding shares.
- 31st March 2021: the company restructures its AI and Cloud business under a subsidiary named JD Digits. The value of the assets transferred to JD Digits is RMB 15.7 billion. JD now has 42% equity interest in JD Digits.
As the founder of the Chinese e-commerce leading marketplace, Mr Richard Liu holds the governance structure’s apical position, as Chairman and CEO.
The group comprises three underlying different (but interconnected) businesses: e-commerce, logistics and technology.
Any of these three companies has its internal governance structure, which gives enough flexibility to surf the change waves.
Here’s a simple table that describes the overall management team.
2. Qualitative Analysis
Business model and subsidiaries highlights
JD.com group invests in different businesses. However, it’s reasonably easy to spot the main relevant ones.
The B2C online marketplace, which is also the most relevant part of the group, provides Chinese customers with a quick and smooth buying process.
By doing this, JD.com solves several problems: from the fast availability of the products at a reasonable price, to its extended coverage of the entire Greater China.
JD’s e-commerce puts the client at the center of a series of services that make the process of online buying a go-to solution for many. The partnership with Tencent’s WeChat allows clients to pay for their purchases with their preferred payment method: that’s just one of the examples of an all-round service proposition.
The e-commerce marketplace sees both JD.com and third-party vendors compete for providing clients with the best products. However, the group’s Retail sector makes the most significant part of revenues selling proprietary goods: in the year 2019, the net sales reached $ 79 billion, with $ 10.24 billion gained from the marketplace services to third party vendors and logistics services.
Marketplace and advertising services have seen a rapid year on year growth, as the 2015-2019 compound annual growth has gone over 40%.
Distribution is JD’s main strength. In fact, without the impeccable supply chain management and the capillary distribution, the retail marketplace would be simply one of the many that populate Mainland China.
The top 20 Chinese retailers control only 18% of the whole market, while the same number of companies control 48% in the US.
Although logistics don’t play a significant role in JD’s revenues, this business segment’s contribution snowballs: between 2015 and 2019, financial statements have reported a compound annual growth of 77% year on year.
Sources say that the JD Group will offer this part of the group to the market with a Hong Kong Stock Exchange IPO. The goal is to raise $ 3 billion with the offering expected for the first half of 2021.
To exploit even more value from this subsidiary, the group stipulated a joint venture named Dada Group, China’s on-demand logistics and omnichannel e-commerce platform. This venture is yielding already remarkable growth, but an even more substantial increase in value is foreseeable.
This part of the group enhances the other businesses: it is not yielding revenues, but it is helping the different parts of the group to save cash and implement new strategies for a more efficient supply chain management, technology-based.
Just as an indication of how much data flows through the research centre in Santa Clara, CA, the official website states an information transit of 31 petabytes per day. In “human scale”, it equals 31,000 terabytes of raw data.
JD.com is, thanks to these technological advancements, the first company in the world to make commercial deliveries by drone.
JD-X is a smart logistics department inside JD Technology and focuses on automated fulfilment capabilities: drones, autonomous delivery vehicles and automated warehouse technologies.
JD-Y is the division that specialises in researching the smartest way to manage complex supply chain solutions, with Artificial Intelligence (AI) employment.
Together with AI, JD research centre also focuses on the security of their large customer base and AR/VR technology, allowing customers to interactively and safely experience the purchase process.
The newborn of the group is still waiting for full exploitation. Launched in March 2020, this section is a bridge between the retail services of pharmaceutical and healthcare products and services offered by JD.com and a series of free online consultation portals.
Amidst the end of the COVID-19 outbreak in China, JD.com launched this platform to help people regain mental health and support the government’s virus-containing efforts. This subsidiary has been financed during August 2020 by Hillhouse Capital with a series of non-redeemable series B preference shares, for a transaction value of over $ 830 million.
1. Acquisition of smaller marketplaces
Greater China is a florid environment for online marketplaces. The number of small players in the retail market is relevant.
The group could seize this opportunity by consolidating its leading position through a series of acquisitions.
This solution could give JD a tangible competitive further improvement towards other competing marketplaces such as Suning, Sunart, VIP.com.
2. Acquisition of logistic companies
JD.com reached a relative advantage in recent years through the impeccable Logistics and distribution services: its status is being improved continuously and emphasised by acquisitions in this sector.
A clear example of this strategy is the recent acquisition (Aug. 2020) of Kuayue-Express Group Co., Ltd, a modern integrated express transportation enterprise specialised in limited-time express services.
Acquisitions in this area could help improve the weak-ish “fulfilled gross margin”, currently 8.7%.
3. Luxury brands introduction
Several brands from “Western” economies are jumping into the offering inside the marketplace. In particular, last quarter saw a rapid increase of products listed in the luxury category, with notorious names such as the Italian Ermenegildo Zegna, French fashion house Balmain, luggage brand Rimowa and others.
These infiltrations could further improve the retail division’s gross margins, as luxury products are notably high-margin goods.
Competitors and possible threats
JD.com is facing the reality of a somewhat fragmented retail market in Greater China. As already stated, this means that the group has excellent possibilities of remaining at the leadership of the market and slowly conquering a large share of the market pie.
However, some competitors might endanger the group’s current position, since a merger between the second and third player could bring them already in reach of more than 50% of the net revenues produced by JD.com.
Alibaba Group is trying to slowly slide on JD’s business, investing heavily the profits made in the principal business into the development of a logistic network, and of a collection of brick and mortar stores and cross-border e-commerce marketplaces.
Baba recently acquired Kaola, a player that fulfills orders independently and uses a proprietary logistic network. Moreover, Alibaba’s interest in Cainiao rose to 63%, making the odds of the worldwide known group becoming a first-party logistics player high.
JD.com, then, in the following months and years will have to face the indirect competition of a player that can operate on larger scales than the mere direct competitors.
3. Quantitative Analysis
As shown in the table above, revenues have grown at a fast pace during the last years. It is also easily recognisable that JD retail accounts for most of it, and it is the segment that brings the most relevant share of operating income.
As foreseeable, the services segment doesn’t provide a significant amount of external business; however, it enhances the market power of JD Retail.
The most relevant metrics of a business that operates in the retail sector are distant from the figure of sales they produce. It is vital to have a quick return on capital more than a hefty margin in this industry.
JD.com seems to have nailed it since it presents an asset turnover ratio of 2.1, while the median sector value is 0.94.
That said, other metrics are pretty weak, with a mere 8.1% gross margin during 2020, despite having increased the customer base due to the COVID-19 outbreak.
The projections of the revenue figures for our analysts indicate a 24% Compound Annual Growth Rate over the next five years, seeing the growth rate of the company slightly slowing down its previous pace.
Reported on the latest SEC filing, capital expenditure “will continue to be significant for the foreseeable future for improving fulfilment infrastructures, technology platform, and logistic equipment to meet the needs of anticipated growth.”
JD’s growth can be evaluated by the CAPEX to Operating Cash ratio – a metric to gauge how much cash generated from operations is reinvested back into the business. A large ratio would indicate that the CAPEX base is relatively smaller than the Cash Flow from Operations. To translate into context, much of the cash has not been used to reinvest for expansion and growth.
A ratio of 1 indicates that the entire figure of cash generated from operations is entirely reinvested back into the business. JD has allocated significant portions of the cash flow from operations into CAPEX and R&D as the ratio has been close to 1 in the last 3 years.
The company’s growth has been and will be in the foreseeable future driven by their continuing commitment to reinvest back into the business. JD’s financials are aligned with their statement on the annual earnings report to enter into a high growth period as they continue to expand.
The high cost of sales taking up 92% of Revenue leaves thin gross margins. They are unlikely to change as they are directly fixed and move with sales for the retail company. However, Operating Expenses have declined consistently.
This can be pointed out to cost management practices as SG&A have significantly reduced over the last three years: SG&A as a proportion of Revenue have continuously declined 34%, 31%, 29% for years 2018, 2019, 2020 respectively.
Operating Expenses are inflated because (1) Depreciation and Amortisation is allocated into SG&A; and (2) R&D, often treated as a discretionary expense, is included in Operating Expenses. Regardless, the cost improvements help with cash flow and profitability and will continue to do so.
Gross Margins, Operating Margins, and EBITDA Margins are observed to be on the mend. These numbers will be closely monitored as these trends are highly indicative of high profitability in the future. YoY growth for Operating Margins and Profit Margins can outpace YoY Revenue growth if Operating Expense as a percentage of sales continues to improve.
Let’s now move on to the valuation comps!
JD shows mild gross margins and ROI figures, especially if compared to other peers’.
This could be due to its significant investments in infrastructures that weighed on the company’s profitability.
However, JD is listing almost all the subsidiaries on the markets, which will help the implementation of better cash-yielding revenues.
There’s not only one way to evaluate a group.
What we did was a DCF analysis and a Comparable analysis, using different multiples to arrive at the final synthetic price.
The outcomes are divided into three scenarios: the central value is the enterprise value that resulted in a straightforward DCF.
The other two scenarios are built considering the Standard Deviation of the EBITDA multiples of all the peers considered. In this way, we reached a synthetic worst and best scenario.
Using the revenue figures forecasted for the next five years, as per the graph in the 3.1 paragraph, we expect a 24% CAGR.
Expenses are tied to a fixed rate even though historical figures show that costs have been curbed.
The DCF model used has been built using the following values:
- A beta of 0.76
- An equity risk premium of 5.4%
- A risk-free rate of 3.25%
- A cost of debt of 1.55%
- A cost of equity of 7.35%.
The WACC resulted from this input is 7.6%, which has been used as a discount rate for the DCF.
The output of this DCF analysis gave us synthetic price values in the range between $83.42/share (worst case scenario) and $112.12/share (best case scenario), with a more probable and expected target price of $99.53/share.
The analysis of the chart’s price action of JD.com clearly indicates a moment of strong volatility given by the current uncertainty related to a regulatory crackdown.
Trading around the USD$ 71/share area, the charts show a price action ready to recoup a bullish pattern, with interesting buying points already evident around the USD$ 73/share level (the level of the current support 2 pivot point line).
The recent downtrend was probably the cause of a short-selling frenzy fed by bad news regarding regulatory concerns. That said, the company appears in good health conditions and constitutes still a strong buy.
Peter Lynch’s stock category
The legendary investor Peter Lynch categorized stocks based on their characteristics based on six labels: asset plays, slow growers, stalwarts, fast growers, cyclical and turn-arounds.
JD, due to its numerous business segments, is identifiable at least with two categories: stalwart, which signals a large company with moderate growth, and asset plays, which indicates firms with assets that are overlooked by the market.
However, some of the subsidiaries, such as JD Health, can be considered as fast growers, since they expand at incredible paces.
Now let’s address what are the risks that could arise when investing in this stock.
Risk 1: Internal political issues
Beijing has put under scrutiny Chinese tech stocks, which were in some cases, not precisely respecting the government.
Chinese institutions repeatedly fought the apparent nonsense of a capitalist economy inside a communist regime. However, the Ant Financial Services (Alibaba Group) IPO’s recent cancellation serves as a reminder that the political risk is present.
JD.com has a favourable position towards the government because its leadership has always adhered to respectful behaviour, but has recently encountered fines related to Nov 11 (11.11) event sale prices. Nevertheless, the fine amounted to half a million yuan, which is less than $80,000, making it irrelevant for the finances of the businesses involved.
To sum up, internal political dynamics are complicated, especially for large groups, but JD.com can leverage several useful resources to limit the impact of those apparent problems.
Risk 2: Political issues China-US
The relationship between the two superpowers remains delicate, as Biden steps in the White House as the United States’ new President.
Even though we can’t forecast a precise scenario, it is clear that there will be a turn from the policies introduced during Trump’s administration.
Several economists are giving their opinion, and most of them agree that the new President will likely remove some of the tariffs introduced during the Tycoon’s administration.
Removing duties could boost China’s economy for the years to come. However, it could also help the US get out of a tremendously complicated situation such as the one in which it is now, with elevated debt levels, inequality and widespread tensions.
Opinionists debate vigorously about the recent pressures that Trump made on NYSE to delist Chinese stocks that could compromise the US’ safety.
The companies that could be considered endangered from those allegations are only a trio, of which JD.com is not part.
Moreover, with Biden as President, the worries about this topic are slightly fading, at least from JD’s point of view.
In conclusion, JD.com could see the situation getting better in the following months with Biden’s administration.
5. Conclusion & Investment Strategies
JD.com continues to be an exciting company for international investors looking to diversify their portfolio in Asia.
The e-commerce and tech company, in fact, has reached a maturity stage where is cashing out deals with hidden gems that have been incubated for years.
The implied share price, coming from our numerous analyses performed on the company, lies in a safe range of $83.42/share and $112.12/share.
Our price target is set at $99.53.
Right now, the company is strongly undervalued due to regulatory concerns. Still, we are confident that it will recoup its stock price soon, with an escalation to the $80-90 area foreseen in the following months.
The overall judgement is a STRONG BUY until the $82/share area, after which the stock can be considered a BUY until the $100/share mark.
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