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Can JD.com Deliver? | EMQQ

JD.com’s stock (JD) reached an all-time low of $19.27 in late November 2018.  Since then, it has rallied over 60% to reach its $30 current price level. 

We continue to view JD stock as offering compelling value.  Many of the concerns surrounding the stock have been either dissipated or have been addressed.  The company’s growth initiatives, namely building out its logistics and international business may present investors with a unique investment opportunity.

What caused JD’s recent price activity and how have these concerns been addressed?

Revenue and margins

JD was not alone in experiencing a sell-off of its shares in late 2018.  Many of JD’s peer, such as Alibaba (BABA), Baidu (BIDU), and Tencent (TCEHY), collectively referred to as the BATS, also sold off in late 2018 due to concerns about the Chinese economy and the trade war with the United States.  However, JD has its own unique issues that went beyond the mere economic malaise.

According to an article in InvestorPlace, investors were concerned about JD’s slowing revenue growth and declining profit margins.[1]  A good portion of the slowing revenue growth could be attributed to the overall slowing in the Chinese economy.  The company also attributed the margin compression to investments in growth initiatives like logistics, cloud, and international expansion.  While these projects may contribute to long-term growth, they can eat away at short-term profit margins.

The Rally

A more recent InvestorPlace article highlighted that the company’s fourth quarter earnings report shed some clarifying light on matters and may have helped investors become more bullish on the stock.[2]

First, the company beat earnings expectations.  In addition, the company gave some clarification on its underlying business that investors, based on stock price action, viewed positively.  For the core business, what the company calls JD Mall, operating income, in local currency, rose from RMB4.96 billion in 2017 to RMB7.05 billion in 2018, which implies a rise in operating margin from 1.4% to 1.6% according to the article.

The article went on to note that slim margins in its core business, along with upfront spending in areas like logistics, international expansion, and customer acquisition costs are primarily responsible for the company’s losses.  In essence, the company is spending now to finance future growth.

Logistics - a clear distinguisher

While Alibaba is called the “Amazon of China,” JD’s business model is closer to that of the U.S. giant.  While Alibaba acts as an intermediary between buyers and sellers, JD owns the majority of its inventory.[3]  As a result, it has, and continues, to build out its logistics infrastructure.  During April 2017, JD created JD Logistics, an independent, standalone subsidiary that would provide logistics for its own business as well as outside companies.  It is anticipated that the company may IPO in the future.

International expansion

Over the past two years, JD has moved aggressively into Indonesia, according to InvestorPlace which noted that in 2017, the company made a $100 million investment in ride-hailing company Go-Jek.[4]  It later made a $500 million investment in a fintech and ecommerce solutions company.  In 2018, JD opened a cashless store in Jakarta and launched JD.ID, a virtual store-shopping experience.

Googling JD

During 2018, Google parent Alphabet Inc. (GOOGL, GOOG) invested in JD through a purchase of 27 million JD shares.[5]  The investment will give JD more cash to build out its logistics capabilities and to fund its international expansion, particularly into other areas of Southeast Asia.  According to the article, Google and JD will work on unspecified initiatives which will combine Amazon’s technology with JD’s infrastructure.  The deal will also allow JD to sell through Google Shopping in multiple regions.

JD - In a flash 

JD.com also has a 7% ownership stake in Chinese ecommerce company Vipshop which offers discounted merchandise online via a flash sale strategy.

Summary

To be sure, JD stock, trading at 33X forward earnings and 4.6X book value (as of 4/9/19) is not cheap.[6]  Although the company’s profit margins have deteriorated, it is because the company is spending to fuel future growth.  The company’s international expansion and the build-out of a standalone logistics company may continue to distinguish JD from its competitors and present investors with future value. 

We continue to view JD.com stock as a compelling value.

Find out more about the EMQQ Emerging Markets Internet & Ecommerce UCITS ETF (EMQQ)

As of 24th June 2019, the Emerging Markets Internet & Ecommerce UCITS ETF (EMQQ) held 5.18% of its weight in JD.com. 

Read our EMQQ Whitepaper "The Great Confluence" here

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