Everyone's all excited about the BABA and Amazon! But isn't JD the real ecommerce king in China? Wal-mart thinks so.
Key Stats for JD.Com Inc(ADR)
| Ticker | JD |
|---|---|
| Sector | E-commerce & Auction Services |
| Latest price | $41.92 |
| Value | $59,877M |
| Daily vol | $419M |
| Date | 09 June 2017 |
| Links | Yahoo Finance, SEC Edgar, jd.com |
1. Who's JD?
He's not a person, stands for Jingdong. And it's the largest e-commerce business in China by sales, clocking up twice Alibaba's or Tencent's.
But 50% of sales come from electronics and appliances & nearly 60% of sales is direct, so it's not exciting, eh?
Now the business has morphed dramatically in the last 4 years:
- Electronic sales grew 60% a year, everything else 90%
- So it's down to 50% of total sales volume from 65%
- Direct sales, via their warehouse grew 60%, but their online marketplaces, where 3rd parties sell via their websites, grew 100%
- So direct sales is down to 57% of sales from 77%.
Not surprisingly, this has helped cashflows... but more on that shortly. Though remember this is a warehouses business, so it's profile is more Amazon than Alibaba.
To hit that home... they've over 210 warehouses with four million square meters in over 50 cities, and have physcial pickup points in 5,370 places across China. Yes, Amazon is copying JD.
Oh, and don't forget that Wal-Mart owns 5% of JD, they sold their Chinese marketplace to them, have a Sam's Club partnership, etc etc.
How the numbers look?
It's hard not to be impressed by that growth at the top line, but the bottom line is really ugly.
| Metrics | 2012A | 2013A | 2014A | 2015A | 2016A |
|---|---|---|---|---|---|
| Revenue (RMB) | 41bn | 69bn | 115bn | 181bn | 260bn |
| Operating profit (RMB) | -2bn | -1bn | -6bn | -6bn | -2bn |
| EPS | -$2.18 | -$1.47 | -$5.35 | -$3.33 | -$1.36 |
Now, read the management team's latest presentation and they tell a different story! They point to share-compensation schemes and extra-ordinary items hitting the reported figures. In fact, they show a rather different picture from a "free cash flow" perspective!
| Metrics | 2012A | 2013A | 2014A | 2015A | 2016A |
|---|---|---|---|---|---|
| Free cash flow (RMB) | 0bn | 2bn | 1bn | 7bn | 16bn |
Nice? Well, it's 7% FCF margin, which sounds reasonable for the Amazon of China. And given they get paid by customers a lot faster than they pay out to their suppliers... the bigger they get the nicer their cashflow. And given the growth, they've got cash of the books.
Shareholder friendly
Well, show me a Chinese stock listed in the US that is! Though you can say the same about Google, Facebook, Snapchat, Under Armour, etc where the founders have control.
And sometimes the decisions are a little murky. Recently they decided to spin off their finance arm JD Finance. Now they'll get $2bn in cash for their 69% and 40% of all future profits. Which is a similar deal to Alibaba's spin off of Alipay. But still. Why?
Though in case of Alibaba, etc there is the added complexity of you owning an economic interest via a Cayman Islands' entity, rather than actually owning shares in the underlying business.
2. How's it compare?
Shifting electronics via your own warehouses is far from exciting from a margin perspective. The other Chinese majors listed in the US are substantially higher, but they are capital light / software "heavy" businesses.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| JD.Com Inc(ADR) | $41,532M | 1% | -8% |
| Chinese stock in US | |||
| Alibaba Group Holding Ltd | $23,279M | 37% | 18% |
| Baidu Inc (ADR) | $10,534M | 26% | 12% |
| Weibo Corp (ADR) | $736M | 28% | 20% |
| Other peers | |||
| Tencent Holdings Ltd | HK$174B | 41% | 28% |
| Amazon.com, Inc. | $142,573M | 9% | 14% |
Sadly valuation seems to be a little meaningless at 111x earnings. And there are no earnings to hang our hat on either...so let's try and be imaginative...
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| JD.O | $59,877M | 111x | 132% | 0% | 0% |
| CN @ US | |||||
| BABA.K | $352,139M | 32x | 29% | 0% | 2% |
| BIDU.O | $64,505M | 32x | 22% | 0% | 4% |
| WB.O | $16,929M | 51x | 50% | 0% | 1% |
| Others | |||||
| 0700.HK | HK$2,591B | 38x | 32% | 0% | 3% |
| AMZN.O | $482,884M | 151x | 23% | 0% | 2% |
Let's assume they can get to a 5% net margin in 7 years. And the topline growth at 30% per annum, half the current 60%. Then the $42bn of sales becomes $260bn. If we put it on 20x earnings, the stock would growth nearly 25% a year and you've made over 4 times your money.
Change the assumptions, change the result, but it feels like there's some downside protection here. For example if they switched off growth and made 5% margin on their current sales, it would be trading at 30x.
3. Wall Street's hot / the cold on it...
As usual Wall Street can be disfunctional, saying Buy one minute, but they telling you the stock's just worth $43.37, i.e. 3% higher than the current price.
4. China play
China's more complicated than the US, it seems. It's not a set of quasi-monopolies with Google, Facebook, Apple, and Amazon carving out dominant positions. The game is still afoot.
Where the market thinks BABA is the winner, is JD unloved? It looks less so.
It's hard for me to embrace this one immediately, as I'm just not familiar with the China dynamic, but I'm going to watch
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Disclosure:
I have no position in any of the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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Author notes: u/shane_stockflare is a Chartered Financial Analyst.
Submitted June 10, 2017 at 04:10AM by shane_stockflare http://ift.tt/2rcaUsT
