Dear PGM Capital Blog readers,
In this blog edition, we wish to elaborate, why investing in JD.com Inc can be lucrative for growth investors.
INTRODUCTION:
JD.com, Inc., also known as Jingdong and formerly called 360buy, is a Chinese e-commerce company headquartered in Beijing. It is one of the two massive B2C online retailers in China by transaction volume and revenue, a member of the Fortune Global 500 and a major competitor to Alibaba.
The company was founded by Liu Qiangdong on June 18, 1998, and its retail platform went online in 2004.
The company operates in two segments, JD Retail and New Businesses.
JD.com has invested in high tech and AI delivery through drones, autonomous technology and robots, and possesses the largest drone delivery system, infrastructure and capability in the world. It has recently started testing robotic delivery services and building drone delivery airports, as well as operating driverless delivery by unveiling its first autonomous truck.
The company has numerous business units and offers a vast selection of products across every major category. Its core e-commerce business sells electronics, apparel, home furnishings and appliances, among other products, as well as fresh food and groceries.
JD.com versus ALIBABA:
JD.com Inc. and Alibaba Group, both are high-growth players that benefit from digitalization and growing consumer spending in China.
However JD.com and Alibaba operate with different business models as follows:
Alibaba:
Alibaba (NYSE: BABA) is primarily a platform provider, where third-party sellers offer their merchandise while Alibaba receives a platform fee without handling packaging, logistics, etc. themselves.
At its current share price of US$214, shares are down around one-third from the peak that was hit last fall. This underperformance was, in part, driven by the failed Ant Financial IPO and by increased scrutiny by Chinese regulators.
Currently Alibaba’s shares are trading at 24.65 this year earnings and has generated strong growth rates in recent quarters, which indicates that the recent share price underperformance was likely driven by weak sentiment and reluctance to invest in Chinese companies to a significant degree.
JD.com:
JD.com, operates like Amazon, and sells products themselves, which includes handling, transportation, packaging, etc. The company offers also a marketplace for third-party sellers as well, but this is not its primary business.
JD’s shares peaked in February and are down by 33% from the high today, dropping from US$108 to US$72 in a couple of months. As stated above, growing reluctance when it comes to investing in Chinese equities, coupled with some worries about a regulatory crackdown, play a role in JD’s weak share price performance.
At current price JD’s shares are trading at 13.85 times this year earnings, which is very cheap considering its strong growth rates in recent quarters.
The 5-year chart below shows the performance of the shares of JD.com versus the shares of Alibaba.
PGM CAPITAL COMMENTS & ANALYSIS:
The company has strategic partnerships with Walmart (NYSE: WMT), Google-owned Alphabet (NYSE: GOOGL) and China-based Tencent Holdings (0700.HK).
Walmart established a relationship with JD.com in 2016 and owns a 9.8% stake in the company.
Alphabet invested US$550 million in JD.com in 2018, focused on the creation of next-generation retail infrastructure services.
Tencent owns nearly 20% of JD.com stock, based on this JD.com has access to Tencent’s wildly popular messaging and mobile payment service called WeChat, which drives mobile users to JD.com.
The company has achieved double-digit revenue growth every quarter going back several years and has been consistently profitable.
Q1-2021 Financial Results:
On May 19, JD.com reported better-than-expected first-quarter results that beat views on the top and bottom lines, as revenue jumped 39% to US$31 billion, beating an estimate of US$29.8 billion. On the bottom line side, It reported adjusted earnings of 38 cents, vs. estimates of 35 cents.
The annual active customer accounts, a closely watched metric, jumped 29% to USD 499.8 million.
Based on the following reasons, we have initiated our coverage of the shares of JD.com with a BUY rating.
1. Accelerating revenue growth:
| Growth (YOY) | Q2 2019 | Q3 2019 | Q4 2019 | Q1 2020 | Q2 2020 |
|---|---|---|---|---|---|
| Revenue | 22.9% | 28.7% | 26.6% | 20.7% | 33.8% |
2. Accelerating customer growth:
| Growth (YOY) | Q2 2019 | Q3 2019 | Q4 2019 | Q1 2020 | Q2 2020 |
|---|---|---|---|---|---|
| Annual Active Customers | 2.4% | 9.6% | 18.6% | 24.8% | 29.9% |
Source: JD.com
Disclosure:
We do own shares of JD.com in our personal portfolio
In this rapidly changing world with its subsequent turbulence, exponential growth in technological development and coming hyperinflation cycle, PGM Capital is at your service as your Professional, Trustworthy, Dedicated, Financial Advisor and Asset Management.
Last but not least, before taking any investment decision, always take your investment horizon and risk tolerance into consideration. Keep in mind that share prices do not move in a straight line. Past performance is no guarantee for future results.
Yours sincerely,
Eric Panneflek