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Investor Does Fundamental Analysis on JD.com (JD) - Stock Analysis For Beginners

10 Sep 2021

Transcript

00:00 About JD

Recently announced, founder and CEO of tech giant JD.com, Richard Liu, will step away from day-to-day operations and instead switch his focus to the long-term strategy,

The new role of president will fall on Xu Lei to run the company's day-to-day operations. Is this good or bad? Will it affect the business moving forward?

Hey guys, I’m Alex. Welcome to Behind The Stock where I dissect company information and annual report to discover and identify investment opportunities for you. We upload new episodes every Friday! Make sure to subscribe and turn on the notification bell!

Today, let’s talk about JD.com!

JD.com is China's largest online retailer, biggest overall retailer, as well as the nation's biggest Internet company by revenue. They sell electronics products and general merchandise products, including audio, video products, and books. Currently, they have over 500 million active customers!

The company was founded by Liu Qiangdong or Richard Liu and has been around since 1998. If you were to tell young Richard Liu that he would grow up to be a CEO of one of China's largest e-commerce retailers, he probably wouldn’t have believed you. That’s because as a young man, his interest was actually to go into politics. And he didn’t really have this vision for an e-commerce giant.

And now as of 6 September 2021, Richard Liu is worth over 20 billion US dollar! He's also on the Forbes World's Billionaires List of 2021 and The China Rich List 2020. Back to the business! They weren’t always known as JD.com. Over the years, the company’s name has changed several times.

At one point the company was known as Jingdong Century. At that time, they mostly dealt in selling magneto-optical goods. They then launched an online retail site called jdlaser.com and expanded into offering more diversified consumer products.

After a few years, they renamed yet again to 360buy.com and it wasn’t till 2013 that the company decided to rename themselves to JD.com.

Fun fact, the company’s name, JD which is short for Jingdong was actually named after the founder and his girlfriend at the time. Liu Qiangdong and Gong Xiaojing. So, even though they broke up in 2003, the name still stayed! I wonder if she regrets breaking up with him....

Anyway, On 22 May 2014 was the company’s IPO debut on Nasdaq under the symbol "JD". Then last year on 18 June 2020, JD completed their secondary listing on the Hong Kong Stock Exchange under the stock code "9618".

03:40 JD Business Overview

JD.com operates in two main business segments. JD Retail and New Businesses.

For JD Retail, it consists of online retail, online marketplace and marketing services in China. The online retail is JD.com which sells items directly to consumers. They acquire products from suppliers and sell them directly to customers. JD has the largest online product review database in China. By end of 2020, the company sourced products from over 31,000 suppliers and the platform had approximately 7.1 billion product reviews generated by customers.

In terms of the online marketplace segment, it's dedicated to the service of third-party vendors. JD provides transaction processing and billing services on all orders placed on the online marketplace. So, third-party merchants offer products to customers on the JD online marketplace and they pay sales commissions to JD.

As for the marketing services, it complements their online retail and marketplace. Leveraging on AI capabilities and all the data accumulated, JD provides a variety of marketing services to suppliers, third-party merchants, and other business partners. They provide user behaviour insights to brand marketers and third-party merchants. It then becomes a one-stop brand building and sales growth solution.

For the second business segment, categorised as New Businesses, it includes logistics services provided to third parties, overseas business, technology initiatives, as well as asset management services to logistics property investors and sale of development properties by JD Property.

The most notable one is their logistics services which is JD Logistics. They offer a full spectrum of supply chain solutions and high-quality logistics services. From warehousing to distribution, JD Logistics cover from manufacturing to end-customers for regular and specialized items. As of June 2021, JD Logistics operates over 1,200 warehouses! According to the CIC Report, JD Logistics is the largest player in China’s integrated supply chain logistics services market in terms of total revenue in 2020.

Besides that, there’s also their healthcare subsidiary which is JD Health. Currently, it is the largest online healthcare platform in China. By transforming the healthcare industry and making it digital, JD Health is able to provide easily accessible, convenient, high-quality AND affordable healthcare products and services for everyone in China.

JD.com also has a financial technology arm which is JD Digits. The company offers a "one-stop" online investment and financing platform to consumers, startups, SMEs and other businesses in China. It includes supply chain finance, consumer finance, crowdfunding, asset management, payment solutions, insurance, and securities.

06:36 JD Growth

Now let’s see JD’s growth potential.

First is their growing e-commerce market.

The e-commerce market is in a fast growth phase, which means JD could continue to benefit from this rising market. Since JD is in a good dominant position, they can use it to continue to gain market share. However, there’s also possibility that the Chinese government could slow down their growth with the increasing anti-monopoly regulation

Second factor of growth for JD is their paid membership subscription.

JD Plus is an important driver of JD's growth. Shoppers on a membership program are more loyal and spend more, encouraged by special privileges like rebates, free shipping, and other perks. As spending rises, JD gets more leverage to negotiate better prices from suppliers. It can then share these savings with JD Plus members, which leads to even more purchases. Amazon has used Amazon Prime very well to scale their business.

Next is the growth of their younger businesses.

JD is well-known for their e-commerce business. But what's equally impressive is their ability to start, build, and scale new businesses other than e-commerce. Among these businesses, three of them have reached the necessary scale to operate as stand-alone businesses. They are namely JD Digits, JD Logistics, and JD Health!

JD Digits has grown into one of China's major fintech players. It looks well-positioned to grow, leveraging JD's e-commerce ecosystem to provide financial services to consumers and small businesses. 

JD Logistics is riding on the growth of JD's e-commerce business. They also provide logistics solutions for other companies, which accounts for half of the business. This gives the company another engine for growth.

JD Health, as mentioned previously is now the largest online healthcare platform in China!

In terms of Alex Meter, I rate JD’s growth as great!

08:33 JD Moat

Moving on to the competitive advantage of JD.com, I would say it’s their distribution network.

Looking at the China domestic e-commerce field, the three main players are Alibaba, JD, and Pinduoduo. Comparing with Alibaba and Pinduoduo, it’s clear then that the core competitive advantage of JD.com is their logistics arm – JD Logistics.

JD logistics services are good, fast, and delivery time is guaranteed. Only SF Express can match their service, but SF Express does not have the powerful e-commerce platform behind JD Logistics.

One of JD’s biggest competitors, however, is Alibaba. And the biggest difference between JD and Alibaba is around their supply chains. For Alibaba, they are not as laser-focused on supply chain as they are a marketplace first model. Jack Ma at Alibaba preferred to be asset-light, with a focus on volume rather than delivery and customer service. They did not own the inventory of the merchandise they sold.

For JD however, it’s the opposite. JD was starting out with an asset-heavy model by owning inventory and its own logistics network. They are now expanding into the more asset-light marketplace business. JD is benefitting from a headstart and at a great position in terms of reputation due to their quality assurance, authenticity and quick delivery.

In terms of transportation, JD Logistics' digital fleet has nearly 200,000 managed and operated vehicles. In terms of distribution, JD.com has a stable and large team of couriers, and JD.com has covered 99% of the domestic population.

In terms of Alex Meter, I rate JD’s competitive advantage as strong.

10:11 JD Risks

Now let’s understand what some of the risks that JD faces.

First is regulatory uncertainties.

JD hasn't been hit by an antitrust probe or a massive fine like Alibaba yet, but China's State Administration of Market Regulation or SAMR still imposed minor fines against JD over the past year. This is due to their pricing strategies, misleading advertisements, and other antitrust violations.

As of May 2021, the company has received seven fines from SAMR, ranging from 60,000 yuan to 400,000 yuan. This is the equivalent of USD 9,000 to USD 62,000.

As China's largest direct retailer, JD also remains exposed to new antitrust laws. China's new data protection laws, which will go into effect on Nov 1 could affect JD's ability to gather data from their customers.

Another risk to consider also is competition.

The online retail industry in China is intensely competitive. The current or potential competitors include major e-commerce companies in China such as Alibaba Group, which operates taobao.com and tmall.com. Besides that, there's also major traditional retailers in China that are moving into online retailing, such as Suning Appliance Company Limited, which operates suning.com. They also face competition from online retail companies in China focused on specific product categories and from physical retail stores, including big-box stores that also aim to offer a one-stop shopping experience.

In terms of Alex Meter, I rate JD’s risks as medium risk.

11:50 JD Financial

Next on, let's look into the financial of the business. In terms of revenue, we can see that the revenue is growing and it is currently turning losses into profit.

Due to the business nature they have low profit margins. However, if you look at their debt, their current debt to equity is at 0.12x which is acceptable and they're able to generate strong operating and free cash flow.

In terms of Alex Meter, I rate JD’s financial as strong.

12:20 Like & Dislikes about JD

Here’s what I like and dislike about JD.com

What I like is that JD has built a strong in-house distribution network which is able to deliver the best customer experience to end users. In May this year, JD announced that they will offer Delivery in Minutes service in over 200 cities. We know about same-day delivery this one really next level and it’s possible because of JD Logistics’ advanced technology.

Not only that, JD is also launched a new luxury white glove service that changes the experience of shopping for high-end products online. The service, JD Luxury Express, offers personalized delivery by specially-trained JD employees. They are in special uniforms, complete with white gloves, making deliveries in electric vehicles rather than JD’s usual tricycles and scooters.

And because of JD’s business model in which they own the inventory before they sell it, they're able to ensure the authenticity of the goods to prevent fake or counterfeit products.

As for what I dislike, it is that the CEO Richard Liu is stepping away too soon. I would like him to continue to lead and run the business. So, now we need to give Xu Lei, current CEO of JD Retail time to prove himself.

Another thing I dislike is their low margin due to JD’s business nature. Not only that, they also mainly operate in a highly competitive market.

So, after watching my analysis, would you add JD.com into your watchlist?

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Till then, I’m Alex and goodbye!