JD - JD.COM

[walkie518]

Interesting thread, the short rebuttal was a good read.  Both sides seem to have good points.

 

I haven't followed this name closely, I know it's a hedge fund hotel, but a short based on valuation seems a little shaky here.

 

China is an interesting market.  Before the 08 crash there was a LOT of China hype too, no one could go wrong buying Chinese equities.  It's a strangely fascinating thing, I get that it has 1b+ people and is undeveloped.  But so is India, and India gets zero investment attention.  I understand that non-Indians can't buy Indian equities, but China is the same.  You're buying into a VIE that has a contractual relationship with the underlying entity.  Why can't they do this in India?

 

 

Do longs look at this as a buy and hold forever deal? Or is it more of a growth isn't being valued, so you buy until it's valued?

 

It amazes me how readily investors in Chinese companies via this structure disregard the risk of waking up one day to find that they now own nothing more than a tiny interest in a Cayman Islands PO box. Or, less flippantly, the principal-agent problem already looms large in investing, why invest in a situation in which the "agents" (management and the Chinese communist party) are completely beyond the reach of the "principals" (foreign investors)?

 

My thinking is that if it looks like a duck, walks like a duck, and quacks like a duck...

 

there are no other options other than the VIE structure to transfer ownership of earnings rather than the ownership of Chinese-owned assets ... the most sophisticated attorneys and investors came together to make the vehicle for purpose of opening the US capital markets to Chinese companies; I think this is here to stay and investors either get comfortable or don't buy the shares

 

JD may have its own problems, maybe there's fraud, maybe tons of fake product, but these are company specific matters that should get ironed out by investor due diligence, I would think Google likely took a good look though, of course, validation doesn't mean verification

[Liberty]

Wiedower Capital 1h18 letter, contains a long section about JD:

 

http://wiedowercapital.com/files/Letter1H18.pdf

[randallchsu]

Wiedower Capital 1h18 letter, contains a long section about JD:

 

http://wiedowercapital.com/files/Letter1H18.pdf

 

JD is a pretty good place to buy things. I would continue to use their services, but I think the emphasis on logistic and customer satisfaction is overblown.

 

First of all, logistic infrastructure is crazy good in China, so the marginal benefit is at best like a domestic short-haul flight. Unless you are a higher tier frequent flyer member, you don't really care which carrier you fly with.

 

The most important thing is price and selection. I recently bought four pieces of apparel on Tmall from Massimo Dutti (a brand of Zara), and they arrived next day from Beijing to Shenzhen with impeccable packaging and delivery.

 

Although Alibaba doesn't control the logistic, built-in incentive structure will ensure the delivery experience is satisfactory. The Cainiao network is the Uber of courier delivery services, each delivery guy is responsible for his own P/L, and if he gets many poor ratings from customer feedback, that'll impact his income.

 

In terms of customer satisfaction, JD changed the T&C of the plus member program during my membership period, so I got less vaule than what was originally promised. It caused an uproar from many plus members and plenty reporting on this in Chinese, one example (https://www.ithome.com/html/it/348644.htm).

 

I got plenty of bad experience with JD. More than half a dozen of time, a JD delivery guy would just put my package outside my door without telling me (viewing it from the positive side, business is too good for delivery to handle). Item went missing, and I had to contact customer service multiple times for help. Every time the online CS promised someone will call me to follow up but never did. Finally after about a month, a JD delivery guy just showed up with the item.

 

The future of retail is evolving extremely quick in China. I used to order plenty of grocery using JD's on demand delivery Dao Jia. Ever since a Hema Supermarket opened up nearby, I moved all our household grocery spending to Hema.

 

So my point is probably there are plenty of bad experience to talk about with any of the retail platforms in China. In the end, the experience is not significantly different and the differentiation is quite small and could easily be disrupted. You can pretty much find all the SKUs that's on JD either on Taobao or Tmall.

[thowed]

Many thanks for your personal insights - it's hugely valuable.

 

The JD.com story has been quite compelling, but I think a lot of people (including myself) are limited in our understanding by not being 'on the ground' and actually experiencing it.

 

[Liberty]

11-minute interview with Richard Liu:

 

[hillfronter83]

An interesting article from New Yorker talking about JD and eCommerce in China.

 

https://www.newyorker.com/magazine/2018/07/23/how-e-commerce-is-transforming-rural-china

[randallchsu]

iqiyi recently ran a promotion with JD.

 

For 89 rmb*, a buyer gets one year iqiyi gold vip and JD plus. And the buyer can purchase the promotion package twice, so that's two years of services for 178 rmb*. If the buyer already has JD plus and paid 178 rmb*, the plus membership will automatically extend for another 24 months.

 

iqiyi and JD are both likely to report skyrocketed membership level for this year.

 

*if the buyer purchased via cash-back sites, that's another 20% cash rebate

[blainehodder]

I just don't get why this continually sells off. It trades sub 1x rev with massive growth and a massive runway.  Yes it is capital intensive but even with a tiny future margin they are worth min 2x the current mcap.  It can't all be explained away by trade/currency war fears.  Yes BABA is a huge competitor but JD is well financed and has the backing of Tencent and Walmart. It just doesn't make any sense to me. It doesn't look like a failing company, but it certainly trades like one.

[lucasnascimento]

I just don't get why this continually sells off. It trades sub 1x rev with massive growth and a massive runway.  Yes it is capital intensive but even with a tiny future margin they are worth min 2x the current mcap.  It can't all be explained away by trade/currency war fears.  Yes BABA is a huge competitor but JD is well financed and has the backing of Tencent and Walmart. It just doesn't make any sense to me.

 

Me neither.

[Liberty]

I just don't get why this continually sells off. It trades sub 1x rev with massive growth and a massive runway.  Yes it is capital intensive but even with a tiny future margin they are worth min 2x the current mcap.  It can't all be explained away by trade/currency war fears.  Yes BABA is a huge competitor but JD is well financed and has the backing of Tencent and Walmart. It just doesn't make any sense to me. It doesn't look like a failing company, but it certainly trades like one.

 

They are also backed by Google, with a recent investment of half a billion.

 

Shanghai's index is down about 20% year to date, so that certainly doesn't help.

 

Saw a rumor today that Hillhouse and Tiger Global sold out. No idea if true, but could explain some pressure on the price.

 

If you have conviction that it's worth a lot more than where it's trading at, it's an opportunity.

[winjitsu]

No position, but I'll happily play the other side.

 

I think people think JD is the next Amazon platform play where one subscription gets you access to videos music shopping etc but in China, JD is just for commerce and I'd argue Tencent is the real platform play (you use the wechat portal to access music, videos, shopping, use wechat currency etc.). Also China is slightly different because we see federation of companies teaming up, so the value is spread between the members of the federation and you can't have certain segments like AWS subsidize money losers like Video / Alexa etc like Amazon. Result is a weaker flywheel.

 

Walmart is dumb e-commerce money. If anything this is a contra-indicator.

 

Market will be winner takes all, Alibaba is winning in that regard. I ask my Chinese national friends where they do their online shopping -- majority use Alibaba over JD.

[fareastwarriors]

No position, but I'll happily play the other side.

 

I think people think JD is the next Amazon platform play where one subscription gets you access to videos music shopping etc but in China, JD is just for commerce and I'd argue Tencent is the real platform play (you use the wechat portal to access music, videos, shopping, use wechat currency etc.). Also China is slightly different because we see federation of companies teaming up, so the value is spread between the members of the federation and you can't have certain segments like AWS subsidize money losers like Video / Alexa etc like Amazon. Result is a weaker flywheel.

 

Walmart is dumb e-commerce money. If anything this is a contra-indicator.

 

Market will be winner takes all, Alibaba is winning in that regard. I ask my Chinese national friends where they do their online shopping -- majority use Alibaba over JD.

 

 

This is pure speculation. Doesn't Tencent own like ~18% of JD? Any chance Tencent takes out JD to compete directly with Alibaba? One stop shop.

[chrispy]

Yes, they own an amount right around there

[petec]

I just don't get why this continually sells off. It trades sub 1x rev with massive growth and a massive runway.  Yes it is capital intensive but even with a tiny future margin they are worth min 2x the current mcap.  It can't all be explained away by trade/currency war fears.  Yes BABA is a huge competitor but JD is well financed and has the backing of Tencent and Walmart. It just doesn't make any sense to me. It doesn't look like a failing company, but it certainly trades like one.

 

I'm new to the name. Mind if I ask how you value it? I get that it's <1x sales but that alone doesn't necessarily mean much. You have to make a margin assumption. If you assumed 2% net margin on RBM600bn of sales you're still on 29x. Should margins, or sales, be much higher than that any time soon? Genuine question - I don't know, I'm just reading as much as I can. But it's not immediately obvious how it's worth "min 2x" from here.

[blainehodder]

I just don't get why this continually sells off. It trades sub 1x rev with massive growth and a massive runway.  Yes it is capital intensive but even with a tiny future margin they are worth min 2x the current mcap.  It can't all be explained away by trade/currency war fears.  Yes BABA is a huge competitor but JD is well financed and has the backing of Tencent and Walmart. It just doesn't make any sense to me. It doesn't look like a failing company, but it certainly trades like one.

 

I'm new to the name. Mind if I ask how you value it? I get that it's <1x sales but that alone doesn't necessarily mean much. You have to make a margin assumption. If you assumed 2% net margin on RBM600bn of sales you're still on 29x. Should margins, or sales, be much higher than that any time soon? Genuine question - I don't know, I'm just reading as much as I can. But it's not immediately obvious how it's worth "min 2x" from here.

 

 

Margin expansion should happen in the next 3-4 years to 4%+ in my opinion. While GMV is about 1/3 to 1/4 of the closest comp, ad rev is 1/10th - Ad revenue growth will drive material margin expansion. Further logistics margin on rapidly increasing 3p sales will again drive expansion. Combined with the rapid revenue growth, it is highly likely JD is trading with a large discount. Your 29x becomes more like 14x  for a company with an endless growth opportunity and revenue growth rates likely sustaining above 30% for years.

 

 

 

[lucasnascimento]

I just don't get why this continually sells off. It trades sub 1x rev with massive growth and a massive runway.  Yes it is capital intensive but even with a tiny future margin they are worth min 2x the current mcap.  It can't all be explained away by trade/currency war fears.  Yes BABA is a huge competitor but JD is well financed and has the backing of Tencent and Walmart. It just doesn't make any sense to me. It doesn't look like a failing company, but it certainly trades like one.

 

I'm new to the name. Mind if I ask how you value it? I get that it's <1x sales but that alone doesn't necessarily mean much. You have to make a margin assumption. If you assumed 2% net margin on RBM600bn of sales you're still on 29x. Should margins, or sales, be much higher than that any time soon? Genuine question - I don't know, I'm just reading as much as I can. But it's not immediately obvious how it's worth "min 2x" from here.

 

 

Margin expansion should happen in the next 3-4 years to 4%+ in my opinion. While GMV is about 1/3 to 1/4 of the closest comp, ad rev is 1/10th - Ad revenue growth will drive material margin expansion. Further logistics margin on rapidly increasing 3p sales will again drive expansion. Combined with the rapid revenue growth, it is highly likely JD is trading with a large discount. Your 29x becomes more like 14x  for a company with an endless growth opportunity and revenue growth rates likely sustaining above 30% for years.

 

This. And you didn't even mention the product mix away from electronics.

 

JD doesn't need to destroy BABA for the thesis to play out. Both will do fine.

 

JD's margin expansion is a secular tailwind that will reward the patient investors, given today's multiples.

[Jurgis]

company with an endless growth opportunity

 

Jedi will crush the Galactic Empire and expand beyond!  8)

 

 

 

 

Sorry, not picking on you.... well maybe a bit.  8)

 

 

[lucasnascimento]

https://www.forbes.com/sites/lukeschiefelbein/2018/07/25/is-jd-com-the-future-of-chinese-e-commerce/#7321585737db

[peluche]

JD.com Chairman Richard Liu Arrested in U.S. in Sexual Misconduct Case

 

https://www.nytimes.com/2018/09/02/business/richard-liu-arrest-minnesota-china.html

[Liberty]

Possibly more detail... Things still unclear.

 

 

[lucasnascimento]

Valuation is just madness.

 

JDF valued at 20B (36.4% profit sharing to JD, convertible to equity interest or one time market value payment), JDL valued at 13.5B (JD owns 81.4%); JD Mall (core business) then is valued at 42B-13.5*0.814-20*0.364 = 23.7B or 0.33X 2018E SALES (IT IS GROWING 31%) and 9.5X FCF (if you think 2017 FCF is the normalized one - in my view normalized CAPEX is half than that given high investments in land).

 

I mean...Don't know what to say anymore...

[SnarkyPuppy]

Valuation is just madness.

 

JDF valued at 20B (36.4% profit sharing to JD, convertible to equity interest or one time market value payment), JDL valued at 13.5B (JD owns 81.4%); JD Mall (core business) then is valued at 42B-13.5*0.814-20*0.364 = 23.7B or 0.33X 2018E SALES (IT IS GROWING 31%) and 9.5X FCF (if you think 2017 FCF is the normalized one - in my view normalized CAPEX is half than that given high investments in land).

 

I mean...Don't know what to say anymore...

 

There's a lot of incredible value in China - but it's just much more difficult to get comfortable as a minority shareholder.

 

Two examples that are immediately obvious:

-  YY is growing at 10-20% a year and trades between 2x to 3x (depending on assumptions) FY2019 free cash flow.

-  SINA owns a 56% stake in WB (weibo).  Weibo is publically traded for ~$17bn.  SINA trades at ~$5bn.  Sina's ownership of Weibo alone is almost 2x the market cap of Sina.  In addition, you get $1bn of cash and a handful of chinese investments (including Alibaba investment made in 2011). 

 

Just absurd valuations all over the place.  In some ways it feels like Buffet describing his early days of flipping through handbooks and just finding solid businesses trading at 2-4x price.  In other ways, it's obviously different given the corporate governance issues over in China.  With that said, Munger and Li Lu are very transparent about the prospects of China right now. 

[cameronfen]

There are people that claim even BABA have inflated GMV and other factors.  Thus it's not clear you are getting what you are are listed in the financials even with a company like BABA much less JD. 

 

Another note: YY is a very sketchy company.  If you visit the site, it's obvious that the company makes most of its money from people paying women to flirt and undress themselves on video.  Do you trust a Chinese business like that to accurately state its financials?  I dont know, so it's in the too hard. 

[mwtorock]

no position

 

For every buyer, there is a seller. In the case of JD, the sellers are tiger and hillhouse. Rumor has it that they both are out of JD position in Q3, but hillhouse really started dumping in Q2. So anyone buying now is confident that he or she knows better about JD than hillhouse?

 

[SnarkyPuppy]

There are people that claim even BABA have inflated GMV and other factors.  Thus it's not clear you are getting what you are are listed in the financials even with a company like BABA much less JD. 

 

Another note: YY is a very sketchy company.  If you visit the site, it's obvious that the company makes most of its money from people paying women to flirt and undress themselves on video.  Do you trust a Chinese business like that to accurately state its financials?  I dont know, so it's in the too hard.

 

That's an inaccurate statement - but variant perception is where money is made and the headline is partially why you can buy a growing business for 3x FCF.  There are issues with the company, both idiosyncratic and regulatory, but they do not make the majority of their money paying women to flirt/undress.  And if they did - I'm not entirely sure that is directly related to their financial disclosures. 

 

Sorry to derail - there's a separate thread on YY if you would like to discuss further.