JD - JD.COM

[siddharth18]

 

Picture it this way: You're happily riding along in your wagon full of stock certificates until your horse (JD.com) and jockey (Richard Liu) break free of the faulty harness (a Cayman Islands holding company) and run off. Now you have to go to the sheriff (the Chinese Communist Party) to try and get recompense. Better bring your Colt .45 because it might get ugly.

 

 

 

But Richard could have done it in the past, and can in future do it, even if we assume that the sexual assault incident hadn't happened. So in your view does this event, or will an indictment increase the likelihood of Richard doing what you just described?

 

From Richard's point of view - he'd not just be a rapist in the eyes of public, but also a thief which means he can never raise capital again. Plus, the number of investors who would give capital to Richard accused of a shaky sexual assault case is likely larger, because investors only care about execution and return, compared to zero investors who'd give him capital after Richard is accused of theft/fraud.

 

A very likely scenario is him making his wife or a trusted family member or a trusted employee the CEO/Chair but still be involved in leading JD forward due to his substantial economic interest.

 

Also I'm not sure how Chinese government would allow a single and relatively small company stiffing American investors when there are hundreds of billions of dollars invested by Americans in Chinese companies collectively and these companies collectively benefit from having American investors around. The needs of the many (Chinese companies needing American shareholders' trust) outweigh the needs of the one company - JD (that is angry at America). So, logically, wouldn't Chinese government be against JD cheating American shareholders and damaging China's reputation and increase cost of capital for all Chinese companies? I'm not saying Chinese government would send your investment back to you on a silver platter, but there's a chance that Chinese government acts rationally and acts in a way to keep the trust alive and prevent the trust in the ecosystem from plummeting.

 

Based on Richard's previous conduct I think he does deserve the benefit of the doubt as far as integrity involving matters of money is concerned. He refused to sell counterfeits, refused to renege on a verbal promise with Tiger Capital, refused to dilute Capital Today's stake.

[Spekulatius]

I do think that the key man the ist here is real. A conviction of the CEO in the US would not be relevant, but I think the Chinese government will investigate on its own and the outcome of this might well be.

 

Note that the accuser appears to be a chinese national and returned to China. I also think that if Liu indeed atttempted to rape, it would not have been the first time either and he has done similar things in China. So, the key is not what happens in the US, the key is what the Chinese government makes of this. They have put other prominent people in line before and they could do so with Richard.

https://www.cnn.com/2018/09/14/asia/fan-bingbing-china-celebrity-intl/index.html

 

I really don’t know how to handicap this, but ther so can’t be ignored and needs to be discounted, which appears to be what Mr. Market is doing.

[Broeb22]

What is interesting to me is to think about JD without Liu. Without Liu, you still own a business with a lot of tailwinds, and let's be honest, the reinvestment choices at this point are probably executable by someone else (build more delivery infrastructure, and develop website functionality). On top of this, the valuation of the business is significantly cheaper on a P/S basis than Walmart or Amazon have been in the last 10 years.

 

[IanBezek]

I agree key man risk is quite real here. I will likely sell my JD stock if Liu is forced to step down. I don't see a replacement being able to fill in easily, especially given how tightly Liu controls the company and board now. I'm a fairly longtime holder (cost basis in the 20s from 2016 rode it up and back down now)... it's compellingly priced compared to peers, but with any sort of stock with 3-5x potential over the next few years, it could easily drop another 33% as well. Not for the feint of heart.

[siddharth18]

I do think that the key man the ist here is real. A conviction of the CEO in the US would not be relevant, but I think the Chinese government will investigate on its own and the outcome of this might well be.

 

Note that the accuser appears to be a chinese national and returned to China. I also think that if Liu indeed atttempted to rape, it would not have been the first time either and he has done similar things in China. So, the key is not what happens in the US, the key is what the Chinese government makes of this. They have put other prominent people in line before and they could do so with Richard.

https://www.cnn.com/2018/09/14/asia/fan-bingbing-china-celebrity-intl/index.html

 

I really don’t know how to handicap this, but ther so can’t be ignored and needs to be discounted, which appears to be what Mr. Market is doing.

 

Seems like the random actress in the article was accused of tax-fraud and the evidence was brazen and obvious so the authorities were compelled to act to save face and maintain a semblance of law & order. Notwithstanding the alleged rape, I think Liu has enhanced the image of China by providing employment, bringing technology, progress and foreign investment to China (from WMT & GOOG). Are they willing to take him down based on a shaky allegation that even American prosecutors didn't find credible? Another difference is that JD provides provides direct employment to 150k people, so the economic impact of the JD engine slowing or dying is different compared to a random actress goes down.

 

 

Also to note is that Chinese government is not a fan of #metoo and feminism, for what that's worth: https://www.theverge.com/2018/2/9/16897048/metoo-china-feminism-activism

 

I'm trying to imagine how flimsy the evidence must have been for the police, prosecutor and judge to allow Liu's (who btw is the textbook definition of a flight risk) to be released earlier than necessary for the sole purpose of letting him fly back to (one of the only few places on Earth) where he's literally out of reach.

 

stock with 3-5x potential over the next few years, it could easily drop another 33% as well. Not for the feint of heart.

 

Seems like the perfect setup to buy LEAPs.

[Liberty]

https://wondurrrrboy.wordpress.com/2018/09/24/an-update-on-jd-com/

 

https://www.reuters.com/article/us-jd-com-ceo-insight/the-night-a-chinese-billionaire-was-accused-of-rape-in-minnesota-idUSKCN1M40EQ

[pcm983]

that reuters article certainly makes it seem like there could definitely be something to the allegations

[Spekulatius]

that reuters article certainly makes it seem like there could definitely be something to the allegations

 

Looks like too much boozing is a bad idea altogether , see Kavanaugh, Lui.... who would have thought?

[rogermunibond]

Too much booze and you start thinking with the wrong brain.

[siddharth18]

Does not look good at all for Liu. It's also a bit strange though. If someone's in fear of their life do they text their friend abroad or do they call police/911 ?

 

 

But no matter what the truth is, if they did in fact sleep together, what's keeping Richard from writing a $50M check to the girl so that she recants the accusation and essentially says it was consensual ?

 

$50M is a rounding error in his net worth - so what's he waiting for?

[lucasnascimento]

Does not look good at all for Liu. It's also a bit strange though. If someone's in fear of their life do they text their friend abroad or do they call police/911 ?

 

 

But no matter what the truth is, if they did in fact sleep together, what's keeping Richard from writing a $50M check to the girl so that she recants the accusation and essentially says it was consensual ?

 

$50M is a rounding error in his net worth - so what's he waiting for?

 

Imagine if she reports it... extreme downside risk

 

[kh812000]

What is ironic is that all this distraction around Richard Liu has made people overlook the fact that JD's ecommerce biz in China has fundamentally shifted massively to  their benefit based on the new chinese ecommerce law.  If this CEO thing gets cleared, JD should be off to the races....

 

 

https://pandaily.com/how-would-the-new-chinese-e-commerce-law-change-taobao/

 

[Spekulatius]

What is ironic is that all this distraction around Richard Liu has made people overlook the fact that JD's ecommerce biz in China has fundamentally shifted massively to  their benefit based on the new chinese ecommerce law.  If this CEO thing gets cleared, JD should be off to the races....

 

 

https://pandaily.com/how-would-the-new-chinese-e-commerce-law-change-taobao/

 

Very interesting and timely. Thanks for posting!

[Happy]

I agree the article doesn't sound good. That he was seen with the girl before and was at her appartment in the morning should push the probability to like 99% that he slept with her. I don't like that given that he is married but it probably wouldn't fully disqualify his integrity as a CEO. If he in fact raped her on the other hand I would not trust him at all. That is so bad, who knows what other shady things he is doing then?

What seems really weird to me though is that the girl apparently sent messages throughout the night and was able to call the police. If Liu really raped her, he would have to be totally insane to sleep there and allow her to send messages multiple times and call the police someway and let him find him there. Especially given that he is a public figure and married. And it's also weird that the police initially didn't arrest him and she didn't accuse him although she apparently called the police.

The only way I can explain this is that he thought it was consensual and she did not. Or that he in the end was so drunk that he passed out. But why wouldn't she just leave then?

 

[lucasnascimento]

I agree the article doesn't sound good. That he was seen with the girl before and was at her appartment in the morning should push the probability to like 99% that he slept with her. I don't like that given that he is married but it probably wouldn't fully disqualify his integrity as a CEO. If he in fact raped her on the other hand I would not trust him at all. That is so bad, who knows what other shady things he is doing then?

What seems really weird to me though is that the girl apparently sent messages throughout the night and was able to call the police. If Liu really raped her, he would have to be totally insane to sleep there and allow her to send messages multiple times and call the police someway and let him find him there. Especially given that he is a public figure and married. And it's also weird that the police initially didn't arrest him and she didn't accuse him although she apparently called the police.

The only way I can explain this is that he thought it was consensual and she did not. Or that he in the end was so drunk that he passed out. But why wouldn't she just leave then?

 

Good points. However I think you cannot assume that they were still married in the moment he was in Minnesota. You can see that his wife hasnt been posting on Instagram about them since June. A marriage can end overnight and people can get to know it long time later.

 

This whole story is confusing AF

[koshigoe]

https://aibusiness.com/ai-future-chinese-retail-jd/?utm_content=buffer7b0a0&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

[Spekulatius]

Hopefully not a snarky question, but at which point do consider the investors here the thesis is broken. The last quarterly results were nothing to write home about - slowing revenue growth and the growth (25% compared to 30%+) and the improvement in gross margins has stalled too. It looks like they are falling further and further behind Alibaba.

 

I don’t follow this very closely, so I may have overlooked something.

[_JJ_]

Hopefully not a snarky question, but at which point do consider the investors here the thesis is broken. The last quarterly results were nothing to write home about - slowing revenue growth and the growth (25% compared to 30%+) and the improvement in gross margins has stalled too. It looks like they are falling further and further behind Alibaba.

 

I don’t follow this very closely, so I may have overlooked something.

 

From the Q3 earnings call:

Gross margin was relatively stable year-over-year, thanks to the gross margin expansion from the core JD Mall business offset by JD Logistics which is in an investment phase, but has seen sequential improvement in unit economics over the past three quarters.

 

Non-GAAP gross margin in the third quarter was 15.2% compared to 15.3% in the same quarter last year. If we look at JD Mall, gross margin on our direct sales business improved 15 basis points on a year-over-year basis on top of a very strong third quarter last year, driven by continuous increase in economies of scale across all key categories.

[Broeb22]

Hopefully not a snarky question, but at which point do consider the investors here the thesis is broken. The last quarterly results were nothing to write home about - slowing revenue growth and the growth (25% compared to 30%+) and the improvement in gross margins has stalled too. It looks like they are falling further and further behind Alibaba.

 

I don’t follow this very closely, so I may have overlooked something.

 

Why would one quarter of data suggest a thesis is broken? Can you point to something more enduring (and concerning) suggesting the company's competitive position is actually eroding?

 

[Spekulatius]

Hopefully not a snarky question, but at which point do consider the investors here the thesis is broken. The last quarterly results were nothing to write home about - slowing revenue growth and the growth (25% compared to 30%+) and the improvement in gross margins has stalled too. It looks like they are falling further and further behind Alibaba.

 

I don’t follow this very closely, so I may have overlooked something.

 

Why would one quarter of data suggest a thesis is broken? Can you point to something more enduring (and concerning) suggesting the company's competitive position is actually eroding?

 

It’s not one quarter, it’s a string of quarters. There is no evidence that the often cited “flywheel” is actually happening. A stable gross margins is bad news, because the gross margin should have increased with the changes in merchandise and increasing service  revenue, but it doesn’t.

 

The gap to Alibaba is widening, not getting smaller.

[oddballstocks]

I have always wondered when do you pull the plug on busted growth? How long until you know growth is dead or the compounding isn't happening?

[Gregmal]

Hopefully not a snarky question, but at which point do consider the investors here the thesis is broken. The last quarterly results were nothing to write home about - slowing revenue growth and the growth (25% compared to 30%+) and the improvement in gross margins has stalled too. It looks like they are falling further and further behind Alibaba.

 

I don’t follow this very closely, so I may have overlooked something.

 

Why would one quarter of data suggest a thesis is broken? Can you point to something more enduring (and concerning) suggesting the company's competitive position is actually eroding?

 

It’s not one quarter, it’s a string of quarters. There is no evidence that the often cited “flywheel” is actually happening. A stable gross margins is bad news, because the gross margin should have increased with the changes in merchandise and increasing service  revenue, but it doesn’t.

 

The gap to Alibaba is widening, not getting smaller.

 

The thesis IMO was flawed to begin with. This is a classic value investor investment. They want to own AMZN or BABA but are too cheap to pay up for quality so a second rate knock off version like JD with enough of an optically pleasing fundamental profile fits the bill. But at the end of the day it will always be priced at a discount to BABA and for good reason. Better off just paying for quality...

[nkp007]

The thesis IMO was flawed to begin with. This is a classic value investor investment. They want to own AMZN or BABA but are too cheap to pay up for quality so a second rate knock off version like JD with enough of an optically pleasing fundamental profile fits the bill. But at the end of the day it will always be priced at a discount to BABA and for good reason. Better off just paying for quality...

 

Really well said.

[Aqul]

BABA bulls should really take a look at the company's accounting before claiming it is "high quality."

 

Much of JD's CapEx currently is going towards building out the Logistics assets. So, on an FCF basis, the core JD Mall appears somewhat cheap, with free call options on JD Finance and Logistics. Moreover, JD Mall is clearly under-earning (large investments in technology initiatives, 3P delivery operating at break-even, etc.).

 

Obviously, it is tough to separate Mall, Finance, and Logistics, as they all support each other. I'm still doing more work on whether the SOTP analysis makes sense or not. Still, JD is starting to look interesting at these levels.

[lucasnascimento]

JD story turned into a disaster this year because of the unexpected depth of Logistics losses and the much higher than expected R&D investments, which are masking the underlying margin improvement of the business. IMO, it was a execution flaw within JDL (management clearly didn't anticipate the struggle they would have in the first years of operation in convincing sellers to adopt their solution) and also there was a serious communication error, as they could have better communicated the rapid R&D ramp-up and most importantly the insane CAPEX ramp-up for this year. Core business thesis is intact (shift to 3P/Ad which are growing faster, is really driving higher margins), but JDL/R&D led to significant earnings revisions for the next 1-3 years.

 

Those who invested late 2017/early 2018 with the core margin improvement thesis were not wrong. Those unexpected losses, the consumption slowdown and moreover Liu's arrest (!!) have come at the same time. Really really unfortunate.

 

On the flipside, seems like JDL will turn profitable on a gross basis next year (from ~ -20% GM this year - bizarre margin take off) and R&D will stabilize and bear fruit in the coming quarters. Logistics moat seems mostly intact. JDL monetization fund will also begin to yield returns. From a macro level also, the only way for China is up. Consumption rebound will help 3C/electronics.

 

SOTP, P/Sales and P/FCF also point to significant misprice. If JD delivers 80% of FCF they did in 2017 (w/ some capex normalization and no one-offs in CFO like this year), you have a FCF Yield of 8% 2019E. Worth taking a look.