JD: I'm Up 75% But Holding Out For A Big Buyback Bazooka (Rating Downgrade)

seekingalpha10-07

I initially rated JD as a Strong Buy due to China's economic revival efforts and JD's management improving margins and share buybacks.JD's supply chain investments and 3P business model expansion have...

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SuperDuper1
·10-07
The question is whether JD will continue with buybacks at this level.
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In fact, of all the Chinese companies whose ADRs were listed, JD was the only company that I recommended a Strong Buy at the time.There were two reasons for my confidence in this name. First was my general belief in the sovereign efforts to revive the Chinese economy. Second, and more importantly, was the inherent efforts by JD’s management to steer the company into pole position, which I observed in their margins and share buybacks.These two reasons positioned JD at a unique intersection where it stood to benefit from endogenous and exogenous tailwinds, setting JD apart from the rest of the other Chinese companies.Exhibit A: JD is one of the biggest beneficiaries of the Chinese stimulus package due to its buyback programs (Seeking Alpha)45 days later and ~75% higher since I initiated my bullish note on JD, I am still optimistic on this name, but with the massive move higher, I am altering my thesis to a Buy from a Strong Buy.Why A Big Share Buyback Program Is ExpectedIn my previous research note on JD, I explained why I expected the company’s profit margins to soar 2x because of improvements that management had already made in their supply chains. I noted in my previous note how the company’s supply chain investments were helping JD in its 1P business model, where it sells its products directly to customers, as well as its 3P business model, where merchants use JD’s platform to sell to JD’s customers. JD’s 3P business model is similar to the business models used by its peers Alibaba (BABA) and PDD Holdings (PDD).In addition, the expansion in JD’s 3P business was also being driven by advertisements, again similar to the trends seen in JD’s peers. This meant that despite the single-digit revenue growth that JD was seeing on a TTM basis, JD’s supply chain investments were driving strong 40-bp gains in its operating leverage, with consolidated margins landing at 3.1% on a TTM basis. As seen in Exhibit B below, the majority of the operating leverage expansion was seen due to the 200 bp of operating margin expansion seen in JD’s Logistics business segment.Exhibit B: JD’s operating margins boom due to JD Logistics (Company sources)Keeping that tailwind in mind, I had issued a Strong Buy recommendation on JD in August. But, with the Chinese government agencies recently announcing massive stimulus programs, I expect JD to continue to be a beneficiary.My basis for my conviction lies in the recently announced stimulus program that rewards Chinese companies that plan to buy back their own shares. Companies such as Alibaba, JD, and Tencent have been rapidly buying back shares, and the management of these companies has indicated that they will continue to buy back shares in the near term.Exhibit C: JD and Alibaba have already rapidly started buying back shares this year (Company sources)As can be seen in Exhibit D above, Alibaba and JD are the only two companies from the large-cap US-listed Chinese companies who have been buying back shares and ADRs and returning value back to their respective shareholders.JD's management had mentioned on their recent earnings call that they would continue to repurchase shares “with the goal of gradually reducing the total number of outstanding shares over the long term” while maintaining dividend payouts, “ensuring that shareholders benefit from the company's value creation.”As I had mentioned in a recent article on Alibaba, the stimulus programs were that the Chinese authorities announced ~RMB300 billion in cheap refinancing loans to Chinese companies that would engage in stock buyback programs. These program terms give companies like JD cheap access to liquidity, which I expect will further boost the outlook of companies like JD.JD is still quite cheap at ~11x earningsOn many valuation metrics, JD still appears quite cheap. JD’s market capitalization is still at par with its sales, implying an extremely favorable sales valuation multiple for investors. Even JD’s GAAP forward PE is cheap as it trades at ~15x forward earnings or 12x non-GAAP earnings.Exhibit D: JD’s valuation is still very cheap compared to its peers and to its own history (Seeking Alpha)But I will concede that the massive run-up in JD over the past month has quickly expanded its earnings multiples from the ~9x GAAP earnings I noted in August. For those reasons, I will downgrade JD to a Buy rating, but this is still a strong name given its cheap valuation.Given my outlook on JD, I am still holding on to my shares at the time of writing this note.Risks & Other Factors To Be Aware OfOne of the main reasons that I still believe JD is a Buy is because I anticipate most Chinese companies, such as JD, to announce extended buyback programs in light of the Chinese stimulus programs launched a couple of weeks ago. In case management decides against deploying cash towards share buybacks, the thesis may not stand and the stock may see sharp pullbacks. However, I find that possibility extremely unlikely because management has strongly hinted at announcing such buyback programs in the past.Moreover, the company is extremely well capitalized, with more than $11 billion in cash and equivalents, over $16 billion in short-term investments, and just under $12 billion in debt and other obligations. Management has enough dry powder to deploy towards share buybacks.TakeawayI still expect JD to be a winner given the management’s favorable position on the company’s share buyback programs, which hold even more allure in light of the recently announced Chinese stimulus package.In addition, my view on JD’s expanding profit margins still stands further boosting its growth-led profitability outlook.But with the +70% boom in the company’s stock, I will now move to recommend a Buy rating on JD.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"Shareholding Changes,analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":357453013197008,"gmtCreate":1728278365260,"gmtModify":1728278370112,"author":{"id":"4136897647765072","authorId":"4136897647765072","name":"SuperDuper1","avatar":"https://community-static.tradeup.com/news/default-avatar.jpg","vip":1,"crmLevel":9,"crmLevelSwitch":1,"authorIdStr":"4136897647765072","idStr":"4136897647765072"},"htmlText":"The question is whether JD will continue with buybacks at this level.&nbsp;","listText":"The question is whether JD will continue with buybacks at this level.&nbsp;","text":"The question is whether JD will continue with buybacks at this level.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/357453013197008","repostId":2473198734,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":4,"commentSize":1,"repostSize":1,"favoriteSize":2,"likeStatus":false,"favoriteStatus":false}}