To The Moon

In an earnings season replete with mentions of "AI" and "autonomous technology", the earnings release by Chinese e-commerce giant JD.com Inc ( $JD.com(JD)$ or $JD.com, Inc.(JDCMF)$) - which easily ranks in the Top 5 or Top 10 e-commerce companies worldwide - stood out in that there was virtually no mention of either, despite sustained efforts in AI, Big Data and robotics over several years, continual development of drones for delivery for the better part of a decade, and the release of a ChatGPT-like large language model for enterprises last year. The company was deemed to have beaten analysts' expectations by a handsome margin, leading to a near-immediate rally in after-hours session on the day of the earnings release as well as pre-trading session on the 7th of March. There are several encouraging trends in key line items that highlight how far the company has come in five short years. 

Trend Drilldown

While the company does offer a series of apps for individual buying, group buying for greater discounts as well as on-demand delivery, it's somewhat unfair to deem the company as solely an "e-commerce company": the company is also (arguably) China's largest "physical" retailer through malls, convenience stores, wholesale marketplaces and pharmacies. The company's extensive logistics network (which includes an all-cargo airline) is available for other commerce players as well as industrial supply chains. 

The company's work has already found significant instituitional buy-in: the warehouse infrastructure funds have GIC (Singapore’s sovereign wealth fund) and Mubadala Investment Company (Abu Dhabi's sovereign fund) as partners, along with investment houses Hillhouse Capital and Warburg Pincus. Walmart and Tencent ( $Tencent Holding Ltd.(TCEHY)$ or $TENCENT(00700)$) own stake in the company itself while Shopify is a strategic partner. 

An examination of revenue trends between segments and key line items begins to reveal the factors behind this institutional fervour:

While the company's mainstay has always been the sale of electronics and appliances, the unlocking of logistics solutions very efficiently picked up the eventual slack wrought by intensifying competition. Over the course of six years, cost of revenues maintained a firm ratio while net income and free cash flow showed some fluctuation as the company continued to build out new solutions and facilities for services. 

Examining key line items on a first-order (i.e. "year-on-year") basis as well as second-order (i.e. "rate of change") to consider any possible deeper trends yields some further context:

With respect to first-order terms:

• Outside of 2021 when Logistics became a separate business segment, net income has remained positive and growing.

• Outside of 2021, income from operations has been strong and growing, although growth has slowed down a little in 2023. 

• Cost of revenue largely paces alongside revenues and is even showing signs of decreasing relative to revenue increases. 

• Free Cash Flow is a mixed bag with a drop in 2023 but nonetheless is positive. 

Second-order trends are mixed and indicative of substantial spends to keep the business growing. However, when juxtaposed with first-order trends, there are no significant concerns. 

Net income per American Depositary Share has had the biggest growth at 130% relative to 2022. Even here, 2021 was the only time since 2019 when this metric was negative. 

Investor Sentiment: U.S. vs China

Each JD.com American Depositary Share equals two Chinese shares. Unlike with the comparison done for Baidu and NIO’s earnings, however, the comparison reveals sentiment to be fairly even-handed in both countries. 

Through 2023 until the 6th of March, the Chinese share had declined 60.2% but the ADS had declined 56.1%. Daily traded volumes in both types are generally close to each other with the ADS being traded a little more. 

The slight uptick in traded volume in the ADS can be ascribed as the reason why there's a slight difference in valuation on any given day. On the balance of it, there is no significant disparity in conviction. 

"However" and Conclusion 

Much like JD's malls, the company seems to have a little bit of everything, with most of it being quite good. However, there are also a few areas of concern to bear in mind. 

The company announced a share repurchase program of up to $3 billion worth shares (including ADSs) over the next 36 months through March 2027. Unlike with NVIDIA, this isn't a regular occurrence: the last time a similar program was pursued was in December 2018, which ran for one year for a maximum amount of $1 billion. Share repurchases tend to buoy valuations since there's a high likelihood of finding at least one potential buyer: the company itself. Given the time frame, it could be assumed that the company's laying a safety net of sorts for the average investor. There might be a reason for this.

The company's high-profile on-demand delivery platform Dada Nexus (which was spun off into its own stock $Dada Nexus Limited(DADA)$) was subjected to internal inquiry regarding overstated revenues and expenses, which cause the stock to lose half its value overnight. Dada's president confirmed, one day after the main company's earnings release, that fraud had in fact been perpetrated and that he's stepping down. While the company asserts that this was only in Q3 2023, there will also be questions as to whether it was only one quarter or more and if the main company has similar issues. Thus, a substantial amount of reputation degradation is impacting the stock valuation of both the main company as well as the separately-listed subsidiary. 

As it stands, the company's reduced free cash flow situation might be a persistent feature over the next year or so; a large portion of the sales achieved over the final quarter of the year was achieved through aggressive discounting to attract consumers paring down spending amidst economic headwinds. At the same time, the company is considering diversifying its target audience by acquiring British white goods retailer Currys, which is active across  Britain, Ireland, Sweden, Norway, Denmark and Finland.

On the other hand, the company announced its first ever dividend, a relative rarity in high-conviction Chinese companies sought out by foreign investors. At $0.76 per ADS, the implied dividend yield is approximately 3%. This too might be a sign of assuring investor confidence but the language employed doesn't suggest that this will be a regular feature. 

Macroeconomic conditions raise the question as to how long can the discount regime be effective in propping up sales while the company continues to find new means of reducing costs and monetization. All in all, it's a "wait and see".

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For broader articles that deep-dives into business and culture in Asia, visit asianomics.substack.com. The latest article summarizes all of the talking points featured in media outlets regarding Nvidia’s earnings and the ongoing US sanctions regime regarding tech exports to China.