To The Moon

$JD.com(JD)$

Summary

• JD is still reporting high revenue growth rate - compared to companies like Alibaba or Tencent.
• While JD is facing several risks, the diversified business will most likely continue to grow with a high pace.
• The company also has a very healthy balance sheet with huge amounts of cash and cash equivalents that can be used for share buybacks or growth initiatives.
• In my opinion, JD remains deeply undervalued at this point.

Annual Results

We can start by looking at the annual results for fiscal 2021 and whether JD could report strong growth rates once again. Especially when looking at other major Chinese companies – like Tencent (OTCPK:TCEHY) or Alibaba (BABA) – the retail and logistics company seems to perform better right now. JD could still grow its revenue 23% in the last quarter, while Alibaba could grow 9.7% and Tencent grew only 7.9%.

When looking at the full year results for fiscal 2021, JD generated RMB 951.0 billion in revenue and compared to RMB 745.0 billion in fiscal 2020 this is resulting in 27.7% year-over-year growth. While revenue could increase with a strong pace, total consolidated operating income declined from RMB 12,343 million in fiscal 2020 to RMB 4,141 million in fiscal 2021 – a decline of 66.5% year-over-year. Diluted net income per share also declined from RMB 15.84 in fiscal 2020 to a loss per share of RMB 1.15 in fiscal 2021. And finally, annual active customer accounts increased from 471.9 million in 2020 to 569.7 million in 2021 – an increase of 20.7%.

I mentioned that JD outperformed other high-growth companies like Alibaba and Tencent, which seem to struggle right now. Especially in the fourth quarter, growth slowed down. JD, however, is still reporting strong growth and could increase revenue from RMB 224.3 billion in Q4/20 to RMB 275.9 billion in Q4/21 – an increase of 23.0% YoY. While revenue was still growing with a strong pace, total consolidated operating income declined from RMB 595 million in Q4/20 to an operating loss of RMB 392 million in Q4/21.

JD Q4/21 Presentation

Diversified, Growing Business

We are not only seeing strong growth for JD in the last few years but can also assume that JD will be able to continue growing with a high pace. And JD is becoming a more and more diversified business. First, JD Retail, which is responsible for the biggest part of revenue, can be seen as an already resilient business, that can continue to grow with a solid pace. During the last earnings call, management pointed out that user shopping frequency as well as the range of categories purchased from JD improved in the fourth quarter – driven by a stronger user engagement. Additionally, JD is also focusing on its omnichannel initiatives, and the offline stores and business partners achieved close to 80% year-over-year gross merchandise volume growth in the full year of 2021.

JD Q4/21 Presentation

Additionally, we have JD Logistics, which could grow revenue 28% in the fourth quarter of fiscal 2021 and is now responsible for about 10% of total revenue and could also report an operating income in the fourth quarter of fiscal 2021 (instead of an operating loss in the same quarter last year). And finally, the “New Businesses” were growing 46% year-over-year in the fourth quarter, and these are investments for long-term sustainable businesses, that might contribute to growth in the years and decades to come.

And when looking at analysts’ estimates, we see revenue growth slowing down over the next few years. But revenue growth is still expected to be in the double digits in the years to come.

And while analysts are expecting revenue growth to slow down, analysts are expecting high growth rates for earnings per share in the years to come. Between fiscal 2021 (using adjusted EPS) and fiscal 2025, analysts are expecting earnings per share to increase with a CAGR of almost 40%. And it seems likely, that JD will be able to improve its margins and make especially the “JD Retail” business more profitable. But JD Logistics might also contribute to a higher operating income in the future.

Risks

When talking about JD, there currently seem to be many risks we must consider before making an investment decision. First, the delisting risks that are still surrounding many Chinese companies could also be an issue for JD. Recently, theSEC called out five Chinese companies– including YumChina Holdings (YUMC) – for not adhering to the Holding Foreign Companies Accountability Act, and it is threatening to delist the stocks from US exchanges. And when thinking about companies like Didi Global Inc. (DIDI), Chinese companies are not only facing delisting risks from US institutions like the SEC, but also Chinese institutions. But similar to companies like Alibaba or Tencent Holdings, I do not think that the risk of delisting is high for JD.

A second risk for JD could be the increasing competition in the Chinese e-commerce sector, which is still highly competitive. And other companies like Pinduoduo (PDD) are reporting impressive growth rates and might take market shares from its competitors – including Alibaba and JD. And the competition might get even more intense. In the last two years, COVID-19 was a huge tailwind for ecommerce businesses and growth rates could slow down faster than we imagine in the quarters to come, which might increase the competition between the different players in this market. However, in the short-term, the recent rise in COVID-19 cases in China might be a tailwind for companies like JD, Alibaba or Tencent.

When looking not only at JD or the retail or ecommerce sector but at the Chinese economy, we can also identify some risks. I mentioned these about Alibaba and Tencent.

The biggest problem in China are the high debt levels of nonfinancial corporations. While nonfinancial corporations had to report a debt-to-GDP ratio of 85% in June 2021 in the United States and 103% in Europe, Chinese nonfinancial corporations reported a debt-to-GDP ratio of 159%. And in total, China is facing extremely high debt levels and there is a high risk, that Evergrande was the first domino creating a ripple-effect. This whole situation has the potential to lead China into a major recession and in such a scenario, growth rates and spending of the population will slow down.

And JD would be affected by such a scenario in a similar way.

A final risk is the war between Russia and Ukraine. Not only do many fear that the conflict between Taiwan and China could escalate further in the coming months. China also did not really position itself against Russia and did not condemn the invasion like most other countries did and this could also lead to potential sanctions against China, which will affect Chinese companies – including JD.

Balance Sheet

As I mentioned in my last article, JD has a great balance sheet. But, when making the case for JD being a great investment, we must point out once again how much cash and how little debt JD has on its balance sheet.

We can start by looking at the debt. On December 31, 2021, JD had RMB 4,386 million in short-term debt and RMB 9,386 million in unsecured senior notes. When comparing the total debt to the total shareholder’s equity of RMB 245,572 million, JD has a debt-equity ratio of 0.06. When comparing the total debt to the operating income of fiscal 2021 (RMB 4,141 million), it would take about 3.3 years to repay the outstanding debt, which is acceptable for a company growing at such a high pace (and operating income will most likely be much higher in the years to come – as it has already been before).

But, to be honest, we can ignore the debt JD has on its balance sheet. When looking at the asset side, JD has RMB 70,767 million in cash and cash equivalents as well as RMB 114,900 million in short-term investments. This is more than enough to repay the outstanding debt right away. In case of JD, cash, cash equivalents and short-term investments are 37.4% of total assets (RMB 496,507 million). And with a current market capitalization of HKD 577,037 million (resulting in RMB 468,949 million), cash, cash equivalents and short-term investments sum up to 39.6% of the current market capitalization of JD.

At this point, it is probably no exaggeration to say that JD has a great balance sheet and that JD has enormous financial flexibility due to the current assets it has on the balance sheet.

Intrinsic Value Calculation

We can start again by looking at simple valuation metrics. And as JD is not profitable (once again) and reported a loss per share in the last two quarters, we cannot calculate a reasonable P/E ratio for JD right now. But we can look at the price-free-cash-flow ratio of JD and see the stock trading for 13.7 times free cash flow. This is an extremely low valuation multiple, and we don’t even have to talk about a growth company. A P/E ratio in the low-to-mid teens seems reasonable even for a business that is growing only in the mid-single digits.

But, as JD is a company that can most likely grow at a high pace in the years to come, we must reflect that growth somehow in our intrinsic value calculation. By using a discount cash flow calculation, we can also include growth rates. As basis we can use the free cash flow of fiscal 2021, which was RMB 26.2 billion and seems like a reasonable number to use. Compared to my last article about JD, I would be a bit more cautious and assume 20% growth for the next year, but will also assume that growth will slow down faster than before and that, from fiscal 2030 going forward, JD will be able to grow only 6% till perpetuity. When calculating with 2,679 million outstanding shares and a 10% discount rate, we get an intrinsic value of RMB 387.09 for JD. And as JD is trading in Hong Kong Dollar, the intrinsic value of JD is HKD 476.31. And considering that JD is trading for HKD 215 right now, the stock is trading 55% below its intrinsic value right now.

If these assumptions are realistic, we are looking at an extreme bargain, with JD trading for only half of its intrinsic value right now. And even if growth is slowing down dramatically right now and JD would only be able to grow with 6% from now till perpetuity, we get an intrinsic value of RMB 244 (about HKD 300) and JD would still be undervalued right now.

JD Q4/21 Presentation

When looking at the free cash flow in the last few years, we see that free cash flow was lower in fiscal 2021 than in fiscal 2020 due to much higher capital expenditures. To be rather cautious, I don’t want to use higher assumptions for free cash flow in my calculation, but like to point out that JD has the possibility to generate a much higher free cash flow in the next fiscal year.

Conclusion

And JD is not only undervalued at this point when calculating an intrinsic value by using expected future free cash flows. We must also take into account the huge amounts of cash and cash equivalents as well as short-term investments on JD’s balance sheet. Despite the risks that clearly exist, I think JD is worth a shot. While there is downside risk, an investment in JD could be extremely profitable if the bullish thesis plays out.

This article was written by Daniel Schönberger