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JD.com – Don’t be Fooled by Shiny GMV1

APS Asset Management

Contributing APS Analyst: Sid Choraria
May 20th, 2016

Executive summary:

 Gross merchandise volume (GMV) is a misleading metric due to its very definition. We would discount it by 35-50%.
Using GMV is inappropriate, especially for loss-making companies like JD.com consistently raising capital.

 Incoherent investments in 24 months have led to $1bn impairments. JD CFO on the Bitauto Board from 2010. JD took
a 25% stake and since then, Bitauto stock lost ~70%. Bitauto stock down -13% and -9% in 2 days after Q1 2016 results.

 The assumption that JD’s model will produce adequate profits to justify $30bn price tag is questionable. Core
electronics/household business (>74% of revenues) is unlikely to make relevant money even if scale doubles due to
intense competition. Growing GMV of these businesses do not make sense as cash will have to be burnt.

 China’s big three internet companies, Baidu, Alibaba and Tencent (BAT) make significant profits from core business
and can afford to burn cash in new businesses. We believe JD.com does not have that same luxury.

 Not a surprise that JD raised ~$2bn in last 5 months to finance unprofitable businesses. Fitch2 comments JD may have
a high yield credit profile, while Moody’s/S&P gave it the lowest investment grade rating at Baa3/BBB-. As soon as
banks and investors stop funding JD, its operations may be weaker which is a risk investors must be mindful of.

 Limited tenure of management of ~3 years for a 12+year old company. This pales in comparison with other companies
and does not square with the claim that it is the leading online company in China.

 Reported net selling by insiders (Fortune Rising) and outside large shareholders over the last 12 months.
 JD has been touted as the Amazon of China but it is not comparable for reasons delineated in this report. Amazon does

not obsess about metrics like GMV, unlike JD – a telling sign
 Except for one analyst, nearly 30 sell-side analysts have a buy rating on the stock which can mean that the stock is

over-owned as reported also by the media. Looks like a crowded trade like Valeant?

Key Statistics (as of May 16th 2016) – in US$mm unless specified (December FY end)

Ticker NASDAQ: JD

40 Share price per ADS US$23

35 Peak/current market cap US$50bn/$31bn

30 Core GMV (2015) US$70 billion

25 Electronics/house appliances 74.1%

20 revenue contribution %

15 2015 Net Loss -US$1.5bn

22/5/2014 Accumulated deficit -US$3.1bn
22/8/2014
22/11/2014 Operating cash flow (2015) - US$280mm
22/2/2015
22/5/2015 Founder Voting Rights 81%
22/8/2015
22/11/2015 52 week high / low 38/21.5
22/2/2016

Source: CapitalIQ. Company filings, sell-side research, analyst estimates. Each ADS represents 2 class A ordinary shares. Note: $1 = RMB 6.5.

Source: Company filings, website, press releases, news articles, channel checks, sell-side, industry analysts. Read full legal disclaimer on Page 2.
1 GMV stands for gross merchandise volume. Please refer to definitions on Appendix A.
2 http://www.bloomberg.com/gadfly/articles/2016-05-11/jd-com-stands-for-just-don-t

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Disclaimer

IMPORTANT NOTICE: This APS Company Research (the “Publication”) is strictly for information and general
circulation only and does not have regard to the specific objectives, financial situation and particular needs of
any specific person. It is not, and should not be construed as, an offer or invitation to offer, whatsoever, to enter
into any dealing of securities. Nothing con


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