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Ahead of its Q3 earnings release, is JD.com undervalued?

CKN
minutes 2018/11/16 07:28:21
2,712
China's Financial News, China News ,JD

Nov 16, 2018 (China Knowledge) - JD.com, China’s second largest e-commerce platform will be releasing the its quarter earnings results next Monday. The company has been hit hard, this year, with its share price falling by more than 40% amid concerns over the Sino-U.S. trade war, macroeconomic slowdown in China and a scandal revolving around their CEO, Richard Liu.

When talking about JD.com, it is often difficult not to draw comparisons with Alibaba. The two companies operate very similar business models in the same segments and markets. So how does JD.com compare to Alibaba?

Taking a look at the companies’ profit margins, Alibaba typically sees margins above 20% while JD.com’s margins hover around the 10% range, reporting a non-GAAP gross profit margin of 13.6% in the second quarter this year. This can be attributed to a slight difference in business model. Alibaba operates as a third-party seller, with merchants plying the wares on the company’s platform while JD.com purchases its goods from suppliers for sale on its platform, acting more as a first-party seller.

In addition, JD.com has also been developing its own in-house logistics system whereas Alibaba has traditionally outsourced its logistics to third parties such as Shunfeng in China. The development of its in-house logistics has put a squeeze on JD.com’s margins but will likely reap returns for the company in the future. Just last month, JD.com announced its move into the parcel delivery business for consumers, signaling that the company is just starting to capitalize on the logistics system it has painstakingly built up over the years.

On the revenue end, JD.com is still seeing strong growth with revenue for the first half of this year increasing by 32% to RMB 222.4 billion from RMB 168.4 billion in the first half last year. The company currently boasts fulfillment centers in 7 cities, front distribution centers in 27 cities and more than 500 warehouses providing coverage for almost all counties and districts in China. Furthermore, it is also expanding into China’s rural economy with innovative solutions such as drone deliver to reach hard-to-access areas in rural China.

One thing to look out for it its Q3 earnings release will be company’s performance in its new business segment which includes its logistics business and other services such as advertising which will be a key driver for the company’s growth in the coming years as it unlocks the potential of its logistic network. The company is currently able to deliver 90% of its packages within 24 hours and it recently, during Singles’ Day festival, introduced a 1-hour delivery system to 63 cities in China. An astounding feat considering the size of China.

Currently, trading at just 0.5 times this year’s revenue estimate, the company looks like a steal when compared to rivals Alibaba which is trading at 7.4 times this year’s revenue estimate, given that e-commerce companies are typically valued based on their revenues.

However, one point of concern for JD.com is the company’s quick ratio which is measured as the amount of liquid assets available against its current liabilities. JD.com’s quick ratio stands at 0.66, lower than similar companies such as Alibaba and Amazon that have ratios of 1.44 and 0.80 respectively. This may also be attributed to the fact that JD.com purchases its goods from suppliers instead of acting as a third-party seller like Alibaba which increases the company’s liabilities. Despite this, given JD.com’s free cash flow of nearly USD 2.5 billion, this is unlikely to pose as a problem anytime soon.

 

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