JD.com – Don’t be Fooled by Shiny GMV

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?

Full pdf here

JD GMV