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Is JD.com The Amazon of China?

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JD.com is one of China’s largest e-commerce company by revenue and transaction volume and a member of the Fortune Global 500.

Founded in 1998 in Beijing, China by Liu Qiangdong – or by his English name Richard Liu – JD.com has come a long way since starting out as a brick-and-mortar electronics shop called 360buy.

In 2004, JD.com went public exchange for the first time, listing on NASDAQ and raising $1.8 billion in the process to expand its global ambitions, including retailing opportunities in Southeast Asia, US and Europe.

The company has 321.3 million annual active user accounts as of 2Q 2019, has fulfilment centres in 7 cities, owns about 600 warehouses and has operational coverage of almost all districts in China, serving even the far-reaching areas of Lhasa, Urumuqi, Harbin and Haikou.

JD.com is backed by large companies like Tencent, Walmart, and more recently, Google, having invested US$550m for a stake in the company to collaborate on a range of strategic initiatives including joint development of retail initiatives in other parts of the world and battle rivals like Amazon.

Often compared to Alibaba’s Tmall and Taobao in terms of e-commerce prowess, JD.com operates on a rather distinct model resembling Amazon, choosing to focus on its logistics network, relentless customer-focus and industry partnerships.

Introduction and macro factors

The Chinese retail landscape is expected to be boosted by the rising middle class, growing consumption habits of both domestic and foreign goods and improved shopping and customer experience on online-to-offline channels.

According to the National Bureau of Statistics of China, the Chinese retail market has grown at a 10.1% CAGR from 2012 to 2018, and the online retail market has grown even faster, at 36% CAGR during the same period.

Despite the slowing growth of China and headwinds from the trade war, the online retail market story continues to hold strong and is expected to continue growing at 20% CAGR over the next 3 years.

The number of Chinese internet users has also surged strongly over the last decade, and at more than 800 million Internet users today, there are now as many internet users in China as there are people in the United States, Indonesia and Brazil combined.


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However, 2 in 5 Chinese are still offline, and there is still room for further growth in terms of the number of Internet users, the correspondingly, the number of online shoppers.

Business model and key competitive advantages

If you’ve been to China recently, you’d be amazed at its rapid transformation to a hi-tech, consumer-driven economy. The traditional levers such as exports and industrials that used to drive China’s economy have slowed, but the Chinese consumer remains a dominant force – driving about 76% of GDP growth in 2018, up from less than 50% in 2011.

With the growing importance of consumers driving the Chinese economy, it is no surprise that JD.com has chosen to pursue the strategy of relentless customer focus as its key value proposition.

Unlike Alibaba which operates on a marketplace model where it makes money from commission fees and advertising space, JD.com operates on a first-party retail model (i.e. direct sales) by taking on inventory ownership from suppliers, giving it the ability to control product quality in its value chain and guarantee the authenticity of its goods – even though it makes less money per dollar of sales while doing so.

JD.com also spent a tremendous amount of resources building up its countrywide logistics and delivery network from warehouses to fulfilment centres at every end of the country, and takes care of the delivery in-house rather than outsource the delivery to third party providers.

With logistics operations tightly controlled, JD.com’s customers can receive their orders much faster and more reliably than the competition, increasing customer stickiness and profitability as it seeks economies of scale with its processes.

For JD.com, more than 9 out of 10 orders are delivered on the same-day or next-day by JD’s own fleet of 65,000 drivers. This incredible statistic has proven to be a sustainable moat that is difficult to replicate by others, given it has invested millions of dollars on building an unrivalled data-driven supply chain and logistics service with small-to-medium-sized warehousing, oversized warehousing, cross the border, cold chain delivery, frozen and chilled warehousing facilities, B2B and crowdsourcing logistics.

In fact, its logistics business has been proven to be so successful that it has started opening up its logistics facilities to other companies looking to take advantage of their industry-leading level of delivery service.

Industry partnerships

JD.com is no stranger to industry partnerships and over the past several years, expanded its collaboration efforts with major players such as Intel for smart retailing platformsRakuten for unmanned delivery solutionsFarfetch for luxury products distributionTencent for expanding e-commerce into social channels like WeChat, among many others.

These partnerships are interesting for JD.com, as it vies for market share in both its home market and abroad. For instance, leveraging Tencent’s social media platforms like WeChat will bring customer data and behavioural insights to understand consumer shopping behaviour. As you probably know by now, WeChat is China’s most popular social messaging super app with over 1 billion monthly active users. With better targeted marketing efforts and consumer understanding, we should expect to see higher profit margins in the coming years as it gets consumers to spend more on its platform.

Breaking down its financial metrics

JD.com’s latest 2Q results showed stronger profitability than ever before, with RMB 618.8m net income attributable to ordinary shareholders compared to a net loss attributable to ordinary shareholders of RMB 2,212.5m for the same period a year before – a stunning reversal of fortunes.

Net revenues from products and services increased by 20.8% and 42% respectively YoY, while cost of revenues increased 21.2% YoY.

The core JD retail business has shown signs of stability and improved fundamentals, as operating income for the first six months  of 2019 has doubled from RMB 3377m to RMB 7233m YoY.

It also continues to invest in its new businesses such as overseas businesses and logistics services to third parties, and the net operating loss for the first six months of 2019 has narrowed from RMB 2415m to RMB 2044m, representing a 16% decrease YoY.

Threats to JD.com’s rise as an e-commerce and logistics powerhouse

Competition

The Chinese e-commerce industry is characterised by strong competition from many players in a fragmented landscape, with both local and international brands contesting for a piece of the pie. We see companies like Pinduoduo operating a group-buying platform similar to Groupon and smaller e-commerce players like VIPshop and Xiaohongshu also vying for consumers’ attention in the crowded space.

With consistent marketing spend needed to lure consumers onto their platform, JD.com’s profitability in the near term might be weighed down by higher marketing and customer acquisition costs.

Richard Liu’s rape allegations and governance lapses

Over the past year, JD.com’s share price fell almost 50% because of rape allegations against its CEO Richard Liu by a University of Minnesota student, although he was eventually not charged.

With this incident, the company’s governance policies have been called into question – as the company’s bylaws state that the company cannot hold a formal meeting without the CEO being present, or unless he recuses himself.

As the CEO and face of the company, anything that happens to him would pose a key-man risk, where the company’s operations would go into dire state of affairs where decisions made might not be valid.

Thankfully, the company has recently announced a series of restructuring efforts, such as the establishment of a Chief Executive Office to diversify its management team and better serve its customers.

Future growth and expanding its logistics business

Despite the challenges, e-commerce is still growing rapidly in China, especially in lower tier cities where the burgeoning middle class and limited physical stores have led to consumers turning online to shop. You can also expect mobile growth and social shopping to drive further growth in the industry – there is sufficient room for many players to co-exist and compete with one another – especially if the overall size of the pie is increasing.

JD.com is continuously improving its logistics system through its big data resources which drive smarter and more efficient logistics systems. With its investments in smart logistics, automation and artificial intelligence, it is also looking into developing the world’s first fully-automated warehouse in Shanghai, delivery drones and automatic delivery robots – further reducing delivery costs.

It is also focusing on slashing costs as it scraps basic salary for couriers in its JD Logistics business and deep job cuts as it reduces headcount – potentially improving margins further in the coming years.

Conclusion

As JD.com take a breather from the trade war and rape allegations on its CEO over the past year, it is showing promising signs of improved profitability, cost control, continued investments in new technologies and global expansion efforts through industry partnerships.

It’s a great growth story to be buying into, but it might take several years or even decades for it to play out successfully.

Editor’s Note: Growth stocks take a lot of time and effort to analyze correctly. And even then, the underlying assumptions need a titanic amount of effort to seek clarity on. Most of the time, that’s where the advantage lies. That is why you need a framework to analyze things. If you’d like to know what ours is, you can find out more here under our case studies or here in a live session. See you there.

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