Here Is How JD.Com Grew To Challenge Alibaba Group

Listed on NASDAQ in 2014, JD.com Inc. (JD.com) has emerged as China’s largest retailer and the third largest internet company globally in terms of revenues. In this article, I’ll cover its fundamental strengths, latest financial results and plans to grow in the future. Thus, here are 8 things to know about JD.com before you invest.


  1. It is a Fast Growing Retailer
    JD.com has achieved significant growth in terms of its number of active users and gross merchandise volume (GMV). Its number of active users had grown by a multiple of 10.4x, up from 29.3 million in 2012 to 305.3 million in 2018. It has resulted in a rapid growth in GMV from RMB 86.9 billion in 2012 to RMB 1.68 trillion in 2018.


Source: JD.com’s Financial & Operational Highlights Q4 2018


  1. Growth Strategy 1: It has Vast Logistics Network Nationwide.
    JD.com has a superior reach which covers 99% population across China as it has built an extensive network consisting 550+ warehouses, which includes large fulfilment centres, small warehouses and also cold-chain facilities which cover almost all counties and districts across China. This allows JD.com to provide unrivalled and superior shopping experiences to local customers, thus, is a driver to JD.com’s rapid growth for the last 5 – 6 years.



Source: JD.com’s Financial & Operational Highlights Q4 2018


  1. Growth Strategy 2: It has a Strategic Corporation with Tencent
    On 10 March 2014, JD.com formed a strategic partnership with Tencent which include the following agreements:


    a. Tencent offers JD.com prominent level 1 access points for Weixin and QQ mobile app platforms. Thus, it allows users of Weixin and QQ to link and directly access to JD.com’s interfaces in just one click.


    b. Both parties agreed to cooperate in a number of areas such as:
    – Mobile-Related Products.
    – Social Networking Services.
    – Membership Systems.
    – Payment Solutions.


    This cooperation has a term of five years and is applicable in territories such as China, Hong Kong, Macau, and Taiwan. Tencent has agreed not to engage in any direct sales or managed marketplaces business model for eight years and has selected JD.com as its preferred partner when it comes to e-commerce of physical goods.


    c. It acquired the following subsidiaries:

    – 100% stake in PaiPai and QQ Wanggou. (10 April 2014)
    – 9.9% stake in Shanghai Icson (10 April 2014)
    – 91.1% stake in Shanghai Icson (10 March 2017)


    PaiPai is a consumer-to-consumer (C2C) marketplace where JD.com has shut down as I write presently. Meanwhile, QQ Wanggou and Shanghai Icson operate of business-to-consumer (B2C) marketplaces in China.


  2. Growth Strategy 3: It has a Strategic Corporation with Walmart
    On 20 June 2016, JD.com formed a strategic alliance with Walmart with a series of agreements as follows:

    a. JD.com acquired YiHaoDian (YHD)’s marketplace platform assets such as the YHD brand, websites and mobile apps.


    b. Walmart has agreed not to engage in and invest in any e-commerce direct sales, marketplace, or online-to-offline (O2O) platforms in China for a period of eight years starting on 20 June 2016.


    c. JD.com and Walmart signed a Business Corporation Agreement (BCA) in several strategic areas for five years starting on 20 June 2016 such as:

    – Sam’s Club China agreed to open a flagship store on JD.com.
    – Leverage their supply chain to increase product selections in China.
    – JD.com provides Sam’s flagship store preferential traffic entrance.


  3. Revenue Breakdown & Its Performances
    JD.com derives revenues from three main business segments:



No.

Business Segments
Revenue(RMB Billion)Revenue (%)
1Electronics & Home Appliances280.160.62%
2General Merchandise136.029.44%

3
Marketplace, Advertising, Logistics and Service Revenues
45.9

9.94%
Total462.0100.00%


Source: Q4 Results of JD.com


All of the three segments had grown substantially:



No.


Business Segments
Revenue2015(RMB Bil)Revenue2018(RMB Bil)CAGR(%)
1Electronics & Home Appliances134.5280.128%
2General Merchandise33.4136.060%

3
Marketplace, Advertising, Logistics and Service Revenues
13.1

45.9

52%



As a result, JD.com has achieved CAGR of 65% in group revenues, rising from RMB 8.6 billion in 2010 to RMB 462.0 billion in 2018.



Source: JD.com’s Annual Reports


  1. JD.com is yet to be Profitable
    However, JD.com has yet to deliver profits to its shareholders as JD.com has incurred a significant increase in the following expenses:



No.


List of Expenses
Amount 2010
(RMB Bil)
Amount 2018
(RMB Bil)

CAGR(%)
1Cost of Revenues8.17396.0762%
2Fulfilment0.4832.0169%
3Marketing0.2019.2477%
4Technology & Content0.0512.1499%
5General & Administrative0.115.1662%
Total Operating Expenditures9.00464.6264%


Source: JD.com’s Annual Reports


  1. Balance Sheet Strength
    As at 31 December 2018, JD.com has a low gearing ratio of 18.9% and a current ratio of 0.87 where its cash reserve is RMB 37.5 billion. As such, it remains adequately funded to finance its working capital and embark on its plans to grow in the future.


  2. Recent Update: JD Logistics Properties Core Fund (JDLPC)
    In 2018, JD.com had established JDPM to develop and manage logistics properties to support the growing needs of its e-commerce businesses.

    In February 2019, JDPM has established JDLPC with GIC Private Limited, sovereign wealth fund of Singapore for total committed capital of RMB 4.8 billion. JD.com serves as a general partner and has committed 20% of the total capital of the fund.

    JD.com would dispose of certain of its logistics assets into JDLPC worth as much as RMB 10.9 billion in gross asset value. It enables JD.com to first unlock value from its balance sheet and subsequently use the proceeds for its growth initiatives. JD.com would leaseback the facilities disposed for operational purposes.

VIA’s Verdict

JD.com has experienced tremendous growth in revenues as a result of having a handful of strategic partnerships and collaborations with retail and e-commerce giants such as Tencent and Walmart. However, as I write, JD.com remains a firm that is unprofitable as it continues to incur higher operating expenses. Thus, no valuation figures are calculated and provided for JD.com.

JD.com did not declare or pay out any amount of dividends to its shareholders. Thus, investors who intend to invest in JD.com would depend solely on capital appreciation of its shares to realise their investments.

So, would you invest in JD.com at US$ 28.14 presently?

Please do leave your comments below:

Ian Tai

Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia. As a Malaysian with close family ties in Singapore, Ian publishes a series of newsletters on how anyone can invest profitability in both countries.

2 thoughts on “Here Is How JD.Com Grew To Challenge Alibaba Group

  • April 15, 2019 at 1:51 pm
    Permalink

    Interesting analysis Ian. Curious to understand how this would compare to an Amazon or Alibaba at a similar stage in their growth. After all, Amazon proved to be grossly undervalued for years before it turned a profit and started attracting attention. And loads of these agreements can always end and create competitive pressures down the line

    Reply
    • April 19, 2019 at 6:54 am
      Permalink

      Hi Karan, you are totally right. JD.com is following the playbook of Amazon by going asset heavy as a retailer while Alibaba Group has always been focused on acting as just the platform for merchants rather than being the retailer.
      The space is indeed very competitive.
      But I think there is room for both companies to co-exist and grow together.

      Reply

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