At $24 per ADR, JD.com's core business is being valued in the market at only $20 billion.
This is extremely cheap for the largest retailer and second-largest e-commerce player in China with a vast and under-monetized logistics infrastructure asset.
JD's massive success has been driven by a relentless focus on selling only authentic goods at the lowest prices available, and utilizing technology to maximize efficiency.
Shares of JD.com are an attractive investment at its current price of about $24 per ADR. At this price, the market cap of the company is about $35 billion. Excluding about $6 billion of net cash, the market is valuing the business at $29 billion. JD owns equity stakes, or is entitled to a percent of future profits in the case of JD Finance, in at least 10 other non-consolidated entities. Valuing those stakes either at JD's cost, the current market price in the cases where the entities are publicly-traded, or recent private transactions, these stakes would be worth about $12 billion. That means JD's core JD Mall retail business, its 81% stake in JD Logistics, its emerging logistics asset management business, and everything else the company is working on is being valued by the market for just $20 billion.
That price is extremely cheap. JD is China's largest retailer (online or offline) and the second-largest e-commerce business. The Chinese economy has an attractive long-term growth profile and its middle class should continue to grow and gain purchasing power for several decades. Given JD's scale and competitively-advantaged logistics infrastructure, its long-term ambitions, and a conservative assumption about its long-term margin profile, $20 billion is a bargain.
Company Background
In 1998, Liu Qiangdong, also known as Richard Liu, started a business selling video editing hardware and systems for wedding photo studios. He set up his business in a small stall in one of Beijing's markets. He differentiated himself by having clearly-marked prices on his goods, not bargaining, and refusing to sell counterfeit products, which were and are rampant in China. Initially, customers went elsewhere because they liked to bargain with sellers, but they eventually returned to Liu because his prices were the best for genuine goods. As his business gained this unique reputation, sales grew. Soon, he hired his first employee, moved to a larger space, and expanded into magneto-optical products, CD burners, videotape conversion systems, and other electronics.
In 2003, the SARS outbreak in China decimated Liu's sales as people avoided public places like the market where his business was located. Liu pivoted by creating a simple website where customers could order his products. That was the beginning of what would become JD.com. The company's reputation as a seller of genuine goods with great service allowed online sales to grow rapidly. Liu eventually decided to close his offline locations because the online business was growing so quickly and was a superior customer experience.
Since then, JD's sales have grown rapidly to 416 billion RMB over the last twelve months, which converts to about $60 billion at today's exchange rates. In order to grow so rapidly to such scale, JD diversified its sales mix away from being focused solely on computers and electronics and towards a broader mix of electronics, appliances, general merchandise, a third-party marketplace, advertising, logistics, and other services.
As you can see from Exhibit 1, JD's growth in a very short time has been staggering.
From the beginning, Liu believed in low profits per transaction but maximizing sales volume. He recognized that this was the path to gaining scale, which was the company's first priority. Scale would allow for increased bargaining power with suppliers and lower costs, which would allow him to charge lower prices, which would further drive more sales volume, more bargaining power, and so on in a virtuous cycle. Sometimes, JD temporarily priced at cost or even slightly below to secure repeat business and further its reputation as the place to buy genuine goods for the lowest price. Many competitors that operated with wide profit margins or sold goods that could not be trusted gradually lost share to JD.