JD's non-consolidated equity stakes are worth about $13.0 billion at current market prices.
That suggests core JD including 81% of JD Logistics is being valued in the market at $14.9 billion. That is 0.2x this year's revenue.
Further backing out the $10.9 billion value of 81% of JD Logistics reveals that the core online retail business, with its ~300 million customers, is being valued at $4 billion.
Despite the trade war, JD is too cheap. Management appears to agree having initiated a $1 billion share repurchase program in December.
JD.com is China's largest online retailer by revenue, largest retailer overall, and second-largest e-commerce company. JD is well-positioned because China's economy has long-term growth tailwinds as its 1.4 billion people become increasingly affluent. China's total retail market grew 11% annually between 2012 and 2017, while online retail's share of total retail sales has grown from 6% to 18%. This drove the online retail market to grow 38% annually over this period. But JD has performed even better, having grown revenues at a blistering 54% annual rate. Importantly, China's economy should still grow significantly over time, and the mix shift of retail sales to online channels is an enduring trend.
Liu Qiangdong, also known as Richard Liu, started JD as an offline electronics retailer in one of Beijing's markets. He gained a reputation as a seller of exclusively authentic goods in a market full of fakes and knock-offs. His low but firm prices were refreshing compared to the competition's higher but negotiable prices. Customers appreciated his no-nonsense approach and rewarded him with more business over time. When the SARs epidemic in the early 2000s decimated foot traffic, Richard moved his business online. JD's reputation helped the business continue to grow and expand into adjacent product categories over the years.
One of JD's biggest strategic decisions was to build out its own logistics network. By controlling the transaction from end-to-end, JD can better guarantee a positive customer experience. Today, the company has a sprawling logistics infrastructure, including 15 logistics parks, more than 500 warehouses, 7,000 delivery and pickup stations, a quarter million vehicles, including self-driving vehicles and drones. This network has the ability to deliver to 99% of China's population and can deliver 90% of orders the same day or the next day. This is a valuable asset, and JD recently started to deliver packages for third-parties, alongside its own, through its network. This should allow the company to leverage its existing assets, driving down per-parcel delivery costs. I believe margins have meaningful upside over time as JD scales and monetizes its historical investments.
JD's stock is down 53% from its high. This has been primarily due to the trade war between the U.S. and China, which appears to be impacting China's economy, and unbelievably, a rape accusation. In September, Richard Liu was accused of rape while in Minnesota. He was arrested but released without having to post bail and allowed to return to China. He professed his innocence, claiming the encounter was consensual, and his quick release seemed to suggest a weak case. Prosecutors weighed the evidence and declined to prosecute, but the saga has weighed on sentiment.
JD is now one of the most attractively-priced stocks I have seen. One way to demonstrate the undervaluation of JD is by calculating the value of the company's minority ownership stakes in other businesses. The following table shows these businesses, their market capitalizations, and the value of JD's ownership stakes.
At $23.63 per ADR, JD's market cap is $34.9 billion. Backing out the $13.0 billion market value of its non-consolidated equity stakes, net cash, and investment securities reveal that JD's core online retail business and its 81% ownership stake in JD Logistics is available for about $14.9 billion.
That is a very low price for China's largest online retailer with one of the largest logistics networks in the world. China's growing GDP per capita is still less than one-third that of the United States, indicating enormous room for growth. Of China's 1.4 billion people, there are still about 600 million who do not have high-speed internet access. Rising wealth and more people coming online over the next decade should provide a healthy tailwind for JD.
But how cheap is it? JD has generated about RMB437 billion of revenue, equal to $64.8 billion, over the last twelve months and is expected to generate $80.7 billion this year. That means JD's enterprise value-to-revenue is only 0.2x using this year's revenue estimate.
That is an unusually low valuation for a business with its attributes. Based on my view of JD's long-term economic model and reasonable valuation parameters, I think a 0.75x revenue multiple would be fair over the long term. That suggests the value of JD's business should grow at a rate much faster than its revenue growth rate.
Of course, I cannot predict exactly how fast JD's revenues will grow over the next decade, but let's assume growth decelerates to just 10% annually - a big slowdown from last year's near 30% growth rate. If at the end of 10 years the business is worth 0.75x revenue, the value of core JD would grow about 9-fold from today.
One could go a step further and back out the transaction value of JD's 81% stake in JD Logistics. Last year, JD sold 19% of the unit for $2.6 billion, implying the remaining 81% stake is worth $10.9 billion. Backing that out of the $14.9 billion implied value of core JD suggests the market is valuing JD's core online retail business for a bizarrely low $4 billion. This is a business with around 300 million active customers generating about $80 billion of revenue and probably $2 billion of operating income this year.
Why is JD trading so cheaply? I believe the trade war and its impact on China's economy is a major source of uncertainty and the primary driver behind the depressed sentiment. However, I have confidence the trade war will get resolved sooner or later because it is in both countries' interests to finalize a deal. Richard Liu's legal trouble, although now resolved, is still probably behind some lingering negative sentiment, but that should fade over time.
JD is an example of a high-quality business with a long growth runway that is extraordinarily out-of-favor with the investment community for temporary reasons. Low stock prices mean low expectations, and low expectations are more easily beatable. Management appears to agree the stock is a great value, having announced a $1 billion share repurchase program in late December. Today's stock price is also a 42% discount from the $40.58 per ADR valuation at which Alphabet invested $550 million into JD last year. Alphabet joined Chinese tech giant Tencent and Walmart as strategic investors in JD.
Disclosure: Long JD