JD.Com Inc

JD: NASDAQ

JD is a Chinese e-commerce company with $53 billion in sales, and over 600,000 employees. JD also owns JD Finance (somewhat similar to Paypal), JD Logistics, and a number of other passive investments. JD was founded in 1998 as a brick and mortar retailer by Richard Lui (the current CEO and 16% owner). By 2004, JD’s e-commerce business was generating $1.5 million in sales per year. By 2007, the company was doing $56 million in sales, and 13 years later is doing $53 billion in sales.[1]

Investment thesis

Even as the company has grown sales at over 35% per year since IPO, we believe the stock has been more or less flat since September of 2014, as it has burned valuation multiples, and we believe it is at a cheap price today. In terms of trends, 54% of the Chinese population is online today, and it is expected to grow to 60% by 2020. There is a long room to grow as 91% of the U.S population is online. China online retail sales are 13.4% of total retail sales versus the U.S at 9% of total retail sales, but Chinese e-commerce is growing at 29% versus U.S e-commerce at 15%. Shipping costs on packages in China are about half the cost of the U.S, at $2.20 per package. JD started by dominating a niche in computer products (similar, we believe to AMZN with books), and has since expanded all the way to fast-moving goods.[2] Over these next 5 and 10 years, we believe that JD will grow with the Chinese e-commerce market (growing today at nearly 30%).The CEO believes in the next 5 years, the company will do $15 billion in free cash flow, and on a $50.4 billion enterprise value, that is quite attractive as value investors.

Confirmation through research

JD has gone from 14% share to 27% share of business to consumer (B2C) e-commerce in China over the last 5 years. The e-commerce player has seen share in total e-commerce go from 6% in 2013, to 18% today. 85% of JD packages are delivered on the same day or next day, whereas Alibaba on average takes 3 days to deliver a package. The power of the fully integrated logistics model JD has, allows them to offer low prices for customers, while JD still generates significant free cash flow over time. JD has a number of investments, which together have a value equal to more than half of the current market cap.[3] The founder is known for having integrity in the investment community, based on previous examples as a private company with investors in the company such as Tiger Global and Hillhouse Capital. Both of those investors have made over 200 fold on their investments, but are still owners of JD today.[4] Based on what we see in consumer surveys in China,[5] we believe JD is known for fast delivery, low prices, and is popular among younger generations in China.

Variant Perception

We believe that JD as a company will continue to grow both with the secular growth of e-commerce in China, as well as small share gains in the space. Further, we believe the value of their investments (such as JD Logistics and JD Finance) should grow, as JD grows with e-commerce in China. We expect to earn a nice return on our investment as the company’s efforts are realized over the next 5 and 10 years.