- JD is basically the Amazon of China and with China’s economy on the rise presents an interesting investment opportunity.
- JD’s growth continues to explode and they now operate a logistical network with over 1,000 warehouses with a reach that exceeds 21 million square meters.
- JD is China’s largest retailer and largest e-commerce platform with same/next day delivery to most areas in China, which is essential to support China’s economic growth.
In a previous article published on 6/25/21 about Alibaba (NYSE:BABA), I had indicated that I was bullish on two Chinese companies as its economy strengthens. JD.com (NASDAQ:JD) is the second stock I am incredibly bullish on when investing in China.
As China’s economy grows, more income will be allocated to purchasing goods and services. JD is China’s largest online retailer while being its biggest overall retailer. JD has built China’s leading e-commerce platform with almost 500 million annual active customers. In addition to e-commerce JD has built out what could be the world’s most robust logistics platform and is embarking down a technological revolution throughout commerce.
China has the largest concentration of people on earth with an economy that is expanding rapidly. JD’s geographic coverage supports almost all of China’s counties and districts while having over 1,000 warehouses. JD’s growth has been phenomenal, and in the fiscal year 2020, it shattered the $100 billion revenue mark. A lot of investors have been focused on FAANG, which makes complete sense as we live in the United States. I am a shareholder of Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Apple (NASDAQ:AAPL), and Facebook from the group, but that doesn’t mean there aren’t other companies from other regions worth investing in. Like BABA, I believe there are significant tailwinds for JD throughout the next decade as China’s economy gets stronger and the buying power across its citizens increases. I have been a buyer of BABA and JD as I believe their share prices have been suppressed and are currently undervalued.
What JD.com does and an understanding of how they compare to Amazon
Think of JD.com as the Chinese AMZN but with a larger addressable market. Like AMZN, JD provides a robust e-commerce platform that allows local and international brands to reach consumers within China. The big difference is that JD provides services to nearly 500 million active customers, roughly 110 million additional users than the entire population of the United States. Just as AMZN Prime customers enjoy the luxury of next-day deliveries, JD’s customers benefit from JD’s nationwide logistical network, which delivers same and next-day deliveries to its customers. JD’s cross-border platform enables brands worldwide to reach the consumer market in China even if they do not have a physical presence in China.
JD.com has partnered with some of the world’s most recognizable brands, enhancing the product offerings across its platform. Louis Vuitton and JD launched an innovative partnership that connects Louis Vuitton customers to enhance the luxury shopping experience on JD.com. JD also started a new partnership with John Lobb, which is the luxury shoe and boot brand under the Hermes Group. John Lobb launched its flagship stores on JD.com. Other luxury brands, such as Marni, which is a luxury Italian brand, adopted a customized one-stop solution from JD. In addition to Marni launching its flagship stores on JD.com, they also are provided with cover marketing, technology, and supply chain management from JD. This all-in-one-package from JD.com allows its 500 million customers to purchase directly from Marni while the products are delivered through JD Logistics. In addition to traditional retail JD Home partnered with many of the nation’s leading cellphone brands, including Honor, Xiaomi, OPPO, OnePlus, and Realme, to collaborate on innovative omnichannel marketing initiatives, including retail chain stores. JD Home has achieved National Key Account (NKA) status with many major cellphone brands, supporting their omnichannel retail channels and the offline shopping experience.
Unlike AMZN, JD is dominating the retail market and faces limited competition. AMZN is currently trailing Walmart (NYSE:WMT) in retail supremacy, while immense competition is in AMZN’s rearview mirror. On the other hand, JD generates about 3x the revenue SUNING does in the #2 slot while being responsible for more revenue than the next nine competitors combined. JD has built a massive moat around its business, and competitors are having a hard time competing with them.
A common theme across the United States has been ordering through AMZN Prime, as in many cases, the turnaround time for deliveries is one to two days. China has roughly 1.1 billion more people than the United States as its population is 1.44 billion. JD operates 32 “Asia No 1” logistics parks which are among the largest and most automated smart fulfillment centers in Asia, in addition to over 1,000 warehouses to create a nationwide logistical network that delivers same and next day deliveries to its customers. Throughout JD’s 21 million-plus sq meters of warehouses space, they provide small-to-medium-sized warehousing, oversized warehousing, cross border, cold chain delivery, frozen and chilled warehousing facilities, B2B, and crowdsourcing logistics.
At the heart of JD’s logistics is the technology which provides their competitive advantage. JD is a global leader in innovation as they incorporate the latest technological advancements into their logistics business. Through these capabilities, JD can have almost any product delivered the next day throughout China. JD has been at the forefront of innovation in robotics and automation to reduce time restraints throughout its supply chain. JD was the first company to facilitate commercial deliveries by drone and develop unmanned delivery vehicles, warehouses, and stores. In many ways, JD has paved the way and created the blueprint for logistical and retail innovation. While AMZN may be the first in the US with unmanned stores and smart warehouses, JD has been doing this for years. JD’s platform generates 31 petabytes of data each day which is an unfathomable amount of data that JD is building machine learning and AI tools around. This will provide an advantage the competition won’t have access to as JD will unlock unrivaled insight into consumer behavior in China.
Inside JD.com’s explosive numbers
JD has been spending tens of billions building out its e-commerce and logistical platforms, and the revenue is now finding its way to the bottom line. Since 2012, JD’s revenue has increased by billions sequentially YoY on its way to breaking the $100 billion annual revenue mark. Over the past five fiscal years, JD has increased its annual revenue by $86.37 billion (232.17%) at an average annual growth rate of 32.99%. More recently, JD has increased its revenue by $58.56 billion (105.17%).
Most of JD’s massive amounts of revenue have gone back into building its business, but its gross profit and net income have recently been flourishing. Over the past five years, JD’s gross profit has increased by $7.58 billion (453.4%) with a 5-year average growth rate of 41.18%. Over the past three years, JD’s gross profit increased by $5.42 billion (141.34%) at an average growth rate of 34.19%. As gross profit increased, so did JD’s net income. JD now has two consecutive years of generating billions in pure profit. In 2019 JD generated $1.75 billion in net income, and in 2020 that number jumped to $7.57 billion. In just one year, JD’s net income increased by $5.82 billion (332.5%) as they converted 6.62% of its revenue to net income.
These trends aren’t slowing down, and 2021 is setting up to be JD’s largest and most profitable year to date. Over the past three years, the quarter ending in December has generated JD’s largest amount of revenue with a drop off in March:
- Dec 2018 – $19.6 billion then Mar 2019 – $18.04 billion
- Dec 2019 – $24.51 billion then Mar 2020 – $20.64 billion
- Dec 2020 – $34.37 billion then Mar 2021- $31.01 billion
In 2020 JD’s overall YoY revenue grew by $31.4 billion (37.90%), and that growth isn’t slowing down. In Q1 2021, JD generated $31.01 billion in revenue, a YoY increase of $10.37 billion (50.24%) compared to the $20.64 billion generated in Q1 2020. JD is in a stronger position in 2021 as its building off of $31.4 billion in revenue and $552 million of net income compared to $20.64 billion in revenue and $151.5 million in net income in 2020. All of the growth trends point toward JD continuing in its progression from the raw Q1 data, the TTM numbers, and YoY metrics. Unless something changes, JD is positioning itself to have another blowout year and eclipse 2020.
How JD’s revenue and net income can become amplified during China’s economic resurgence
When it comes to China, I constantly review their economic trends as a country, and it’s perplexing how their growth story isn’t emphasized more throughout the investment community. China is projected to be the world’s largest economy by 2028. The per-capita income in China is expected to grow by roughly 50% from 2020 to 2025. China’s average economic growth has been projected to increase at a rate of 5.7% from 2021 to 2025, then slow to 4.5% from 2026 to 2030. By the end of 2022, McKinsey predicts that the middle class could expand to 550 million people larger than the entire US population.
I believe the projected economic growth in China will directly benefit BABA and JD. What normally happens when someone makes more money? In many cases, they purchase goods and services which were previously unattainable. As China’s middle class expands, many will use their newfound capital to enhance their lives and acquire items or services to make their lives better. For JD, China becoming the world’s largest economy by 2028 and having 550 million people in the middle class by the end of next year is a recipe for generating billions upon billions in revenue and net income. There is an old saying; a rising tide lifts all ships. With the data indicating that JD is by far China’s largest retailer with the most sophisticated logistical network, it would make sense that as the economy and per-capita income increase, JD will experience significant growth. This trend could last throughout this decade and why I invested in the Chinese AMZN.
Political risks out of China could impact JD as DiDi was dealt a major blow by China’s Government
DiDi Global Inc. (NYSE:DIDI), which is known as the Chinese Uber, completed one of the largest US initial public offerings in recent times on 6/30/21. DIDI was valued at more than $60 billion as it went public on the New York Stock Exchange. Just days after what should have been a celebratory period for DIDI, their wings were clipped as a Chinese cybersecurity regulator ordered DIDI’s app to be removed from app stores. The cybersecurity regulator alleged DIDI had illegally collected and used customer’s personal information. DIDI issued a statement indicating:
“We sincerely thank the competent authority for guiding DiDi to investigate risks,” DiDi said in a Sunday statement. “We will earnestly rectify and reform, continuously improve risk prevention awareness and technical capabilities, continue to protect user privacy and data security, prevent network security risks, and continue to provide users with safe and convenient services.”
The removal of DIDI’s app is a continuation of China’s big tech crackdown, which has played a part in JD’s price suppression. Recently BABA was fined $2.8 billion for antimonopoly violations. Companies such as DIDI and ByteDance, which is TikTok’s parent company, have been summoned before regulators and ordered to put the interests of the nation first. China’s internet regulator has named hundreds of apps that it alleges collect personal data to excess or use in improper ways.
This is an investment risk for JD without question. JD could be looked at as having a monopoly in retail as they are the single most dominant force in the sector. Looking at what is occurring in China, the 31 petabytes of data JD’s platform generates each day could put JD right in China’s crosshairs. JD isn’t shy about publicizing how this data is collected, and they are building machine learning and AI tools to generate a better user experience from its data.
China can’t have its cake and eat it too, and it seems like its most important goal is passing the United States as the world’s #1 superpower. President Xi recently spoke at the Communist Party anniversary and delivered a speech that included powerful statements about China not accepting sanctions from those that feel they have the right to lecture China and China would never allow any foreign force to bully them, and any attempt would “find themselves on a collision course with a great wall of steel forged by over 1.4 billion people.”
Yes, the control issues in China are investment risks, but I am not too concerned. BABA got past them, and any efforts to clip JD’s success would be minimal, in my opinion. For China to become the world’s largest economy, the Chinese Government needs to support its economy, including business. I believe China’s thirst to become the largest superpower is their biggest priority, and they know to do this, they need a robust and booming economy. JD is too crucial to these goals for the Government to seriously hinder their operations. What JD has that no one else has is the most sophisticated logistical network, and this is needed for China’s expansion. I am not worried about what-ifs and what may or may not happen in the future. I make investment decisions based on the best information I can find and the conclusions I can personally construct. In my opinion, JD will thrive as China expands, and I will cross the bridge when the day comes if China decides JD is a target. If that happens and depending on the magnitude of the situation may be would dictate if I change my stance on JD. I still think BABA is an excellent investment, and the Chinese Government targeted them, so I can’t see JD’s appeal changing much in my eyes.
If you had another chance to invest in Amazon before its share price reached triple digits, would you act on it? I think JD is severely undervalued and underestimated in the markets. JD’s numbers reflect a tremendous growth spurt and there not stopping. China has the largest population globally, and by the end of this decade, it is projected to have the world’s largest economy. JD’s current growth rates are about to be amplified by the economic tailwinds coming out of China. JD has put all of the pieces together perfectly for this very moment. They are operating the largest retailer with the largest and most sophisticated logistics network in China and possibly anywhere in the world. They are positioned to facilitate all of the growth China will experience and play a critical role in facilitating the Chinese retail needs. I plan to buy more JD and hold throughout this decade as I want the Chinese AMZN in my portfolio.
Author: Steven Fiorillo, Seeking Alpha