JD.com, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

JD.com is a Chinese e-commerce giant, operating a business-to-consumer (B2C) marketplace, logistics network, and other diverse services. It faces fierce competition in the Chinese e-commerce landscape, and the company’s moat is therefore somewhat limited.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

JD.com operates primarily in China’s e-commerce sector. It’s crucial to look at this company on how it compares to other players like Alibaba and PDD. The company is not simply an online shopping platform, it also has multiple strategic interests and business lines. Here’s a closer look at their different segments:

  1. JD Retail: This is the core business, operating a massive direct sales model and e-commerce marketplace. It includes online retail, and, brick and mortar stores.
    • It generated the majority of its revenue, which is mostly from sales of products, not commissions.
    • They also have a 3rd party marketplace, but it is not as important as their core operations.
    • This segment is driven by the quality of its products, brand name recognition, and convenient shopping experience.
  2. JD Logistics: This is a separate, independent logistics platform. It offers warehousing, distribution, and last-mile delivery services. It has become a substantial part of JD’s brand.
    • It supports both JD’s internal operations and other external clients.
    • Its geographic reach and scale enable faster delivery, which is a big advantage in the Chinese market.
    • A good example of that is, for the full year of 2022, 64% of JD Logistics’ total revenues from external customers.
  3. New Businesses: This is a broader category that encompasses several new and developing businesses of the company like:
    • Cloud and artificial intelligence technologies
    • Health services
    • Overseas expansion operations
    • Real estate investments

The e-commerce sector in China is huge and growing with massive room for future growth. Here are some key trends that we need to account for:

  • Growth of Online Retail: Online shopping continues to increase in popularity, even for traditionally hesitant customers. This increase creates both opportunities and challenges for companies in the online space.
  • Competition: There are intense and competitive players like Alibaba and PDD that dominate this industry, therefore putting huge pressures on returns.
  • Technological Innovations: E-commerce companies are rapidly adopting technologies like AI and personalization to improve user experience and operational efficiencies.
  • Changing Regulatory Landscape: As Chinese companies look to list in foreign exchanges and attract more money, the regulatory risk increases as well.
  • Cross-border E-commerce: There is growth of cross-border e-commerce as Chinese consumers buy from other countries, and companies are trying to tap into this market.

Competitive Landscape

JD operates in a very competitive Chinese market. Here’s what is important to focus on:

  • Price Competition: Price is the most important battleground, given that competitors offer similar products and services. This is why many companies have to cut prices to compete for the customers.
  • Logistics: Companies with well-established logistics networks hold a large competitive advantage as most Chinese consumers prioritize faster deliveries.
  • Technology: Companies who are able to integrate new technologies (like AI) into their core operations gain an edge over their competitors.
  • Brand Power: Strong and reliable brands are able to command greater customer loyalty as many users prefer trusted brands, especially in a market where quality can be uncertain.

What Makes JD.com Different

Here are some specific characteristics that make JD different from its competitors:

  • Direct Sales Model: Unlike the typical marketplace model, JD sells goods directly to the customers, meaning that they handle inventory and logistics.
  • High-Quality Logistics Network: Its focus and investments into logistics have enabled it to build a high quality and fast delivery network that has no equal in the market.
  • Emphasis on Quality: The company has built a brand around quality products, especially in higher-tier goods. This has helped it capture higher-end consumers.

Financials In Depth

Revenue: JD.com’s revenue is primarily derived from net product sales on its retail site, rather than commissions earned through a marketplace model. As per its latest filing (for 2022), JD.com generated RMB 1046.2 billion or $150.84 billion of revenue. The majority of that comes from the JD retail sector, which accounts for RMB 894.8 billion or $128.88 billion.

  • Growth: Although JD has had robust sales, it is in its lowest growth rate in the last 3 years due to many external pressures, like covid lockdowns and the crackdown on tech companies.
  • Margins: Gross margins are also contracting slightly for this giant, and it’s crucial to watch if they continue contracting, as it could be bad sign of eroding profitability. For instance, their gross margins decreased from 13.1% in 2021 to 12.4% in 2022.

Operating Income: Operating income has been declining in the company.

  • The company’s operating expenses have been increasing for the last few years. The big culprit is the rise in their selling and marketing expenses.
  • Their operating income was RMB 14.4 Billion or $2.1 billion for 2022

Net Income: JD’s net income for 2022 shows significant reduction over the past few years.

  • The company had a net income attributable to ordinary shareholders of RMB 9.3 billion or $1.34 billion for 2022.
  • This was a reduction of RMB 7.8 Billion over 2021 profits.
  • This drastic reduction in net income is primarily due to the fall in their fair value of equity investments, and is not due to operational issues.

The company’s latest earnings calls highlight their concerns over market uncertainty and inflation. They also plan on focusing on growth and profits while controlling costs and capex.

Moat Assessment: 2/5

JD’s moat is narrow, leaning towards weak. While JD has strong financial backing, brand recognition, and a well-regarded distribution network, these are not as defendable as one might wish, and its competitive advantages are subject to erosion.

  • Brand strength: In recent years, the brand has been more successful in acquiring more market share. The consumer trust in its product is also good, which allows it to retain customers more easily. This gives the company a slight edge over its rivals.
  • Distribution Network: It is considered an advantage because of its scale and speed, and this moat cannot be easily overcome, but the increasing presence of other logistical companies like SF Express means that this moat’s strength may be dwindling.
  • Cost Advantages: It does not possess meaningful cost advantages over its peers. The competition in the retail space also limits any pricing power that they might have.
  • Switching Costs: There are very little switching costs from one e-commerce company to another. This makes consumers more likely to jump to competitor companies on the basis of price, and does not guarantee long-term profitability.
  • Network Effects: While a good base of both suppliers and customers does exist, network effects are not as strong as other technology giants, such as Amazon or Microsoft.

Risks to the Moat

  • Competitive Pressures: The Chinese e-commerce industry is extremely competitive, which can put significant pressure on JD’s profit margins and overall market position.
  • Technological Disruption: Changes in technology and consumer behavior may quickly make existing advantages of the company obsolete.
  • Regulatory Risk: Regulatory shifts in both China and the international markets it’s exploring can result in new costs and compliance hurdles for the company.
  • Macroeconomic Changes: Changes in the overall economy, such as changes in consumption and inflation, are external headwinds that may make their operations unprofitable.
  • Geopolitical Factors: An increase in Chinese tensions with US and the West may also severely affect its business model.
  • Management Inability to Capitalize: The management also needs to be skilled and adaptable to maintain the competitive advantage and capitalize on it. If not, there is a chance of a lost opportunity, even if it had a high quality moat.

Business Resilience

JD has good fundamentals and has shown resilience in the past, but recent performance has been shaky due to macro pressures and competition. It also faces risks of regulatory hurdles and government intervention. However, it can still recover and thrive if it is able to capitalize on its existing assets and strengths. If it can take the appropriate steps, there is a chance it may come back even stronger than it was before.

Understandability: 3/5

The company has complicated operations with its large network of fulfillment and logistics. In addition, it also has several other smaller segments that are not easy to understand. It also faces intense scrutiny by the Chinese and US government because of its data handling and large size. While the core operations are easy to understand, the other nuances make it a little more complicated for investors.

  • The basic concept is easy to comprehend, but there is a lot of nuance that can confuse an average investor.
  • The company’s large scale and numerous interconnected units make it difficult to fully grasp the business in its entirety.
  • Their international structure and foreign regulations add to complexity.

Balance Sheet Health: 4/5

JD.com is in an overall healthy financial position. They hold a decent amount of cash and liquid assets.

  • It has very good cash reserves to make it safe for future downturns.
  • The company does not have a lot of debt, so it has a more stable financing structure.
  • Despite recent economic shocks, there has been no indications of financial distress.

In short, this is a business that requires caution, but is not a losing investment if bought at a reasonable price. There are both risks and rewards with this company and there are more nuances than may seem at first glance.