Initial Report: JD.com (JD), 52% 5-yr Potential Upside (China Tech Fund)
Let's see what's kicking with JD
Introduction to the Next Gen China Tech Fund
About
The inception of China Tech Fund was the shared idea between Shinya and Max while having a discussion about the exciting opportunity of the Chinese listed shares in the United States and Hong Kong. During these past two years, the Chinese government executed a total crackdown into the technology and real estate sector causing a hard deleveraging and share liquidation by foreign investors all around the world. The Hang Seng Index (HSI) fell approximately 50% and foreign investors totally lost confidence investing in the Chinese market. With the tightening of financial markets all around the world due to persistent high inflation, China remains firm on the decision to lower interest rate; however financial and psychological repercussions remain and market participation is fearful of allocating capital. With the previous successful execution of the inception of China 101010 Fund during the severe bear market during 2011-2012 period in China, China Tech Fund’s goal is to also replicate the success by capitalizing on the rare contrarian opportunity to buy into the highest quality internet technology companies in China and hopefully with a long term perspective (10 years) and patience to successfully compound capital by beating the benchmark indexes.
LinkedIn | Max Tai
Company Overview
A leading technology driven e-commerce company transforming to become a leading supply chain-based technology and service provider.
Business Model
JD Retail
Operates a mostly 1P selling model, also known as the Direct Sales Model. In the 1P model, JD directly sources products from businesses/suppliers and sells them to consumers. In comparison, a 3P model is where the marketplace is merely a platform that hosts and connects businesses to consumers. This is adopted by rivals Alibaba and Pinduoduo.
JD’s choice of the 1P selling model is from its history of selling 3C products. Due to the high price of 3C products, consumers demand authenticity, and 1P selling model allows JD to guarantee its products’ authenticity, compared to platforms like Taobao and Pinduoduo. This has allowed JD to establish branding image as a premium retailer as compared to its competitors even after JD’s expansion towards selling general merchandise.
JD Logistics
To complement its JD retail business, JD invests heavily in its proprietary logistics network, JD Logisitics (HKG:2618).
Source: JD 4Q 2021 Report
JD’s extensive logistics and warehouse network allowed it to achieve “211限时达”. Users who place their order at 11pm can get their order by 3pm the next day, or if placed before 11am, to get it on the day itself. Apart from 限时达, other services like 京准达（delivery within 2 hours）,隔日达（delivery within the next day）etc. provides JD’s customers with a premium shopping experience and increases customer satisfaction.
Apart from supporting JD Retail’s business, JD Logistics has also branched out to providing logistics solutions to 3rd party corporate companies. However, this has yet to form a significant part of its revenue.
Revenue Composition (Annual Report 2020)
Net Product Revenue – From online retail segment (Including 3C and General Merchandise sales)
Net Service Revenue – Commission from 3rd party merchants on JD platform, marketing service for 3rd party merchants, based on per click and website placement, logistic service to 3rd party through JD logisitics, JD Plus membership
JD’s reliance on electronics product is reducing as it shifts towards generating revenue from selling General Merchandise, as well as JD logistics and JD PLUS.
Regulation Risks
Was fined in 2021 by Chinese Government for violating antitrust laws. However, even though JD is a e-commerce market place, it is not a traditional technology company. Therefore, risk of further regulations on JD is low. JD’s foray into fintech, JD digists, has also restructured into JD technology to focus more on AI and Cloud instead of fintech.
Market Structure and Competition
JD’s main competitors are PDD and Alibaba. However, JD takes a differentiated approach to the e-commerce market, as they focus on the premium and high value goods segment. Its approach to capture the sinking market through Jingxi was cut off. This is a logical move as the fight for market share in the sinking market is too cash burning, which limits JD’s growth. JD’s focus on its premium service presents a strong moat against Alibaba and Pinduoduo, as they are unable to replicate JD’s logistics network easily.
We can see that JD’s market share is growing, albeit at a slower rate due to the unique value proposition JD has. However, this approach is in line with the fact that China has a growing middle class which demands higher quality service and goods, all of which JD is able to offer.
Investment Theses
One of the best logistics networks and services in China. Allowing them to offer premium service to consumers in China. With the growing middle class in China, the demand for such services is bound to increase and JD will see growth in market share in future.
China established regulations preventing monopolistic “either-or” platform dilemma. JD.com now sees many brands returning to JD.com, as well as partnerships with luxury brands like LVMH. This will bring more customers to the platform and increase JD’s margins as these goods have higher margins than digital goods that JD specialized in.
Increasing economies of scale from their vast logistics network, as well as investment in AI automated warehouses will further decrease COGS and improve operational efficiency, improving JD’s bottom line.
Cutting and reduction of loss-bleeding Jingxi community buying improves the company's bottom line.
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.