Tencent (SEHK: 0700) distributed most of its stake in JD.com (SEHK: 9618) to its shareholders earlier this year. If you are a shareholder of Tencent, you would notice new shares of JD.com deposited in your account.
What now?
Investors who were given the JD.com shares can now decide if they want to hold on to the shares or simply sell them.
Here’s what you should know before making a decision.
What is JD.com
JD.com is one of the largest e-commerce companies in China. The company started as a traditional brick and mortar retailer in 1998 before transitioning online in the early 2000s. JD.com focused on selling its own electronics inventory and built out a wide logistics network.
Today JD.com is also a marketplace for third-party sellers who want to leverage the company’s massive base of more than 500 million annual active users.
Unlike Alibaba (SEHK: 9988) which is an asset-light business that relies heavily on third-party logistics players, JD.com primarily uses its own logistics capabilities after years of investments building warehouses and expanding its logistics network. This makes JD.com a formidable force in China’s e-commerce scene.
Growing fast
The e-commerce giant recorded a 27% increase in net revenue to RMB 951.6 billion in 2021. Its annual active customer accounts also grew 20.7% to a whopping 569 million.
From 2018 to 2021, JD.com’s net revenue compounded at 27% per year and annual active customer accounts grew 23% annually.
There have been broad-based growth across JD.com’s business. All of its segments – including retail, logistics, and new businesses – have recorded strong growth.
Innovation and competition
JD.com is well-known as an e-commerce brand that specialises in electronics. But building from that niche, the company has executed admirably to expand into different product categories.
The tech-focused company has also seen its early investments in logistics paying off as it is now able to offer quick deliveries and has control of its own fulfilment. It also offers its logistics capabilities to its third-party sellers and other customers who want to leverage its sprawling fulfilment network.
JD.com competes with other e-commerce companies in China such as Alibaba and Pinduoduo (NASDAQ: PDD), but JD.com has been able to hold its own against these other giants.
Innovation also seems to be ingrained in the company’s DNA as JD.com has consistently used technology and data to improve its logistics capabilities and it is also constantly moving into new businesses to leverage on its large user base. It is now building out its JD Health business for telemedicine and has also established a strategic partnership with Shopify (NYSE: SHOP) to allow Shopify’s merchants to list their products on JD.com. Shopify is a Canada-based global e-commerce software services provider.
Bearing fruit
JD.com’s early investments are starting to bear fruit. It started to generate a chunky stream of free cash flow in the last couple of years.
In the last two years, JD.com generated a combined RMB 61 billion (US$9.6 billion) in free cash flow. This includes JD.com’s increased investments in capital expenditures for business-expansion this year.
Valuation
With China stocks still out of favour, JD.com’s shares are now trading well below their all-time highs. As of 21 March 2022, JD.com’s share price of HK$239 translates to a market cap of HK$748 billion (US$96 billion). At this price, JD.com trades at around 23 times trailing free cash flow.
Conclusion
The distribution of JD.com shares by Tencent to its shareholders have left many investors holding on to shares of a company that they may not be very familiar with. The above summary provides investors with a quick brief of the company and its fundamentals and its valuation.
Although there is still a lot of uncertainty surrounding China at the moment, I think JD.com shares at this valuation still provides investors with a good risk-reward ratio. Nevertheless, each investor is different and investors should do their own due diligence and make a decision based on their own portfolio situation.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Jeremy Chia owns shares of JD.comand Tencent.
