Fri, Jun 19, 2015, 1:25AM EDT – US Markets open in 8 hrs and 5 mins
This Analyst Says JD.Com Fakes Volume, Has ‘Misled’ Investors And Is Worth 30% Less
By John Seward16 hours ago
JD.Com Inc(ADR) (NASDAQ: JD) is “clearly misleading investors” about the nature of its business and faking a portion of its merchandise volume, an analyst said Wednesday. JD, which posted about $18.52 billion in sales last year, is sometimes seen as a Chinese version ofAmazon.com, Inc. (NASDAQ: AMZN). As of earlier this year, TENCENT HOLDINGS (OTC: TCEHY) held a 17.6 percent stake in JD.Com, which has a market capitalization of about $48.91 billion. The analyst, Anne Stevenson-Yang of J Capital Research, issued a Sell rating and $23.36 price target on JD.Com. JD shares are up about 53 percent year-to-date.
Stevenson-Yang, based in China, said JD does up to 50 percent of its business by brokering sales between distributors. “We believe much of this business occurs at a loss,” the analyst said. JD also sometimes buys from distributors and sells the products back to them at a 3 percent discount, Yang said. “The company may use accounting tricks to move subsidies onto its balance sheet as assets,” according to Yang. Part of the company’s revenue, again according to Yang, is derived from buybacks that its suppliers are required to make if products do not sell. Yang also said that land records indicate that JD has overpaid for its assets. JD has paid 20 percent more for 46 percent less land than Suning Commerce Group Co Ltd, a large Chinese retailer, buying in the same time frame, according to Yang.J Capital Research is a registered investment advisor in the U.S. and provides research focused on China.
Latest Ratings for JD
|May 2015||SunTrust Robinson Humphrey||Maintains||Buy|
View More Analyst Ratings for JD
June 19, 2015, 12:56 A.M. ET
JD.com Is Not Even An E-Commerce: J Capital Sees 34% Downside
By Shuli Ren
J Capital‘s Anne Stevenson-Yang, who told Barron’s last December that she would be “shocked if China is currently growing at a rate above, say, 4%”, set her bearish sight on direct-sales e-commerce JD.com (JD). Oh, actually, according to Stevenson-Yang, JD is not even an e-commerce. Let’s hear her out.
That is because 30-50% of products on JD’s platform are sold to offline distributors rather than to end customers. “Our work suggests that the company is pretending to be far larger than it really is and is in effect paying people to run transactions through the online system in order to present the appearance of a growing e-commerce business.”
According to J Capital, distributors are happy to buy from JD only because it offers free shipping:
The market position of a distributor in China is very fragile: distributors simply lack the scale or the capital to hold a secure market position.
For the portion of JD’s business that is essentially wholesaling and distribution, we question whether the company offers any sustainable value even at scale. Instead, we see JD frantically using sales management and price promotions to drive volume at unsustainable prices. JD offers sales management and fulfillment at no extra cost, making it attractive to suppliers who can achieve high turnover volumes. But it is precisely the cost of providing these services that makes us negative on JD’s long-term growth and margins. Naturally, big distributors are going to take advantage of the service, but it is provided because JD lacks the market power to go directly to the brand owner and get the best price. In fact, if the subsidies were removed, we believe JD would lose at least one-third of its sales.
So if the products do not do directly to end-consumers, the platform is not e-commerce?
Even for the portion of the products that are sold to real consumers, JD “appears to inflation revenue”, because:
For products sold on its own account, JD requires suppliers to buy back unsold items, and then it records as revenue what are in actuality returns.Suppliers are asked to execute the buybacks online, as if they were consumers, and they pay associated commissions, getting reimbursed in services from JD.
Now that is a serious accusation.
JD also has a marketplace that resembles Alibaba Group‘s (BABA) model, in that it does not take inventory in products. Its marketplace is flawed as well:
Our primary checks indicate that as much as 50% of transactions for third-party goods are faked.
E-commerce operators get a higher valuation multiple than retailers. But since in J Capital’s viewpoint, JD is not even an e-commerce, JD’s current valuation of 1.9 times sales is way too high:
We value the company at 1.5x sales, assigning JD the same valuation as Suning (002024.China), China’s largest physical retailer of consumer electronics, which also has a very robust online B2C marketplace. We believe this 30% discount to current value is generous, because JD has clearly misled investors as to the true nature of its business.
As such, J Capital has a price target of $23.36, implying a 34% downside from JD’s last close.
Only a 34% discount? “Not nearly as aggressively bearish as most of their reports,” quippedBill Bishop on Twitter, who has a well-read newsletter on China.