Black Friday and the January sales may be the biggest shopping events in the western calendar, but for China’s 1.4 billion population, this week’s Spring Festival sees the height of spending.
This is welcome news for China’s largest online retailer, JD.com, which is the largest retailer in China by revenue. It is also the main competitor of Alibaba as the second largest e-commerce company, in a country where the total retail sales are predicted to grow 7.5% to reach $5.6 trillion (£4.3 trillion) in 2019.
The company is well-positioned to take advantage of the rising affluence in China, although it has struggled as of late, with its share price falling 45% since June 2018.
It has been hit by a number of issues over the past year, but some fund managers argue that underlying structural tailwinds mean it is actually undervalued.
Charles Sunnucks, fund manager in the emerging markets team at Jupiter, believes this is the case.
He said: ‘There are risks around it, but if you look at why there has been this recent underperformance, there is nothing there that is really structural.’
He added: ‘If you just go through putting reasonable values on each part of the business – the platform and advertising business, which is highly profitable, IT development and what they’ve done in logistics – and add it all up, you can quite easily make a case that the net asset value is somewhere north of $60 billion without having to stretch one of those valuations.’
In comparison, the company is currently on a $35 billion valuation.
Haiyan Li-Labbe, greater China analyst at Carmignac, also believes that JD.com can deliver a positive surprise, beating the market’s conservative growth expectation of 25 to 30 basis points a year.
She said now that the company has sufficient space, with its 500 warehouses, spending in this area should come down.
‘It is possible that they can achieve a little bit more than what the market is expecting. The consensus is quite negative or neutral,’ Li-Labbe said.
She added that a possible listing of the company’s logistics arm on the stock exchange can also be viewed as a tailwind.
The company has not made an official announcement about this, but it could be on the cards after JD Logistics became an independent business in 2017, with JD.com holding an 81% stake.
‘There is no timeframe, but last year they gave us a valuation of $13.5 billion,’ Li-Labbe said.
‘They kind of implied a potential spin-off in the future. I think that would depend on the profitability of the business and also the percentage of the third-party services provided by JD Logistics. So far, it is about 50/50.
‘When the percentage of third-party business reaches a significant ratio and shows early profits, they could do that.’
Although the share price is up year-to-date by 14% to $25.15, it is still almost half the $49 price it reached last February.
Andrew Graham, head of Asia at Martin Currie, said there are a number of reasons for this, including ‘a slightly weaker near-term macro environment, a little bit of evidence of a slowdown and a little bit more perceived weakness of JD.com versus its stronger larger competitor’.
He also added that despite record sales, reaching $23 billion on Singles Day in November, it is not a hugely profitable business.
‘They’ve come under fairly persistent margin pressures and I think that has probably had some impact,’ he said.
Key man risk
One major problem, key man risk, compared with its competitor, Alibaba, came to light last year. The company’s founder, Richard Liu, was arrested in relation to allegations of rape.
The shares fell close to 4% on the day the news broke. Despite holding only 11% of the shares, Liu has around 80% of voting rights. In comparison, Alibaba has a long list of partners.
However, Li-Labbe pointed out that the firm has already made some changes to mitigate this.
‘A couple of months before the charge, JD.com had already modified the internal organisation, and during the third quarter earnings call, Liu said that he had stepped back.’
Now, all of the entities have their own chief executives, and a management committee was put in place to make key decisions.
Li-Labbe added: ‘Liu hasn’t shown up in many important events so it seems that he has taken a step back, so I think this one-man show risk has diminished.'