In China, if you need something, you can take out your phone, order it online and potentially have it delivered to your doorstep within the same day. The incredible rise of e-commerce in China is exemplified by the fact that in 2022, online sales made up over 27% of the total RMB 44 trillion (US$6.35 trillion) in retail sales in the country that year.
One of the biggest purveyors of online goods is none other than JD.com Inc (SEHK: 9618) (NASDAQ: JD). Despite the popularity of its bigger e-commerce peer Alibaba Group Holding Ltd (SEHK: 9988) (NYSE: BABA), JD.com was actually started in 1998 – one year before Alibaba.
So, for investors interested in this pioneer of the e-commerce scene in China, what do you need to know about its history, business, and future prospects? Let’s find out more about JD.com.
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Understanding The Customer And Market
In China, competition is fierce everywhere. Where JD really differentiated itself from the competition, at least in the early days, was its online retail business model of first-party products. That meant – unlike a third-party (3P) marketplace like Alibaba – JD actually purchase inventory wholesale from merchants, manage it via their warehouses, and then distributes it to buyers.
While this is normally viewed as a very “asset-heavy” model, akin to US-based Amazon.com, it also helped build up JD.com’s credibility with buyers as a reputable site for authentic goods.
That’s because, during this period, there was a rise in the “Wild West” days of China’s rapid rise in consumerism. As a result, piracy and counterfeit products were rife. JD.com carved out a niche as a slightly more pricey – yet reliable – e-commerce platform when compared to its rivals.
The e-commerce provider was founded by Richard Liu, an entrepreneur who started up the firm in 2004 and which started out mostly selling electronic goods on its site. JD.com then evolved into a fully-fledged e-commerce platform by 2008. Today, JD.com is similar to Amazon in that it sells its own wares but also those of third-party sellers.
Forming Lasting Partnerships With Wechat & Tencent
To tackle the increasingly dominant e-commerce platform of Alibaba, in 2014 JD.com formed a strategic partnership with WeChat and gaming giant Tencent Holdings Ltd (SEHK: 700). Under that initial five-year deal, JD.com would be afforded entry points, data traffic and other platform support via Tencent’s massive social networks of WeChat and QQ.
Effectively reaching a much larger user base, it was a big win for JD.com. In the process, JD.com also gave Tencent a stake in itself that was worth around US$220 million at the time. Over the following years, Tencent continued to be a major shareholder in JD.com.
Tencent did distribute US$16.4 billion worth of JD.com shares to its shareholders as a special dividend earlier this year, meaning its stake in the e-commerce platform was cut to 2% from 17% previously. Elsewhere, it has also been looking for growth opportunities outside of the China consumer.
At the beginning of 2022, JD.com struck a strategic partnership with online commerce platform Shopify Inc (NYSE: SHOP) to help US-based merchants sell to JD’s 550 million active customers in China.
JD.Com Runs Multiple Businesses
JD.com’s business has had to change to adapt to the competitive threats of the likes of Meituan Dianping (SEHK: 3690) and Pinduoduo Inc (NASDAQ: PDD).
Today, besides its main retail business, JD.com also has a faster-growing logistics arm that is a result of its consistent investment into the space since the mid-2000s. For example, in its latest Q1 2023 earnings, JD.com delivered overall revenue growth of 1.4% year-on-year to RMB 243 billion (US$45.3 billion).
Indeed, its retail operation saw revenue decline 2% year-on-year but its logistics business saw strong revenue growth of 34% year-on-year to RMB 36.7 billion for the period. Its overall logistics and other services (including its JD Health business) saw impressive 61% year-on-year revenue growth to RMB 47.4 billion.
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Cash Flow Positive But Challenges Ahead
Overall, JD.com is now a consistently profitable business and has been generating strong free cash flows from 2019-2022. According to reports earlier this year, the company is also looking to spin off its property and industrial units in listings on the Hong Kong Stock Exchange.
That should give JD.com more cash to invest in profitable parts of its business. However, like all tech firms in China, it suffered during the regulatory crackdown. Its Hong Kong-listed shares are down around 35% over the past year and are down a similar amount since first carrying out its secondary listing in the city in the middle of 2020.
There may be light at the end of the tunnel, though. In the past month, more Chinese tech firms – like Ant Financial – have been fined, meaning the crackdown could be coming to an end.
With its strong business, positive cash flows, and various growth avenues, JD.com is definitely worth considering for investors interested in the long-term potential of China’s online commerce space.
Photo by Christian Lue on Unsplash
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