Source: Leverage Shares

Through 2023 until the 6th of March, the Chinese share had declined 60.2% but the ADS had declined 56.1%. Daily traded volumes in both types are generally close to each other with the ADS being traded a little more. The slight uptick in traded volume in the ADS can be ascribed as the reason why there’s a slight difference in valuation on any given day. On the balance of it, there is no significant disparity in conviction.

Much like JD’s malls, the company seems to have a little bit of everything, with most of it being quite good. However, there are also a few areas of concern to bear in mind.

The company announced a share repurchase program of up to $3 billion worth shares (including ADSs) over the next 36 months through March 2027. Unlike with NVIDIA⁶, this isn’t a regular occurrence: the last time a similar program was pursued was in December 2018, which ran for one year for a maximum amount of $1 billion. Share repurchases tend to buoy valuations since there’s a high likelihood of finding at least one potential buyer: the company itself. Given the time frame, it could be assumed that the company’s laying a safety net of sorts for the average investor. There might be a reason for this.

The company’s high-profile on-demand delivery platform Dada Nexus (which was spun off into its own stock “DADA”) was subjected to internal inquiry regarding overstated revenues and expenses⁷, which cause the stock to lose half its value overnight. Dada’s president confirmed⁸, one day after the main company’s earnings release, that fraud had in fact been perpetrated and that he’s stepping down. While the company asserts that this was only in Q3 2023, there will also be questions as to whether it was only one quarter or more and if the main company has similar issues. Thus, a substantial amount of reputation degradation is impacting the stock valuation of both the main company as well as the separately-listed subsidiary.

As it stands, the company’s reduced free cash flow situation might be a persistent feature over the next year or so; a large portion of the sales achieved over the final quarter of the year was achieved through aggressive discounting⁹ to attract consumers paring down spending amidst economic headwinds. At the same time, the company is considering diversifying its target audience by acquiring British white goods retailer Currys¹⁰, which is active across Britain, Ireland, Sweden, Norway, Denmark and Finland.

On the other hand, the company announced its first ever dividend, a relative rarity in high-conviction Chinese companies sought out by foreign investors. At $0.76 per ADS, the implied dividend yield is approximately 3%. This too might be a sign of assuring investor confidence but the language employed doesn’t suggest that this will be a regular feature. Macroeconomic conditions also raise the question as to how long the discount regime can be used to prop up sales while the company continues to find new means of reducing costs and monetization.

Footnotes:

1. “How Chinese Retailer JD.com Uses AI, Big Data & Robotics To Take On Amazon”, Forbes, 3 Aug 2018
2. “JD.com’s Drone Delivery Program Takes Flight in Rural China”, Jingdong (JD) Corporate Blog, 11 November 2016
3. “Chinese e-commerce giant JD.com unveils own large language model, ChatRhino, to drive increased adoption of AI for industrial use”, South China Morning Post, 14 July 2023
4. “Baidu Q4: Why Earnings Missed Expectations”, Leverage Shares, 1 March 2024
5. “NIO Q4 2023: Weakened Earnings, Ambitious Goals”, Leverage Shares, 7 March 2024
6. “Nvidia Q4 Earnings: Solid Company, Risky Stock”, Leverage Shares, 23 February 2024
7. “JD.com’s on-demand delivery unit, Dada Nexus, loses 46 per cent of US stock value overnight amid internal inquiry into potential fraud”, South China Morning Post, 9 January 2024
8. “JD.com’s Logistics Unit Dada Discloses Financial Fraud, President to Resign”, Caixin Global, 7 March 2024
9. “JD.com beats quarterly revenue estimates as heavy discounts buoy demand”, Reuters, 6 March 2024
10. “China’s JD.com versus US’s Elliott in battle for UK’s Currys”, Reuters, 19 February 2024