Brighter Times Could Beckon for JD.com after Stormy Spell

Among the top five Chinese tech stocks listed in Hong Kong, JD.com has fallen the least in the past year and the relatively resilient stock could be set for a rebound

Key Takeaways:

• Key factors in a JD share-price rally would be the results of a U.S. regulatory review of Chinese stocks and the expected launch next year of a scheme to promote dual-currency share trading in Hong Kong
• A settlement in a sexual assault case against company founder Richard Liu has also removed a shadow over the share price

By Ken Lo

For Chinese stocks, the last few years have been fraught with gloom and doom. But some of the storm clouds could be lifting for e-commerce giant JD.com Inc. (JD.US; 9618.HK), which fared better than its peers during the dark times and may now be set to enjoy some sunnier market weather.

Chinese stocks have been plagued by an unrelenting litany of troubles in recent years: the danger of having to delist from the U.S. stock market, a Chinese regulatory crackdown on Internet companies, prolonged Covid-19 prevention measures, and an economic downturn.

As of last Friday, top five Chinese tech stocks Alibaba Group (BABA.US; 9988.HK), JD.com, Meituan (3690.HK), Tencent Holdings (700.HK) and Xiaomi Corp. (1810.HK) had suffered Hong Kong stock-price plunges ranging from about 30% to 58% over the past year. Of these, JD logged the smallest drop. What has made JD more price-resilient than the other giants?

Since last year, e-commerce leaders have been busy targeting China’s less affluent consumers.  JD has been actively expanding in the so-called “sunken market” of smaller Chinese cities and rural areas beyond the big metropolitan hubs. Alibaba has also launched its cost-effective product platform “Taobao Deals”.

However, JD has faced stiff competition with Alibaba and Pinduoduo Inc. (PDD.US) for slim margins in third- and fourth-tier Chinese cities. Even with its annual revenues growing nearly 28%, JD still posted a loss of 10.6 billion yuan ($149 million) for its new businesses, pushing overall accounts for the last financial year from profit to a net loss of 3.56 billion yuan.

Fortunately for investors, JD returned to the black in the first half of this year as new business improved and losses narrowed, posting a  net profit of 1.39 billion yuan for the period.

Lawsuit settled out of court

JD has in fact been making progress in penetrating the previously untapped markets. The e-commerce company had 570 million active users last year, nearly 100 million more than a year earlier, of which 70% came from the “sunken” markets. The strategy has translated into rising revenues. By the end of June, JD’s first-half revenues had reached 507 billion yuan, surpassing the nearly 410 billion yuan of Alibaba, its archrival.

Another cloud of uncertainty for the company was lifted when a civil suit against JD founder Richard Liu ended in an out-of-court settlement.

The lawsuit had been scheduled to go to trial in Minnesota on Oct. 3, but on the evening of Oct. 1 the parties released a statement saying that a misunderstanding arising from an accident between Richard Liu and Liu Jingyao in Minnesota in 2018 had taken up a lot of social resources and caused deep distress to their families. The statement said both parties decided to clear up the misunderstanding and reach a settlement to avoid further litigation damage.

Liu resigned as CEO and named Xu Lei as his successor at the beginning of April this year, only to be reappointed as chairman to focus on long-term strategy. Although JD has moved to a team management model and will be less affected by individual personnel change, the resolution of the case helps clear some of the negativity that was hovering over the share price.

But investors should keep an eye on another price-sensitive issue – JD’s relationship with social media and gaming giant Tencent. In December last year, Tencent reduced its JD stake from 17% to 2.3%, briefly battering JD’s share price. Tencent chose to scale down the stake by distributing the shares as dividends with a market value of about $16.4 billion.

Investor confidence remained fragile even though Tencent and JD announced a three-year strategic cooperation plan at the end of June, and Tencent’s social app WeChat continues to provide traffic support for JD. Shares in JD.com hit a low of HK$193 in early October, rebounding slightly to HK$199 on last Friday.

Stock price stimulant?

But a policy change to encourage dual currency listings in Hong Kong may benefit JD and spur hopes for a share price rebound.

According to Bloomberg, the Hong Kong authorities are planning to change the law this year to allow stamp duty waivers on some dual-currency stock transactions, laying the groundwork for a “dual tranche, dual counter” mechanism to be introduced in the first half of next year. The changes would allow companies to issue shares in Hong Kong dollars and Chinese yuan as part of a push to make Hong Kong into a leading trading hub for yuan-denominated securities.

The additional liquidity could stimulate trading in dual-currency shares, one of the moves to promote the internationalization of the RMB. JD, along with Alibaba and Xiaomi, are among the companies likely to participate in the scheme, which could boost their shares, according to Hong Kong’s South China Morning Post.

However, some analysts are skeptical about the scale of any uplift from the policy changes. Hong Hao, chief economist at GROW Investment Group, was quoted by Bloomberg as saying that dual-currency shares will not be cheap in yuan terms, and the depressed Hong Kong stock market and the yuan’s weakness against the U.S. dollar could deter mainland investors.

The market is also closely watching developments in a dispute about auditing standards between China and the U.S. that had threatened to force Chinese companies to delist from U.S. exchanges.

The U.S. Public Company Accounting Oversight Board (PCAOB) has sent an audit team to Hong Kong, where Alibaba, JD and Yum China (YUMC.US; 9987.HK) are among a first batch of companies to be reviewed. The initial results will be announced in November at the earliest and could determine the direction of Chinese stocks.

To assess JD’s valuation, we can refer to the forward price-to-earnings (P/E) ratios of its peers. JD and Alibaba come in at 16.8 times and 16 times respectively, higher than Pinduoduo’s 10.3 times. However, JD’s operating profit margin in the second quarter of this year was only 3.4%, far behind Alibaba’s 12% and Pinduoduo’s 27.7% and reflecting weaker profitability. Therefore, investors who are tempted to snap up JD shares in hopes of a future price bounce may want to wait for third-quarter financials before making a move.

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