Texas-based investment firm Wiedower Capital is bullish on JD.Com Inc (ADR) (NASDAQ: JD), which operates the third largest e-commerce portal in China. In its latest letter to investors, the investment firm discussed JD.Com in details. The firm’s boss Travis Wiedower noted in the letter that JD.Com’s business is different from Tmall and Taobao – two largest competitors – because the company owns its entire end-to-end logistics network – while Tmall and Taobao don’t buy their own inventory or ship it direct to consumers. According to Wiedower, JD is more akin to Amazon. Let’s take a look at Wiedower’s commentary about JD.Com.
JD.com is the third largest e-commerce website in China. What makes JD unique is that they own their entire end-to-end logistics network. They buy product from manufacturers, store it in their own warehouses, sell direct to consumers, and even manage the last-mile delivery to the customer’s door. JD’s largest competitors, Tmall and Taobao, are both marketplaces that connect buyers and sellers. Tmall and Taobao don’t buy their own inventory or ship it direct to consumers—they are more similar in concept to eBay. JD is more akin to Amazon.
For as big of a company as JD is, I was surprised to come to the conclusion that it appears to be meaningfully undervalued. In general, I find small and micro-cap companies are mispriced more often than larger-caps. This is why I focused exclusively on smaller companies when I launched Wiedower Capital, but my thinking has evolved. I’ve come to realize that I care more about high-quality companies and CEOs with long runways for growth than I do the initial size of the company. Even a company as large as Amazon can have a very long runway for growth. Back to JD, I think there are two factors at play that lead to its undervaluation.
First, like many of our investments, is the time horizon that I look at JD through compared to the vast majority of Wall Street. Most investors care what JD’s earnings will be next quarter and next year, while I care about whether their competitive advantage can survive the next couple decades. I don’t care what their earnings per share will be in 2018 because it matters very little to the intrinsic value of JD.
Second, people who live in China currently can’t invest in JD (or any of the large Chinese tech companies that are listed in the US). But this is about to change. Imagine if Amazon was only listed as a public company in China (where they barely do any business) and Americans weren’t allowed to invest in it. I bet Amazon’s stock would be a lot cheaper because the people who use Amazon and understand it the most can’t invest in it. That’s the situation that JD is currently in.
When I’m researching a company, my goal is to identify the handful of key factors that will determine a company’s long-term success or failure. It’s impossible to know everything about an investment, but if I’m right about the main drivers of the company and industry, I’ll probably be right about the general direction of the investment. With JD, the four key drivers I focused my research around were: China’s tailwinds as a growing consumer economy, if I can trust Richard Liu (the founder/CEO), how durable JD’s competitive advantage is against Tmall and Taobao, and the risk of government intervention and regulations.
To be clear, I don’t expect the Chinese e-commerce market to ever be dominated by one player like the US market is. The US and China e-commerce markets developed much differently, and I think Taobao, Tmall, and JD are all too established at this point to not survive for the long-term. However, I do think JD can continue to grow their market share as they have the past three years.
The biggest difference between JD and Tmall and Taobao is that JD controls the customer experience and the product cost from end-to-end. I believe controlling the entire logistics network allows JD to do a lot of things that Tmall and Taobao can’t do—like providing more consistency across everything they do, better customer service, guaranteeing authentic products, and delivery speed and efficiency.
When I started researching JD, my biggest concern was the risk of government regulations or intervention. The number of unknown-unknowns go up exponentially when investing in a country that I’ve never been to—especially one that is so different than the US. However, I’ve become more comfortable with the regulatory risk than I thought I would.
Throughout my research, I noticed that the other big Chinese tech companies—Alibaba, Baidu, and Tencent—had far more run-ins with the Chinese government than JD has had, and it took me a little while to appreciate why. While Chinese President Xi Jinping has openly endorsed and encouraged more entrepreneurship, tech innovation, and ecommerce, he is extremely strict on censorship. Criticizing the government is simply not allowed. And where online are people most likely to criticize the government? Blogs, social media, and news outlets—not e-commerce sites.
More importantly, the Chinese government recently endorsed the corporate structures that allow foreign ownership in their companies. Chinese citizens currently aren’t able to invest directly into the most successful Chinese companies listed in the US, but the government is changing that. As part of this change, the government explicitly said the current structures are being kept in place. In my opinion, that endorsement largely de-risked the “China screws all American investors” bear case.
JD.Com Inc (ADR) (NASDAQ: JD) has a market cap of $54.56 billion. The company’s performance on the share market isn’t very impressive. Shares are down 12.11% so far this year. The stock has plunged 5.54% over the past three months and 8.62% over the past 12 months.
Meanwhile, JD.Com is also popular among hedge funds covered by Insider Monkey. As of the end of 2017, there were 46 funds in our database with positions in the company, including Hillhouse Capital Management and Tiger Global Management.