The past two years were rough for Chinese stocks, due to the escalating U.S.-China trade war, rising tariffs, and China’s economic slowdown. Unpredictable regulatory crackdowns from the Chinese government on growing sectors like video games, fintech, and streaming video exacerbated that pain. Yet 2020 could be a brighter year for Chinese stocks. The U.S. and China have agreed to sign a “phase one” trade deal to de-escalate tensions, and China recently launched fresh stimulus plans to reinvigorate its sluggish economy.
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For the growth investors, they are mainly focused on searching for companies with criteria such as above-average historical growth rates, strong prospects for future growth, good management, reasonable valuations, and others. In this article, we will like to point out two reasons why growth investors might find JD.com Inc (NASDAQ: JD) an interesting candidate to add to their existing portfolio.
What is JD.com and Why it matters?
For those who are new to the company, JD.com is one of the leading e-commerce players in China, alongside Alibaba Group (SEHK: 9988) and Pinduoduo Inc (NASDAQ: PDD). It operates a first-party e-commerce business, in a similar vein to Amazon.com, and also offers its platform to other online sellers. Moreover, it has also diversified into other business areas such as logistics, financing, offline retailing, and more.
Admirable track record
Growth investors are particularly interested in companies that possess a good historical track record of high growth and potential to continue that growth rate into the foreseeable future. A company that has a proven track record of growing its business in the past has a better chance of continuing that performance in the future. In the case of JD.com, there are many points to suggest that it might be the company that we are looking for. Here are two simple charts to give us a quick overview.
Source: JD.com investor presentation
Let’s start with the first chart – gross merchandise volume (GMV). For starters, GMV is the total value of all orders for products and services placed on the company’s platform. Here, we can see that GMV has been growing at a 64% compound annual growth rate (CAGR) from 2012 to 2018.
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The high growth in GMV translates into strong growth in net revenues during that period, which was up by 50% CAGR from 2012-2018. Note here that net revenue grew at a slower pace since about half of the company’s GMV was sold by third-party sellers who were charged a fixed commission of the sales.
These commissions, rather than the sellers’ sales revenue, are recorded as JD’s revenue. In short, a strong track record of growth for JD.com! Thus, sharped-eyed investors would point out that what we did above was to look at the rear mirror. What about the present, or the future? Can JD.com continue its strong performance? I think the answer is “yes”.
Strong performance is expected to continue
Such performance, however, is far from over.In the latest quarter ended 30 September 2019, JD’s net revenues came in at RMB 134.8 billion (US$4.47 billion), an increase of 28.7% from the third quarter of 2018. In particular, net service revenues grew 47.0% year-on-year to RMB 16.0 billion.
Breaking it down further, its core e-commerce business’s revenue was up by 27% from the third quarter of 2018 while its new businesses (such as JD Logistics) saw revenue jump by 64% to RMB 5.9 billion in the latest quarter.