JD.com - A Great Business At A Fair Price Wrapped In A Special Situation

Summary

122% upside by 2020 in base case scenario using sum of the parts analysis.

Strong moat and long runway for growth with operating margins likely at an inflection point.

Hidden assets worth over one third of JD.com's current enterprise value.

Investment Thesis

JD.com (NASDAQ:JD) is a great business trading at a fair price wrapped in a special situation in way of a spin-off of JD Finance, partial spin-off of JD Logistics and reorganization of the business over the next 2-3 years.

At $39 per share, there is $3 of net cash per share. JD Finance (which will get spun off) was recently valued at $5.6 per share in a private funding round. JD logistics (which will likely get spun off) valued at $7.68 per share in the latest private funding round. These two pieces of information imply a $22.9 valuation per share or 6.4x 2017 EBIT for JD’s core ecommerce business, providing a margin of safety to investors.

Furthermore, JD.com has a long runway for growth, operates in an industry with secular tailwinds, is likely at an inflection point in way of expanding its operating margins, has substantial hidden assets such as JD Finance and JD Logistics which, according to recent private market values is worth over a third of JD’s current enterprise value. It is also managed by an owner operator with a 15.8% stake and majority voting power in the company. Richard Liu earns a 1 RMB salary and no cash bonus. His entire compensation is in stock options that vest over ten years starting in 2015 at 10% per year with a strike price of $33.4 per ADR share.

China’s online retail market size is 6.1 trillion RMB and has grown at a 38% CAGR over the past five years. Assuming a 21% CAGR until 2020, the online retail market size will be 10.8 trillion RMB. JD has 21% market share and 27% market share in China B2C transactions, second to Alibaba’s 57% share. I assume that JD maintains its market share. However, I believe there is upside as JD may gain market share given its superior nationwide logistics network and last mile reach enabling JD to have better speed, lower unit costs and more authentic products given JD’s vertical integration as opposed to Alibaba’s asset light approach.