Benjamin Beneche of Pictet Asset Management presented his in-depth investment thesis on JD.com (Nasdaq: JD) at Asian Investing Summit 2018.
JD.com is the second-largest player in the Chinese e-commerce, with 27% share of a market we envision to grow at a double-digit rate over the next decade. Unlike the largest player, Alibaba, JD follows an asset-heavy approach more similar to that of Amazon. This involves spending on logistics, which has given JD a clear advantage in delivery (~80% same or next day delivery). The company has the industry’s highest growth in users (~292 million) and gross merchandise value (+33% y-y). Whereas the unit economics are favorable, with between 5-15% gross margins, the current business is only breakeven due to upfront investments in logistics and other initiatives such as O2O, finance, groceries, and cloud computing.
Over time, Ben expects mix shifts between categories and the development of third-party businesses, coupled with greater scale economies, to deliver a 5% operating margin. Unlike the competition, JD benefits from negative working capital, with a cash conversion cycle of negative 20 days. On this basis, Ben sees the stock on 10x normalized free cash flow in 2020. Furthermore, option value exists in both JD finance and JD logistics, which were recently valued at $7.2 billion and $13.4 billion, respectively, in private funding rounds.
Taking into account a driven owner-operator CEO in Richard Liu and strategic partners/shareholders in Tencent and Walmart, Ben views JD as a compelling long-term investment opportunity.
Extra: Read Ben’s article on ESG investing.
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About the instructor:
Benjamin Beneche, CFA is a Senior Investment Manager at Pictet Asset Management Limited. He joined the firm in 2008 and is in the EAFE Equities team with a specific focus on Asian equities. Mr. Beneche began his career as a graduate within PAM Equities then as a Junior Investment Manager on the global equities fund with an emphasis on the energy sector. Mr. Beneche is a Chartered Financial Analyst charterholder. He graduated with a first class honors degree in Economics and Economic History from the University of York.