JD JD.com, Inc

Sector financial performance:

This china-based company, who primarily sells, by itself and though its own websites, general merchandise products ( electronic and home appliances mainly) and as well provide service such as marketplace, fulfillment, and delivery, has been grouped into online retail& service sector in merchandise industry.

Almost all companies in this sector in our analysis have experienced fast growth in terms of direct products sales between 2015 and first half of 2017 (double digits growth rate) as reflected from the increased sales volumes. This can be attributed to the lower purchasing costs (price/shipping) in North America or strong natural demands in China. Correspondingly, the service revenue of some of companies where apply increased as well as the sales of third-party seller who use their marketplace increased quickly.

Products sales of most companies in this sector grew slowly or decreased in 2017 in US market and some rebounded back on the track of 2015/16 in 2018. The slowing growth of 2017 in direct products sales of many companies in China market seems to be continuing after entering 2018 and presents a more clearly downward growth trend since 2015for those China-based companies probably due to increasing pressure on price resulted from competition.

Direct sales gross margins (merchandise margin) of companies that focus on US market decreased significantly probably due to the lower price and shipping costs. Benefiting from economy scales and getting better of retail market and from leverage of other expenses such as fulfillment as a result of fast increase in revenue from service, some of US companies have been seeing the improved operating margin and cash flow. However, in China market, due to increasingly intensive competition, most of companies experienced shrinking margins and decrease in cash flow as compared with 2016.

The current average gross margin (direct sales gross margin) is about 15% with a range in 5-28% down from about 17% three years ago. The current average gross margin (products and service) is about 23% with a range in 7-36% up from about 17% three years ago(fulfillment expenses included). At the same time, as companies continued to increase investments in selling& marketing and technology innovation when facing intensive competition since 2017, the average SG&A as percentage of sales (currently average 18.5% with a range 6-32%) and average technology& content as percentage of sales (currently average 5% with a range of 2-13%) got worse in 2018. Therefore, under the help from improved gross margin, the average operating margin firstly went up above 0% from -3% in 2017 (12 months trailing data) and down back to -1% in 2018.

According to our analysis, the current companies’ enterprise price/EBI ratios vary from 100 to 200 and enterprise price/sales ratios vary between 0.4 and 4.5.

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Company performance:

Growth in sales orders continues very strong in the past several years as a result of fast increased orders and new account number of customers. However, the growth seems to be not as fast as 2015/16.

The first six months of fiscal 2018 compared with the same period of 2017

Net sales increased about 32% benefiting from increase in both direct sales and services (51%).

The fiscal 2017 compared with 2016

Net sales increased about 40% benefiting from increase in both direct sales and services (50%).

The first nine months of fiscal 2017 compared with the same period of 2016

Net sales increased about 28% benefiting from increase in both direct sales and services.

Fiscal 2016 compared with 2015

Net sales increased about 44% primarily due to increase in orders.

Fiscal 2015 compared with 2014

Net sales increased about 58% primarily due to increase in orders.

We see an increase of about 90 basis points in gross margin of direct sales products (excluding fulfilment costs) as direct sales increased quickly. With the help of increased service sales, which has higher margin, and with help of improved SG&A due to less compensation expensed, this company’s operating margin went up to about 0% from -8% in 2017 ( 12 months trailing). This company’s subsidiaries created huge loss in 2017. However, it seems that its merchandise margin shrink in 2018 probably due to promotions, which may be a result of increasing pressure on competitions. In addition, due to increased R&D spending, its operating margin down back to -0.5% in 2018.

Stock price

This stock currently has a stock price/sales ratio of 0.66 ($177). We think that its stock is being relatively slightly overvalued considering the concerns with its increasing sales growth pressure as probably a result of competition in 2018.