JD.com Is Worst China Bet as Reopening Play Fades

(Bloomberg) — China’s post-Covid spending spree was supposed to reinvigorate JD.com Inc. But things haven’t gone according to plan.

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After dropping 37% since the start of the year, JD.com trails all its peers in the benchmark Hang Seng Tech Index, as well as a gauge of Chinese shares traded in Hong Kong. A slow and uneven recovery from the Covid slump, in addition to growing competition from rivals PDD Holdings Inc. and ByteDance Ltd., has led the likes of Goldman Sachs Group Inc. and UBS Group AG to cut their estimates.

JD.com’s struggles are emblematic of the challenges faced by China’s online retailers. Demand for big-ticket items is still weak — bad news for a company which counts on electronics and home appliances for half its sales. The stock’s 77% gain from an October low to a January peak has all but vanished.

“Investors dislike uncertainty and here we have uncertainty from a number of angles,” said Adam Montanaro, investment director of global emerging-markets equities at abrdn Plc. “The stock will likely remain in the penalty box until management can prove they can continue to evidence margin expansion and better evidence their competitive moat.”

Signs of cracks in the shares’ rally started to appear in February amid reports that JD.com was rolling out a 10 billion-yuan ($1.5 billion) discount campaign to fend off a challenge from PDD’s budget shopping app Pinduoduo, which has years of experience in offering mass-scale subsidies.

While JD.com has consistently excelled in value-added services such as delivery and after-sales support, it’s difficult for the company to beat Pinduoduo on price wars and promotions, according to Xiadong Bao, fund manager at Edmond de Rothschild Asset Management. “Visibility is low and investors prefer to wait before the company delivers on earnings,” Bao said.

Grounds for optimism receded further in March when the company warned that a robust recovery in consumption is unlikely to materialize until the second half. China’s latest economic data reflect the uncertainties: while retail sales soared last month, industrial output growth is still below pre-pandemic rates and the nationwide urban jobless rate remains elevated.

To make matters worse, investors were caught off guard this month by reports of organizational changes in JD.com’s logistics and retail arms — an overhaul that Barclays Plc analyst Jiong Shao expects to cause near-term business disruption. Another initiative to move some products to third-party merchants is set to hit sales in coming quarters, Shao wrote in a note.

Analysts now expect the online retailer’s revenue growth to slow to 5.8% in 2023 from 10% in 2022, well below a projected gain of 28% for PDD. Their price targets have also been tumbling, with an average decline of more than 9% since March 24 the most among all Hang Seng Tech Index members.

The pessimism is reflected in a valuation that at 12.6 times forward one-year earnings is the cheapest ever, although the stock is still pricier than China’s e-commerce bellwether Alibaba Group Holding Ltd.

“The now lowly valuation suggests it could be an interesting time to add for patient investors,” said abrdn’s Montanaro.

For now though, the stock appears to lack a near-term spark. JD.com is still readying its large language model for a launch later this year while rivals Baidu Inc. and Alibaba have had a head start on AI chatbots. Alibaba also is gaining attention with its plan to split its $250 billion empire into six business units.

“Investors who want to do some rebalancing within the Chinese tech sector would choose to long Alibaba or Tencent, to bet on a sharper business turnaround,” said Kenny Wen, head of investment strategy at KGI Asia Ltd.