A worker looks at a mobile device as he places a package onto a conveyer at a JD.com Inc. warehouse in Shanghai, China. Photographer: Tomohiro Ohsumi/Bloomberg
The mercury has been rising well above what’s normally seen at this time of the year in many parts of China, but e-commerce giant JD.com isn’t feeling the heat.
Shares of JD.com ( JD ) spiked almost 8% on Monday after China’s largest online retailer delivered a stronger-than-expected revenue outlook for the fourth quarter, soothing investor fears that unusually warm winter temperatures may hamper clothing sales and weigh on the top line. The gain offset the 7% loss that JD.com copped last Friday after rival Vipshop ( VIPS ) warned third quarter revenues are likely to land well below what it had forecast, with warmer-than-expected fall temperatures to blame.
Fetching around $28.80 a share, JD.com is up 20% since this column wrote favorably about the stock in January. The stock soared as high as $38 a share in June before fears China’s slowing economy would put a stranglehold on the e-tailer’s growth prospects brought it crashing to earth. While JD.com has bounced back from its October low, there could be room for the stock to advance further given its above industry pace of growth, underpinned by its strong business model, and undemanding valuations.
HSBC analyst Chi Tsang, who initiated coverage of JD.com last week and has a $38 a share price target, notes the stock looks attractive on a number of valuation yardsticks. JD.com currently trades at a 2016 enterprise value-to-gross merchandise volume ratio, a common gauge for valuing e-commerce companies, of around 0.4 times, which is lower than the 0.6 times averaged by rivals Alibaba ( BABA ), Vipshop and Jumei ( JMEI ). On a price-to-free cash flow basis, JD.com trades at 17 times for 2016, which compares to Alibaba’s 21 times.

The catch is that unlike Alibaba and other major Chinese rivals, JD.com is yet to turn a profit. Losses amounted to CNY530 million, or $0.39 per American depository share, which was steeper than the $0.20 analysts were expecting. JD.com has continued to wallow in the red because of its heavy spending on growing its logistics network, with three large distribution warehouses opened in the third quarter. It’s a different approach to the asset-light strategy of most Chinese e-commerce companies like Alibaba, which rely on outside logistics providers rather than building their own warehouses.
However, the reward of its aggressive investment is that JD.com is able to deliver unparalleled service among China’s e-commerce companies. Thanks to its network of warehouses in more than 40 cities and its army of 48,000 delivery staff, the e-tailer has been able to keep tight control over the quality of products sold and deliver 90% of orders on the same or following day. With product authenticity and after sales services among key concerns of the urban Chinese households fueling e-commerce growth in China, JD.com is better positioned to win these customers than its rivals. Meanwhile, the capital intensive nature of JD.com’s business model makes it difficult to replicate and will keep the e-tailer ahead of rivals on the customer service dimension, notes HSBC’s Tsang.
BofA Merrill Lynch analyst Eddie Leung, who has a neutral rating on JD.com with a $38 price target, expects the company to “grow faster than the industry average” on the back of its high quality business model and scope to diversifying its product offering. Because JD.com operates its own warehouses and logistics network, it can more quickly satisfy consumer demands in emerging segments like online groceries.
While some commentary have attributed the deceleration in JD.com’s revenue growth, its slowest in two-and -a-half years, to China’s slowing economy, the tapering is more likely a reflection of an industry that is maturing. JD.com’s third quarter revenues of CNY44.1 billion, which was up 52% compared to the same period a year ago, were in line with analyst expectations, while the company’s forecast of fourth quarter revenues of CNY51 billion to CNY52 billion, which translates to a pace of growth of between 47% and 51% year-on-year, was above analyst expectations.
The e-tailer’s partnership with Tencent ( 700.HK ), which gives it access to the more than half billion users of the Chinese social media giant’s platforms, offers another source of growth. Around of 50% of new customers who shopped on JD .com during Singles Day, a Chinese shopping festival similar to Cyber Monday in the U.S., came from Tencent’s WeChat messaging platform.
While JD.com’s investment in its logistics network and branding will likely pressure net margins in the near term, the shift in revenue mix towards its more profitable marketplace business will help improve gross margins and offset rising operating expenses in the long term, notes BofA Merrill Lynch’s Leung. Stripping away investment spending and operating expenses, JD.com’s gross margins have expanded from 4.8% in 2010 to 13.8% in the third quarter. As JD.com’s newer lines of service such as consumer financing and flash sales expand in scale, the drag on margins is also likely to lessen, notes Leung. At the rate of top line growth and margin expansion it’s expected to rack up, analysts reckon JD.com may well see black ink by mid-2016, which could be a catalyst for its share price.