May 14, 2020 / 3:34 AM / 23 days ago

Breakingviews - China’s JD flexes virus muscle memory

A logo of JD.com is seen on a helmet of a delivery man in Beijing, China June 16, 2014. Picture taken June 16, 2014. REUTERS/Jason Lee

HONG KONG (Reuters Breakingviews) - JD.com is flexing an impressive virus muscle memory. Since developing its online business model during the 2003 SARS outbreak, the company has grown into a Chinese retail powerhouse. Some Covid-19 momentum provided by its logistics division should help ease plans to raise at least $3 billion in fresh capital.

The $70 billion company is aiming to follow Alibaba from New York onto the Hong Kong bourse with another listing. In November, its larger rival raised $13 billion in the Asian financial hub in what was expected to start a migration trend.

Higher valuations in the former British colony are a big consideration. Rising political tensions between Washington and Beijing over trade, security and now, the pandemic, are another. Following pressure from the Trump administration, a giant pension fund for U.S. government workers said on Wednesday that it would indefinitely delay investing in “problematic Chinese companies”.

Against this backdrop, JD has picked an opportune time to tap a new market, despite broad virus-induced uncertainty. Its Amazon-like model of holding inventory and moving the goods itself also has long meant persistently lower profitability compared to Alibaba, which farms out delivery.

The outbreak, however, has vindicated the strategy implemented by founder Richard Liu, who credits SARS for inspiring him to close brick-and-mortar shops and focus instead on e-commerce. JD’s couriers and warehouses have been able to return to work quickly. When the company delivers financial results on Friday, sales in the first three months of the year are expected to grow 13%, to 137 billion yuan ($19.4 billion), from a year earlier, based on an average of forecasts gathered by Refinitiv. By contrast, Alibaba may see e-commerce revenue decline.

What’s more, JD’s gains could translate into longer-term benefits. New users will top nearly 400 million by 2021, up from roughly 360 million last year, Daiwa analysts estimate. As consumers get used to buying higher-margin groceries and daily goods from electronics-rooted JD, average spending per user, and profitability, should increase.

JD shares have jumped by more than a third since the start of the year, outpacing the flat Nasdaq Composite Index. The company also trades at some 32 times expected earnings, roughly 40% higher than Alibaba’s multiple. That should ensure a hospitable Hong Kong reception.

Breakingviews

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