Hayden Capital 3Q18 Letter: Update and Thesis for JD.com

Smart Money
  • Volatility is back. The Shanghai Composite is down -30% from its January high, and the broader MSCI Emerging Markets Index is also down -25%

JD.com (JD)

  • In early September, news came out that Richard Liu (Founder & CEO) was accused of sexual assault while completing a course at the University of Minnesota. Since initial reports, the police have finished their investigation, and no charges have been filed in the subsequent two months. Richard was released from police custody the next day, and is now working back in China. Additionally, his attorney even went so far as to state “I would bet my law license that he’s not going to be charged”
    • Female student accuser has retained two civil attorneys (one firm which earned its reputation in Florida Personal Injury cases and one firm with specialty is unpaid overtime cases in the hospitality / restaurant industry). Despite the odd choice of attorneys, my best guess is the likely outcome will be a civil settlement out of court between Richard and the accusers, in an effort to make this headline “go away quickly”
  • Judging by the stock’s reaction after this news broke, the market thinks Richard Liu’s personal life factor into JD.com is ~20% of the stock price
  • There are other issues that JD is facing: among them are JD’s lack of a data-driven culture vs. competitors, inability to court top tech talent due to this, Alibaba’s impressive ramp up in its Cainiao logistics capabilities in the last few years, and the top-heavy management style of the company
  • These factors are important but as investors we also need to weigh the trade-off between the current state of the company and price too
  • Broad thesis outlined in our previous letters remain intact
  • Simplistically, the company is on track to do ~$70bn in sales this year, and $100bn in 2020. Electronics and appliances make up ~75% of JD’s revenue mix, which due to the nature of the categories carry lower-margins vs. say apparel or general merchandise. If JD can simply maintain a 2-3% margin on this category, the profits by 2020 would reach at least $2bn. This would equate to a 16x EV/EBIT multiple, growing at 20% y/y
  • Additional levels such as category expansion into FMCG or general merchandise would give the stock considerable upside optionality
  • This gets even more attractive if we back out the logistics and finance divisions, which have both raised external funding and may be individually listed at some point. Excluding these divisions, with JD’s stake worth ~$24bn (at the last round valuations), the core retail part of the business comes down to just a ~5x multiple

Hayden Capital 3Q18 Letter, November 9, 2018

Image Source: JD.com

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