Tariffs on billions of dollars’ worth of goods are making it more expensive for Chinese manufacturers to sell their goods to the United States. According to Chinese Customs data, Chinese exports to the United States have fallen for eight straight months. However, can JD.com (NASDAQ:JD) actually benefit?
This leaves Chinese manufacturers scrambling to keep factories productive. To recover these lost sales, they are setting their sights inside their home country.
Chinese Manufacturers Are Seeking Local Buyers
Based on their earnings report, JD.com is helping to fill this void. In an interview with CNBC after the e-commerce giants second-quarter earnings call on Aug. 13, CFO Sidney Huang confirmed, “Given perhaps the trade tension, more and more manufacturers will actually turn their attention to (the) domestic market.”
Huang went on to say,
“This is a phenomena actually already happening for quite some time, slowly, that there are excess capacities for those manufacturing facilities, … there are a lot of very, very low-priced products at good quality they used to produce (as) branded products for global brands. So we think it’s a good opportunity for us to reach down to those quality manufacturers, so we can provide those products at a really good value to our consumers.”
CEO Richard Liu expanded on these comments. According to Liu, JD.com is interested in increasing its investment to the growth of small Chinese cities. And with a growing logistics network, JD.com has the resources to make this happen.
Tian Hou, founder and CEO of T.H. Capital echoed these statements pointing out that logistics are JD’s strength (their logistics network broke even from an operating income perspective) and if they can, in fact, reach out to these lower-tier cities it could create a moat for their business.
The Chinese E-Commerce Market Is Very Competitive
However, price concerns may make it difficult for JD.com to sell their products in these lower-tier cities. They also are facing competition with other Chinese e-commerce companies. Although frequently compared to Alibaba (NYSE:BABA), JD.com’s business model is much closer to rival company Pinduoduo (NASDAQ:PDD). PDD is making some headway in these lower-tier cities, but JD.com is quick to mention that Pinduoduo targets a much lower segment of the market than JD.com.
JD Stock Is on the Rise After a Huge Earnings Beat
The Chinese online retailer posted a second-quarter earnings report that blew away expectations. The company posted a non-GAAP EPS of 33 cents. The consensus estimate was for an EPS of 8 cents. The news was equally good for GAAP EPS that came in 13 cents above the consensus estimate. The company also beat revenue expectations, citing a 22.9% YoY increase to $21.9 billion.
Equally, if not more importantly, JD.com reported a sharply increased margin. This corresponded with company management raising their adjusted net income guidance to between 8 billion yuan and 9.6 billion yuan for the full year. JD had reported full year losses to this number for the past three years.
Shares rose 13% the day after the earnings report, adding about $5 billion to JD.com’s market cap.
A closer look at the numbers shows that JD.com is finally benefiting from the investments it has made in technology. In addition to their logistics network (noted above), this infrastructure includes a push into artificial intelligence, drone delivery service, and the company’s plans to open one million convenience stores “the supermarket of the future” over the next few years.
Investors Have Seen This Before With JD Stock
JD.com has a history of being able to post a great earnings report when it needs to. But frequently, a positive report is followed up by one or more quarters in which the company misses. Is this time different? Two good signs are an improved margin and evidence that the company is reaping the benefits from investments in their operational efficiency.
Analysts have a consensus buy rating on JD.com stock. However a consensus price estimate of $33.02 is less than a 6% increase from current levels. Does this mean analysts are hedging their bets? Perhaps. However, with no clear sign of an end to the trade war, JD stock seems like a safe bet. As long as they have enough differentiation to separate themselves from discount e-commerce sites, JD.com may continue to be a winner in the trade war.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
