If you looked strictly at the headlines, you’d have every reason to fear for publicly traded Chinese companies. As the coronavirus from China ripples throughout the world’s second-largest economy, in theory, JD.com (NASDAQ:JD) should be seeing red ink. Instead, JD stock is one the top performers in the early portion of this year. Why?
A mechanical answer is that JD.com is among the top e-commerce platforms in the globe. Further, it rivals Alibaba’s (NYSE:BABA) Tmall for the ever-expanding business-to-consumer online marketplace in China. And with many consumers in the country under a mandated lockdown, they’ve got a lot of free time on their hands. What better way to spend it than through retail therapy?
But a more significant catalyst for JD stock is that it’s a direct play on China’s booming middle class. This is the main reason why the underlying company has been one of my favorites in the space. Just look at the hard numbers.
According to a survey by Euromonitor, the middle class in China numbered only 80 million. But by the end of this year, experts believe that this category will welcome a total of 700 million. For perspective, the U.S. Census Bureau indicates that we have 329.3 million people in our country. Simply put, this is a staggering upside pathway for JD stock.
Contrast this dynamic with what’s happening in the U.S. Based on data from the Pew Research Center, the American middle class has shrunk since the 1970s. From this perspective, JD stock offers a better risk-reward ratio than other e-commerce names.
And here are three other reasons to consider this Chinese juggernaut.
Middle Class Growing in Size and Confidence
Although the expanding middle class in China is a huge catalyst for JD stock, we must realize the possibility that prior forecasts for growth may be understated. Take a look at it this way: China has roughly 1.4 billion people. That would mean that the middle class would account for just half of the nation.
Realistically, though, since the country is still growing at a rapid clip, we could see the middle class represent 60% of the population or higher…just like it was during America’s rise to prominence.
More importantly, the Chinese middle class isn’t just growing in size, they’re growing in confidence. According to research firm McKinsey, Chinese professionals have adopted western attitudes toward consumerism. Significantly, this has translated to a majority of urban middle-class residents being confident about personal-income growth.
Obviously, this is a massive tailwind for JD stock as consumers continue to purchase goods and services with gusto.
JD Stock to Benefit from Retail Innovation
One of the earlier criticisms about China’s rapidly expanding economy was that the country was merely mimicking the U.S. In recent years, however, I’ve noticed that this view has faded for good reason: Chinese companies are bringing their own brand of innovation to the consumer market.
A great example is JD.com’s introduction of tailor-made clothes. Typically, customization is very personal: what appeals to one person may not appeal to another. Therefore, such requests are often – and rightfully – very expensive.
But JD.com is leading the charge in what the South China Morning Post describes as mass customization. Because it’s competing fiercely with Alibaba’s Tmall, it has to distinguish itself to the customer base. Mass customization is a revolutionary way of thinking in retail, and the company potentially has the technology to pull it off.
Moreover, the fashion e-commerce market is huge in China, with experts predicting continued growth. Better yet, the growth applies to the three main categories of fashion: apparel, footwear and accessories.
Logistics Investments Likely to Pay Dividends
Over the years, JD.com has invested heavily in its logistical infrastructure. Last year, for instance, JD Logistics, Gold Talent and Cosco Shipping Logistics entered a joint venture to invest in online logistics platform EShipping.
This emphasis on building out shipping networks is nothing new. As you know, Amazon (NASDAQ:AMZN) has led the charge in disrupting traditional courier services. But what makes these initiatives appealing for JD stock is its synergies with Chinese middle-class distributions.
According to McKinsey, in 2002, coastal regions in China accounted for 87% of the geographic allocation of the middle class. By 2022, inland China will account for 39% of the middle class, providing a balanced wealth distribution map. Thus, the logistics innovation make more sense in China, where increased supply will surely find demand.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.