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This week, all eyes are on Chinese ADRs. Yesterday, Alibaba Group Holding (BABA) reported its earnings for the quarter ended December 31, and announced a $25 billion increase in buybacks. Analysts expected that Alibaba would reveal $36.4 billion in revenue and $2.64 in earnings per share (“EPS”) in Q4. The company actually did $36.66 billion in revenue (up 2.1% or 5% in constant currency), and $2.67 in EPS, beating both estimates.
Alibaba’s calendar Q4 earnings release is a done deal. As for its peers, the results remain to be seen. PDD Holdings (PDD) has done very well over the last year, although its stock sold off after a news article reported that Donald Trump was planning on levying a 60% tariff on all Chinese goods. It regained some ground after Alibaba’s earnings came out.
As for, the story hasn’t been as positive there. JD has fallen 79% from its 2020 highs, by far the worst decline of all Chinese tech stocks in the last four years. The story about JD is similar to that of Alibaba; namely, it’s perceived as too risky because of China’s macro situation. JD’s stock has sold off more than Alibaba’s, though, likely because it doesn’t have a buyback program like that company does.
That doesn’t mean that JD stock isn’t worth investing in. To the contrary, the company has many of the telltale characteristics of a good investment. The stock is dirt cheap, the company is growing, the earnings usually beat estimates. The company’s margins aren’t quite on par with those of Alibaba or PDD, but as Costco (COST) and Amazon (AMZN) show, sometimes it makes sense for a retailer to run slim margins in the name of capturing market share.
Because of its lack of a buyback, JD stock has gotten ridiculously cheap. At today’s prices, it trades at just 7.2 times earnings, 0.24 times sales, 1.09 times book value, and 4.28 times operating cash flow. The stock even has a 2.8% dividend yield, about double the S&P 500’s yield. It’s not that JD’s managers are especially generous with dividends (the payout ratio is just 19%), but rather that the stock has been so beaten down that it now has yield even though not much of the profit is actually being paid out.
The question is, are the risks in China’s economy really so severe as to make JD worth less than its U.S. counterparts? In this article, I will explore that question, ultimately concluding that JD is likely worth more than its current stock price suggests.
China Macro Risks
Before going any further, I should cover the risks that JD is exposed to. Stocks don’t get beaten down as badly as JD has for no reason. The company’s own performance, going by growth and earnings performance, has been excellent, so we must conclude that China’s macro picture is part of what’s been going wrong. Macroeconomic and geopolitical risk have been heavily cited as factors in the latest leg down in Chinese ADRs. On the macro front, China is facing problems with deflation. On the geopolitical front, concerns about a Taiwan invasion continue to linger. These risks are certainly real. When Russia invaded Ukraine, Russian stocks became essentially worthless, as Russia banned the listing of ADRs and Westerners had difficulty accessing the Russian exchanges directly. Although a Taiwan invasion would not necessarily impact the fundamentals of Chinese companies, there’s at least some possibility that China would retaliate the way Russia did if Western countries sanctioned it. Such an outcome is unlikely in the near term as China is currently seeking to bring in foreign investment. But if you consider an investment in China with a 5-10 year holding period in mind, then delisting is a risk you probably should consider.
The question is “how do you price such risk?” As I wrote in a recent series of X posts, risk is something you assign a discount to; you don’t avoid a security just because it is risky. Investors deal with risk through seeking discount prices, diversifying their holdings, and hedging their bets. The risk of a stock potentially becoming worthless doesn’t mean it’s necessarily a sell: if the potential return is 1,000%, then a hedged position at a modest weighting in such a stock might make sense.
The question is, what kind of a discount should JD trade at?
To answer that question, we need to look at the stock’s valuation, and compare it to that of its peers. Below, I have the multiples for JD, its two closest Chinese competitors, and one U.S. comp, Amazon.
JD BABA PDD AMZN Average of comps JD discount Adjusted P/E 7.6 8.4 22.5 58.8 29.9 74.9% GAAP P/E 11.2 13.4 29.7 58.8 34 67% Price/sales 0.24 1.4 5.2 3 3.2 92.5% Price/book 1.15 1.3 7.9 8.7 5.96 80% Price/op cash flow 4.5 6.8 14.9 21 12.23 63% Price/free cash flow 7 8.29 14.9 54.6 25.9 73% Click to enlarge
As you can see, JD trades at substantial discounts to comparable companies. Note that Alibaba and PDD face the China macro and geopolitical risks discussed above, and are still far pricier than JD. If we use the NASDAQ-100 as a comp, for an analysis that focuses only on comps without delisting risk, then, we arrive at JD trading at a P/E discount of 78%!
So, JD’s cheap valuation is not just due to geopolitical risk (it’s cheaper than other Chinese tech names), and the discount compared to U.S. tech is enormous. The risk of China invading Taiwan is non-zero, but is it so great that a 78% discount is required? If you take a $100 per year perpetuity and discount it at the current 10 year treasury yield (4.14%), you get a present value of $2,414. If you discount it at 14.14% (the 10 year yield plus a massive 10% risk premium), you get a present value of $707. That’s a 71% discount in price terms, less than JD’s 78% discount to the QQQ’s earnings multiple. The amount of risk being priced into this stock is absolutely colossal. Of course, Chinese stocks in general are in that boat. The question is how do we explain JD’s discount to Alibaba and PDD. To answer that question we need to look at the company’s earnings performance.
In the most recent quarter, JD dot com delivered:
$34 billion in revenue, up 1.7%.
$1.5 billion in operating income, up 12%.
$0.69 in EPS, up 40%.
$5.4 billion in free cash flow, up 52.7%.
These results beat expectations, and the growth rates were higher than what Alibaba did in its December quarter (although the time period of these releases is non-identical).
Now, let’s look at some performance metrics for the trailing 12 month period. According to Seeking Alpha Quant, JD did the following growth rates in the last 12 months:
4.6% in revenue.
105% in operating income.
1000% in EPS.
86% in free cash flow.
Excellent growth, yet the stock price tanked. A price/performance divergence may be emerging. Finally, let’s look at the profitability metrics:
Gross margin: 8.7%.
EBIT margin: 2.5%.
Net margin: 2.2%.
Return on equity: 10.8%.
Overall, JD is quite profitable. Its margins are not as good as Alibaba’s, but its ROE is actually slightly higher. On the whole, we would characterize JD as cheap, profitable and growing.
The Bottom Line
Before concluding my analysis of JD, I should include a note on risk:
JD’s margins are fairly slim, which means it wouldn’t take a very large decline in revenue or increase in costs to erase the company’s profits. This is a real risk to shareholders. However, those same slim margins could be thought of as a competitive advantage. The reason JD has slimmer margins than JD or BABA is because it holds most of its own inventory, and thus faces higher costs. That reduces profits but it also gives JD far more control over quality and delivery times than JD and PDD have, as it handles all shipping and logistics itself. Its competitors rely on third parties. It shouldn’t come as a surprise, then, that JD has a reputation for better quality control than Alibaba and PDD.
Taking all of the above factors into consideration, I conclude that JD stock is a good value today. Cheap, profitable and growing, its extreme cheapness likely won’t last.



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