Why JD.com is a Solid Long-Term Buy

There have been many discussions recently surrounding JD.com Inc (NASDAQ: JD) and its secondary listing in Hong Kong. The company is set to list shares on the city’s stock exchange on 17 June.

Meanwhile, JD has been competing aggressively against Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) by taking advantage of the recent coronavirus outbreak to capture new customers and expand its market share in the e-commerce sector.

In this article, I’ll outline some key reasons why I believe JD.com should be your next potential buy.

Differentiating JD.com and Alibaba

While Alibaba is often recognised as the largest e-commerce business in China, JD views itself as a “supply chain-based technology and service enterprise” that deals with consumers directly (B2C).

Like Amazon, JD handles the entire transaction end-to-end and uses direct retail to sell goods via its network of warehouses and distribution centres.

Also, it’s a quality vs. quantity game. While Alibaba is known for products that cost less, JD wins over its users’ trust by providing higher-quality products and customer experiences. 

Recently, JD has also increased its reliance on its omnichannel fulfilment programme to improve efficiency amid the coronavirus outbreak.

The programme can match orders with offline supplies to locate the closest delivery route to its consumers in real time.

Boundaryless Retail and Retail-as-a-Service

Today, there are 387 million active users making orders on JD’s platform. To continue penetrating its position in the market, JD’s business model is very customer experience-oriented.

“Boundaryless Retail” is a strategy introduced by JD as it aims to create an ecosystem that can enable consumers to buy whatever, whenever and wherever they wish to from online, offline, or even virtually.

To do so, the company has invested heavily in its logistics and technology such as warehouse automation, delivery drones, and autonomous delivery robots – a series of smart supply chain solutions that has integrated JD’s delivery infrastructure and also enhanced its logistics services business.

JD’s strong command over its self-operated logistics and technology has helped it realise its vision. It wants to grow JD’s retail infrastructure, technology and expertise, as a service.

JD logistics not only cuts expenses for businesses, but also generates greater profit margins from its Retail-as-a-Service initiative via better capacity utilisation by leveraging its logistics assets.

It will further attract more merchants (such as third-party merchants in lower-tier cities in China), and allows JD to absorb a larger market share domestically (as well as internationally) in the near future.

The extensive reach of the company’s supply chain development can grow to become the core engine of JD’s robust growth and main differentiation from its competitors.

Business collaborations

It is also important to remember the strong strategic partnership JD has with China’s leading social media firm and one of the country’s top digital payments provider Tencent Holdings Ltd (SEHK: 700).

As of today, Tencent owns an 18% stake in JD. Both companies should continue to benefit from this strategic partnership as JD still has substantial space to expand its user base via China’s most popular social networking mobile app; WeChat.

By streamlining users’ shopping experience from JD’s social e-commerce platform – Jingxi – that is currently embedded into WeChat’s mini-programme, it will be easier for those 1.1 billion active users to shop within the app and combine purchasing power to enjoy savings.

This will deepen both WeChat Pay and JD’s market penetration to compete with Alibaba’s e-commerce division.

Other strong business collaborations that will create positive synergies to JD’s business performance includes its close partnership with Dada, Walmart and Yonghui. Currently, JD and Walmart own 47.5% and 10% stakes, respectively, in Dada.

These partnerships can enhance JD’s Retail-as-a-Service (RaaS) initiative, last-mile delivery services, product offerings, and user experience to assist JD compete against its biggest rivals – Alibaba and Meituan Dianping (SEHK: 3690).

The know-how gleaned from the partnerships will allow JD to accelerate its venture into offline retail. It creates the omnichannel ecosystem that optimises and improves JD’s logistics capabilities, economies of scale and reach of traffic to compete against its industry peers.

Foolish summary

The impact of the coronavirus outbreak has drastically changed consumers’ behaviour over the past few months, and this trend is expected to continue in the near term.

As users shift to e-commerce platforms that provide quality virtual shopping experiences, running a business online is no longer a challenge when businesses like JD can offer end-to-end services at merchants’ convenience.

With management’s continuous focus on improving logistics utilisation and expansion into lower-tier cities, JD’s turnover and profit margins shall remain robust in the near future.