After Hedge Funds Bail Out, JD.com Loses Luster as Growth Slows

  • E-commerce company has lost about $16 billion of value in 2016
  • Number of shares sold short surged to a record high in June

JD.com Inc., the Chinese online retailer that a year ago was a favorite among hedge fund managers including Tiger Management LLC’s Julian Robertson, is quickly losing its allure.

The U.S.-traded stock has plunged 36 percent this year, wiping out almost $16 billion in market value. The number of shares borrowed for short selling touched a record on June 15 after more than doubling in less than a month. Hedge funds including Tiger and Lone Pine Capital have been bailing out.

The turnaround comes as China’s slowing economy and intensifying e-commerce competition crimp the company’s expansion. With sales growth flagging, investors are increasingly questioning when, or even if, the 12-year-old company will ever become profitable.

“As top-line growth slows coming into 2016 for the premier growth company, investors will seek visibility on the company’s profit turnaround,” said Mitchell Kim, of Kim Eng Securities Ltd., the only analyst surveyed by Bloomberg with a sell rating on the stock. “JD’s profitability is certainly becoming more questionable.”

After revenue more than quadrupled over the past three years, the shortcomings of the country’s second-largest e-commerce company are now being laid bare by China’s slowing consumption.

JD.com’s self-owned inventory and logistics have helped it grab market share by offering authentic products and speedy shipping. That model, similar to Amazon.com Inc.’s, also has driven up costs and led to operating losses as the company builds warehouses and employs over 59,000 delivery staff, more than the total number of employees of Alibaba Group Holding Ltd., its larger Chinese competitor.

JD.com’s expansion to smaller cities and rural areas where delivery costs are higher and customers spend less is making profitability difficult as well, Kim said from Hong Kong. The company also faces increased competition for electronics and home appliances, which account for more than half of its gross merchandise volume, from Alibaba’s partnership with Suning Commerce Group Co., the country’s biggest electronics chain.

The stock slump has deepened since May 9, when JD.com said first-quarter revenue growth fell to 47 percent, from 57 percent the previous period. Its loss widened to 10 cents per share, from 8 cents a year earlier. The company warned that revenue may increase as little as 40 percent in the second quarter.

Analyst Ratings

Josh Gartner, a JD.com spokesman in Beijing, said the company doesn’t comment on trading in its stock.

“The Chinese consumer is slowing and Alibaba is escalating the competitive pressure,” said Gil Luria, an analyst at Wedbush Securities Inc. in Los Angeles. Luria said he remains optimistic about JD.com’s prospects but in the near term, “there’s been more and more concern about whether JD’s growth can be sustained.”

For all the negative signs, most analysts remain bullish on the stock. Twenty-seven of 35 surveyed by Bloomberg recommend buying JD.com. The median forecast is for the shares to rise 54 percent in the next 12 months to $31.24 from their Monday’s closing price of $20.24. The shares rose 2.6 percent as of 9:32 a.m. in New York.

JD.com is also focusing on higher-margin products, such as fresh food, and investing in new areas, including Internet finance. The stock rallied more than 4 percent on June 20 when the company said will take ownership of Wal-Mart Stores Inc.’s Yihaodian online marketplace, which markets groceries to higher-income female shoppers in Shanghai, Beijing and Guangzhou.

Hedge-Fund Holdings

Alistair Way, an Edinburgh-based money manager at Standard Life Investments, said he has bought more shares of JD.com as the valuation is becoming more appealing. The partnership with Wal-Mart will help it diversify its business, he said.

“JD’s management is steadily building one of the most significant retail operations in China, which should have a lot of value ultimately,” Way said.

Around this time in 2015, investors couldn’t get enough of JD.com. The stock was selling for $37.95 after more than doubling from its initial public offering price a year earlier. Hedge funds loaded up, with Robertson saying the company “may be one of the world’s great retailers.”

The stock has plunged 46 percent since then. Robertson’s Tiger Management, which according to filings owned 3.1 million shares in June 2015, has liquidated its holdings. Chase Coleman’s Tiger Global reduced its investment to 44 million shares, from a peak of 70 million shares. Lone Pine cut its position in half to 22 million shares.

Bearish Bets

Short-interest surged to 50 million shares on June 16, from 22 million at the end of April, according to data compiled by Markit.

In April, Fitch Ratings said JD.com’s “low profits and weak cash generation” mean it should not be investment grade. Fitch hasn’t assigned ratings to the company, while S&P Global Ratings and Moody’s Investors Service Inc. both put it at the lowest investment grade.

The following month, APS Asset Management, a Singapore-based investment firm founded by Wong Kok Hoi, published a report recommending investors sell short JD.com, predicting the shares will fall to $12 in two years.

The report said JD.com’s rapid GMV growth has failed to translate into profit, defying the premise of its business model that economies of scale would allow cost cuts as it expands. It also pointed out that JD.com overpaid for its investments in other Chinese companies, including Bitauto Holdings Ltd. and Tuniu Corp., leading to significant write-downs.

“JD may still make a loss this year and next,” Wong said by e-mail. “Competition is intensifying and profitability will likely worsen from here.”

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