August 9, 2019 / 3:45 AM / a year ago

Breakingviews - JD deserves to be in trade-war tech discount bin

A sign of China's e-commerce company is seen at CES (Consumer Electronics Show) Asia 2016 in Shanghai, China, May 12, 2016. REUTERS/Aly Song/File Photo

HONG KONG (Reuters Breakingviews) - Online retailer deserves to be in China’s tech discount bin. The country’s new-age stocks have turned volatile with global trade tensions. The $40 billion loss-making online retailer led by Richard Liu has lost up to 17% of its value since late July, more than rivals like Alibaba and a much steeper drop than for the broader NASDAQ composite index. It partly reflects poor sentiment but JD’s focus on sales of one-off big-ticket items leave it especially vulnerable. Fraught U.S-China relations appear to be behind a selloff which began on July 29 around the time the two economies failed to reach a truce in bilateral talks. Things got worse this week, after the U.S. Treasury Department escalated the spat by labelling China a currency manipulator. As of Thursday in New York, investors had erased some $6 billion in market capitalisation from JD. That’s at odds with JD’s recent performance. It is expected to deliver a more than one-third increase in adjusted earnings from a year earlier when it reports results on Tuesday, according to an average of analyst estimates on Refinitiv. Cost cuts have helped lift operating margins, while JD’s capital-intensive logistics unit is benefitting from greater economies of scale. There are weak spots, however. Where other shopping sites have diversified into fast-moving-consumer goods, Liu’s empire is heavily reliant on electronics and household appliances. These items accounted for nearly three quarters of the company’s total revenue in the three months to March. If Chinese consumers tighten their belts and eschew iPhone upgrades, for example, the financial damage could be acute for JD. In contrast, rivals Alibaba and the recently-listed Pinduoduo are gaining ground in wooing new shoppers in the far reaches of the People’s Republic. Other stocks have traded weakly too as investors turn cautious on Chinese companies. Gaming and social media group Tencent, whose shares are listed in Hong Kong and tend to fetch a higher valuation than U.S-listed compatriots, has fallen roughly 10%, almost as much as Alibaba in the recent sell off. As bellwethers of the Chinese economy, that may be unsurprising amid slowing growth. But JD’s outsized woes puts it at the bottom of the pack.


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