If JD.com is China’s Amazon, buy the shares when they float this month. Lots of them.
In one sense, it is. Unlike Alibaba, the Chinese internet retailer does not just connect buyers and sellers. That would make it China’s eBay. JD.com owns its inventory and its distribution infrastructure. It is in a low margin, capitally intensive business – Amazon’s business, in short. The investment is significant. The company added 10,000 workers in distribution and customer service between December and March, for a total of more than 40,000. Order fulfilment costs eat up more than half of gross profits.
Further, JD has turned – for one year, at least – Amazon’s trick of generating cash when it is not making accounting profits. It had a $96m operating loss last year and generated $376m in free cash flow. The method will be familiar to Amazon watchers: get paid by your customers faster than you pay your suppliers. Faster growth in accounts payable than in accounts receivable accounted for almost $500m in cash flow last year.
This is part of the reason an unprofitable company can aim for an initial offering that values it at $23bn. As the company adds to sales (which grew 70 per cent in 2013) there will be operating leverage on the fixed cost of the infrastructure, widening margins. In the meantime, the company can fund its operations with negative working capital.
The cash may not flow smoothly. Remarkably for a company growing so quickly, capital expenditures grew only 12 per cent last year. That will accelerate. Note also that 2013 capex was under 2 per cent of sales. Amazon spent almost 5 per cent. More importantly, there is the question of whether the market will be as patient with JD.com as it has been with Amazon. Amazon was at JD.com’s revenue level eight years ago. It is still barely profitable and its shares trade at a multiple of sales (1.5) that JD would be happy to get. The market’s inexplicable deference allows Amazon to keep investing every spare dollar in growth. JD may not get the same leeway.