Wall Street Journal disclosed that Wal-Mart's (NYSE:WMT) recent deal to buy a 5% stake in JD.com (NASDAQ:JD) has a term that gives WMT the option to increase its investment. This term was not widely disclosed until now, and I believe this is significant in that it gives WMT the option to remain relevant in China's fast growing e-commerce space with a formidable partner in JD. My view is that JD alone cannot compete against Alibaba (NYSE:BABA) due to smaller scale in both B2C and C2C segments, less competitive logistics services, and less compelling ecosystem. However, a partnership with WMT could make JD a more competitive player that could potentially reshape China's e-commerce space into a duopoly.
That said, I remain bullish on WMT's prospects in China. I believe that the retailer continues to have solid growth momentum in rural China, where it has less penetration and has better growth prospects on continuing urbanization. The e-commerce partnership with JD is an attractive call option for WMT and may just be the lever that will make WMT a meaningful player in China's rapid growing e-commerce space. As for JD, I remain cautious on the competitive risk, but I do highlight that successful integration with WMT could make it competitive in China.
Under the terms between WMT and JD, WMT would gain observer status at JD's board meetings if the US company increases the stake from the current 5% to 10%. WMT could increase its stake through share purchases from existing shareholders or on the open market. Although WMT is not obligated to increase its stake, there is a possibility that WMT could, and I believe that it will most likely, given the long-term significance of the partnership for both companies. For WMT, e-commerce in China is something it cannot ignore despite the attractive upside it has from running offline retail. For JD, WMT is necessary to enhance its competitiveness against BABA. With WMT helping JD on scale and possibly logistics, and Tencent (OTCPK:TCEHY) helping JD on mobile orders/payments, JD could be in a better position in this hyper-competitive space.
WMT is the real winner in this deal, contrary to the convention where foreign companies are usually at a disadvantage. The reason is that WMT has roughly 430 stores in China, or 1/10 that in the US, and the offline retail expansion alone can ensure WMT steady growth in the next decade. The potential stake increase in JD allows WMT to benefit from the urbanization trend in the lower tier cities through its offline retailers and the e-commerce trend in higher tier cities. On top of that, the current O2O trend in China favors a partnership such as WMT and JD, where offline-online integration can drive significant market share gain and revenue. In short, I remain bullish on WMT's prospects.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.