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JD.com's Recent Results Benefit From Accounting Discretion, Not Fundamental Improvements

May 01, 2018 1:23 PM ETJD.com, Inc. (JD)82 Comments


  • Cash flows benefit significantly from increasing delays in vendor payments.
  • Revenue deltas are materially supported by growth in accounts receivables, loan receivables, and related party receivables.
  • Approximately 40% of revenue growth can be attributed to growth in accrual accounts.
  • Our estimate is that the JD shares are worth $24, a discount of around 38% from current prices.

Recent analyst and media reports have heralded a turning point in the storied history of Chinese e-commerce company, JD.com (NASDAQ:JD).

After years of heady expectations and aspirations, it seems that China's largest retailer is finally coming into glory from a financial reporting perspective: continued hyper-earnings growth yes (39% yoy), but now, for the first time, profitability is on the horizon, and the all-too important metric of cash flow has recently accelerated (417% and 183% in 2016 and 2017, respectively).

Annual growth in revenues, profits and cash flow at JD.com

Source: Company reports

As impressive as these figures suggest, all is not what it seems. JD's financial improvements are less about fundamental strategic and operations success than they are about financial and accounting choices that serve to improve the look of the company's accounts. We challenge some of those discretionary accounting methods below and conclude that JD is still overvalued by 38%.

Cash flow enhanced significantly by delaying payments to vendors: Investors and JD cheered the recent uptick in both operating cash flow (OCF) and free cash flow (FCF). The company reported OCF of RMB 8.8 bn and RMB 24.8 bn in 2016 and 2017, respectively. These were impressive from both an absolute and growth perspective. Upon closer inspection, though, both figures are the result of the company's decision to further delay payments to its vendors.

Days payable outstanding (payables/revenue x # of days in period) is a metric used to analyze how long on average a company takes to pay its vendors. For the past 5 years, JD's DPO has grown considerably, from a low of 52 to a recent high of 75 days.

Annual growth in days payable outstanding at JD.com

Source: Company reports

The impact of the payment extension is considerable once we calculate the impact on CFO

This article was written by

Founded in 2015, by Melvin Glapion, Mithra Forensic Research is an independent investment research firm based in Los Angeles California. Mithra Forensic Research primarily focuses on identifying companies with flawed and deteriorating business fundamentals as well as those companies engaging in aggressive accounting and financial statement fraud. Mithra Forensic Research relies upon a proprietary quantitative model which is used to identify companies showing signs of financial statement deterioration or evidence of aggressive accounting. We then conduct a more detailed analysis of only those companies highlighted as offering the greatest potential for significant price movement in the next 18 to 24 months.

Analyst’s 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.

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Comments (82)

Too much bias in this article to be convincing. Thank you nevertheless.
Impressive rebuttals by William Daniel and LiLi, they reinforce the bullish case for JD. What also is impressive is the increasing number of orders per existing customer, currently at 30. The user experience must be that good.
Useful analysis. The increasing number of days for payment is a warning sign that a company is in trouble. It is enough to put me off investing in JD.com
Mithra Forensic Research profile picture
I am aware of the Chinese government's push for specific market champions. However that does not necessarily mean that the government will simply offer carte blanche.

If that were the case, then why would JD have spent the last 4 years aggressively accessing Western capital markets--to the tune of $11 billon.
"Why would JD have spent the last 4 years aggressively accessing Western capital markets--to the tune of $11 billon.[?]

For the $11 Billion dollars at low rates? Why not?
"40%+ of total revenue growth is clearly material. In addition, loose credit depends upon a company's ability to access cheap credit. This renders financing dependent revenues unsustainable. There is no guarantee that JD will continue to have access to cheap credit and no assurance that customers will maintain an interest in the company's credit offers."

This shows a misunderstanding of the nature of the Chinese political economy. JD will have adequate access to credit indefinitely into the future as long as they stay in compliance with and in the good graces of the government.

The Chinese government needs world-class companies that can compete globally. JD has been chosen to be one of those companies. Like Amazon or Google, it's a state-directed monopoly (duopoly) too big to fail.

It's also increasing R&D in technology. Be patient, be long for the long-term (10+ years) and accumulate on dips. Become wealthy.
kualla83 profile picture
Interesting perspective and good comment thread. I am always suspect of number reported by Chinese companies. I went long at $42 a share and I am obviously sitting in a loss position. The author brought up some interesting points and many commenters brought up additional things that should be evaluated. I will admit this is one Company I bought and did very little research on (Shame on me). I have blindly thought this Company has the ability to be Amazon China. However it appears the two businesses are much less alike than I thought. I will hold the position for awhile but if it continues to trade sideways the next few years or dips below thirty I think I will move on. Most posters on here think all is well in China and with JD, perhaps the author is right and a more detailed analysis of the Company's financials over the last three years is warranted along with a look at the macro economic environment. I would be interest at seeing EBITDA growth over the last three years as this would help offset the CAPEX spending somewhat.
Michael Rogus profile picture
I seem to get acutely nervous when Chinese based companies begin to have accounting issues. But hey - if you're looking for value try China Green Agriculture - Trades a PE of 1.94 and a market cap under $50 million with supposedly $150 million in cash - what could go wrong?
Mithra in a reply above says, to support his position, that JD's numbers are "well in excess" of other "on line retailors" Who r they?? Has Mithra done the same analysis on them? Where r those? Wen were they done? Wat r the prices of those retailors relative to his alleged analysis? Where r the comparisons? Where is the proof? Without providing critical factual information for comparison in my opinion Mithra's comparison conclusion are totally unsupported
dramble profile picture
Many thanks for your report Mithra .. not liking the implications is not the point .. it certainly is food for thought.
Also appreciate your comments Li Li and William Daniel ... meaningful rebuttals rather than meaningless negatives. Don
Mithra Forensic Research profile picture
I am not equating DPO to uncollectability. The DPO relates to extending payables in order to report higher cash flow. The credit risk is in the receivables growth.

Also, while I have respect for Tencent and Walmart, large companies and large investors, particularly in China, have been burned by companies whose financials turned out to be worse than they seemed.
Your analysis is quite puzzling and hard to follow. One has to wonder whether comparing a mature company like Amazon to a younger company like JD is even possible. One also has to wonder why Walmart and Tencent didn't catch this anomaly. Perhaps they are all involved in a conspiracy of international proportion? Even if we take your point to be true regarding the DPO, you simply conclude that a relatively high DPO somehow equates to uncollectability due to shadowy credit risks derivative of longer payment cycles. If JD hits $24, I will liquidate my entire portfolio and back up the truck.
Blue_Star profile picture
Thank you for the view on JD. It doesn't align with my valuation of the company and where I think the stock is going long-term but reading differing perspectives helps keeps me grounded. So may people see this company a young version of Amazon with unlimited growth potential and probably like me have a personal bias toward seeing it succeed as evidenced by some comments above. Nothing is a given however, competition is cutthroat, and prevailing macro economic factors or intensifying trade wars could send the entire market into a tailspin. So, I hope you're wrong, yet I wouldn't mind buying more at $24. Cheers!
Li Li profile picture
One key competitive advantage most people fail to note for JD is its first party purchase operation. People typically only mention logistics as JD's competitive advantage, but this first party purchase operation 1) allows JD to negotiate a better price with merchants, and 2) allows JD to serve as a retail infrastructure player by selling directly to businesses. This explains why JD convenience store, using a franchise model, can take off much faster than Alibaba's Tianmao store. Alibaba just can't provide as much value to business partners under the franchise model. That also explains why Alibaba is pursuing the first party operation route with He Ma Xian Sheng, its fresh grocery chain. I expect JD will unleash some franchise model for grocery shop business soon. That said, the offline market is much larger and more fragmented, and more immune to price comparison, so there will be room for both the grow and thrive.
Dawenxi4758 profile picture
Jd already started 7fresh which is analog to hema.
For the offline market, JD's pricing power and distribution channel would be pro over BaBa
Li Li profile picture
Hema's direct model is too expensive for JD. So far there are only two 7Fresh stores in BJ for JD to explore the best business model. Their goal is to somehow implement a franchise model for 7Fresh.
Li Li profile picture
I do agree with you that the OCF at end of December looks elevated due to the sales season. What I did was to back out about $500 million from OCF (the difference between current liabilities and current assets). That gave me a ~15 Price/OCF...
Mithra Forensic Research profile picture
I have some knowledge of China. The issue here is not that they are using debit cards or Alipay. It's that they are using them at a faster rate every year AND that it is taking longer and longer to convert those card balances (accounts receivables, loans receivable) into cash on JD's books.
Li Li profile picture
Rising consumer debt in China is my biggest concern for this stock and its peers. Chinese consumer debt is catching up quickly with the developed countries. Let's hope that doesn't end badly anytime soon.
Li Li profile picture
How do you conclude JD is taking longer and longer to convert receivables into cash? Honestly with the crazy pace they are investing and JD Finance changes I have a hard time to figure that out.
Mithra Forensic Research profile picture
The rate of growth in receivables is faster than that of sales. Also receivables balances at the end of the year have recently accounted for a larger percentage of the growth in sales each year.
Exactly - if his money is not behind his thought then this is a worthless view/article. That is the truth barometer.
Li Li profile picture
You probably don't know that in China you cannot pay with credit card on either Taobao or JD. They only take debit cards, cash, cash equivalents (like wechat pay), or their own credit offering, i.e., Alipay or JD's baitiao. That's different from Amazon in US, which takes all major credit cards. If the customers decide to use Alipay's huabei or JD baitiao, they are essentially using a platform-issued credit card. If your analysis decides that any purchases made with borrowed money are not real sales, then you're probably wiping out 95% of Amazon's sales.
@LiLi : I was not aware of any of this...thanx for the little bit if info ! ! !
It's my understanding is that WeChat is VERY popular as a payment
method. I'm long JD.
Dilly Dilly ! ! !
kos47 profile picture
I stopped reading as soon as I saw this "Our estimate is that the JD shares are worth $24, a discount of around 38% from current prices".
g.dimit profile picture
Let's stay away from personal Attacks
Silver Fox profile picture
Wow, very impressive article. I suggest the author short the stock to put his money where his mouth is.
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