Outlining JD.com's Advantages With Lester Goh (Podcast Transcript)

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About: JD.com, Inc. (JD), Includes: BABA, BHC, BITA, COST, GE, TCEHY, TOUR, VIPS, WMT
by: Behind The Idea
Summary

This is a transcript version of our recent deep dive JD.com conversation with Lester Goh.

Goh shares his view on JD's advantages and on why headline risks don't scare him.

He also shares what he's learned from riding JD shares down over the last year and why a management-driven thesis is shaky ground.

Editors' Note: This is a transcript discussion of our recent podcast interview with Lester Goh on JD.com. We will be publishing an interview with a bear on the stock on Tuesday, so stay tuned for that.

Introduction

Daniel Shvartsman: On this week's Behind the Idea, we invite JD.com bull, Lester Goh to share his research and take on the e-commerce titan. One of the things we get into is Richard Liu's central role in a lot of people's views of the company and the flaws therein.

Lester Goh: I think more generally the point, that I'm sure investors facing is that if you have a thesis where the Founder or the management is like the largest part or the main part, underpinning your thesis, I think that's like problematic.

DS: We also talk about the concerns that often come up when discussing China-based companies and draw on an example of corporate mis-governance closer to home.

LG: Many people regard like Jack Welch as like best CEO or best manager of the 20th century. But I mean now I think if you look at General Electric closely you can like discern that much of Jack Welch's successes has been largely driven by aggressive accounting and so has most of his successors.

DS: We talk a lot on Behind the Idea about the importance of doing the work, and I'm not getting stuck in shortcuts or biases, and at the same time sometimes the extra work doesn't pay off. Lester's done the work on JD and he shares it in copious detail on this podcast. The question is, is it worth the work? Find out on this week's Behind the Idea.

Podcast

Welcome to Behind the Idea. I'm Daniel Shvartsman. We're going back to JD.com today to discuss the Chinese e-commerce company further. It's a leader in the industry but endured a terrible 2018 with headwinds like the China-U.S. trade discussions as well as more local issues with CEO and founder Richard Liu facing serious accusations in the second half of the year which were eventually not pursued.

We're joined today by Lester Goh, a Seeking Alpha author who has made some compelling arguments about JD, though I should say mostly on his blog and Twitter account. I'm going to ask him about the concerns we raised last time out and try to get deeper into the bull case for JD going forward.

Before we get started, Behind the Idea is the podcast that looks you what makes great investment analysis work based on articles from the Seeking Alpha ecosystem. Nothing on this podcast should be taken as investment advice of any sort. I don't have any positions in any of the stocks we're going to discuss, while Lester is long JD.

You can subscribe to us wherever you get podcast and if you have the chance to leave us a review on iTunes or Apple podcast we'd really appreciate it as it'll help other investors find this podcast. Okay Lester welcome to the podcast.

LG: Yeah, I'm happy to be here and I'm very glad to have this opportunity.

DS: Great, so let's just jump right into what is your thesis on JD. The last thing I read that you wrote about was in September. What do you think about the company now? They just reported earnings, where New Year -- what do you think about JD?

LG: So I think with respect they recently released earnings. I think the quarter was quite well. There were some issue in the prior quarter where there were some concerns over user growth, but I think this quarter showed that, that concern is not really worth it. And regarding like our view on JD, I have three things which like form the base of my thesis.

So basically I believe that JD is one, the lowest cost operator in China retail. And second, I believe that it has a very long run runway for reinvestment. And lastly I believe the valuation for JD, especially as it's content contradiction is very compelling. So basically for JD, JD is mainly a retailer and when we talk about retailers the things that really matter are like sales per square foot, its cost structure and inventory turnover.

So if you consider Costco, why is Costco such a great retailer is because it has sales per square foot of $1,200 and OpEx margin of about 10%. And it turns over its inventory roughly 11 times a year. And these metrics are very, very good in retailing. And if we look at JD, if you look at its direct sales per square foot, it has sales per square foot of roughly $450. This is in U.S. dollars. That Costco one is also in U.S. dollars. But JD has a large market based business, and for a market based business you fertilize where on a net basis system instead from a cost basis compared to direct sales.

So if you adjust the market base GMV for value added tax and accelerated return rate then JD's total sales per square foot will be roughly $1,000. And if you compare this to like Walmart, Walmart does around $500. And so our inventory turnover, if you compare JD to its competitors, JD turns its inventory over roughly at nine times a year, Suning is also at nine times, Call Me is at five. So basically JD turns over its inventory much more compared to its competitors. And okay so recently JD has been front loading along its logistics and R&D investment and -- but prior to this it has OpEx margin. So basically operating expenses as representative of sales of around 12% and its peers have roughly 15% in all.

So this advantage in cost structure is actually much larger than this 12% to 15% plus, because the comparison when we compare JD to its competitors, is not really apples-to-apple, whereas JD has a large market based business which is roughly half of its GMV and its competitors their market base businesses are much smaller. So this in effect over sits OpEx margin for JD. So in fact it will be much lower. So basically this we have call out three things. JD has a very good efficiency in sales per square foot and inventory turnover and it also has a large advantage in construction. So what has allowed the company to do is to a price lower -- makes its price lower than its competitors and reinvest in bids from suppliers into this strong component for its consumers.

And apart from this the company has also reinvested in logistics and this reinvestment in logistics has been very successful and it allowed JD to have profit 20% lower or procurement cost compared to third party express couriers, such as ZTO, IPO, SFXpress have low cost competitor.

So I think one more issue that people like -- the one issue that's controversial is that a lot of people seem to have an opinion that JD will never make money from it's like if you look at its gross margins they are pretty low and they have concentrated in product categories such as they are very low margins such as electronics. Well I believe that like while JD's got profitable on a consolidated basis I believe on a unit economic basis even in categories such as electronics they are really they are actually profitable on that basis.

So if you talk example, let's say, we have an electronics order of around RMB1,000 and we have about 5% gross margin, which is standard for electronics, this will give you RMB50 in gross profit per order and if you look at JD's profits per order, is around $24 and this gives them EBIT per order of around $26 for such a low gross margin category. So I believe actually on unit economic basis it's actually very profitable.

So I've covered like why I believe JD has the lowest cost structure in China retail? And the next part is about why I believe the company has long runway to reinvest. So if you look at -- if you compare like China to other developed countries, their household income and consumption, relative to GDP is around -- for China is around 30% to 40%. If you look at other developed countries it's around 50% to 70%. So I think that as China continuously been, over a very long term basis there's upside to this number.

And JD is like gaining share from like commercial consumer like Taobao and less efficient offline retailers and if you look at its market share as a percentage of total China's retail sales is around low single-digit. So I think there's a lot of upside to that number.

And if you look at its customer base, so JD what it does it provides cohort numbers like orders by cohort. And if you look at the total customer base they purchase around eight to nine orders per year. But 2008 cohort which is a very early cohort, which is like 30 orders per year, and so the average it's in the upside towards the order cohorts.

And another thing I think about reinvestment is that the problem with many companies that really can reinvest but you like when you spend a lot in terms of CapEx and to like fund their reinvestment, whereas I think JD in a sense is special in it, it has negative investment capital. So most of their reinvestment in CapEx is actually funded by accounts payable which are driven by their supply and rebids.

So last year I believe that like JD it has a very compelling valuation so if you net off its stake in JD Finance, JD Logistics and if you call this net case, short investments and investment in equity investing, this all calculates -- all comes out around $22 dollar per share and if you look at the current price it's around $28. So basically the market is valuing the core business at around $6 per share.

And I think this is the number that's -- this valuation is like it doesn't really attribute much value to their core business. So the way I look at the core business is that there is two types of investment. One is the direct sales business and the other side is like the market base business. So the direct sales business is like the normal retail business. So I believe that if you use 4% operating margin for the direct sales business, is something that's very reasonable.

And if we use 30% operating margin for market base business which is also something I think which really is also reasonable. We get like and if you do this on the 2018 numbers, you get like $2.65 in EBIT per share and relative to the $6 in the markets there I mean JD I think it's very compelling, JD is basically being valued at two times fiscal '18 normalized EBIT.

So I think -- so basically I think that JD it's not long and I think it's very compelling due to these three reasons.

DS: Okay, that's a really thorough thesis. I have some of my other questions are going to drill into this a little more, but one immediate follow up I had is when you said -- this is a technical question but we're talking about sales per square foot, but we're talking about an e-commerce retailer. And so I'm just curious how investors, how our listeners should be thinking about how to translate a number like that as compared to a Costco which has e-commerce but is mostly a physical retailer?

How does -- what's the -- how do you make that comparison when you're analyzing JD?

LG: So basically I think that if you look at Costco versus JD, basically Costco basically the entirety of their sales is direct sales. So they do not really act like market base business. So for most of their sales if they exclude their membership subscription part most of the sales, the direct sales that recognize on what -- on a net basis -- sorry on a gross basis. So basically Costco is the principal in the transaction. They take inventory risk, they get set prices as such. But if you look at JD there's two parts, so their direct sales business, which is recognized in same way as Costco, and they have the market base business where basically the revenue is recognized on an agent basis.

So instead of recognizing -- if you have an order of like $100 and still are fertilizing the $200 for the market base business you recognize your commission or your trade from that $100. So you recognize something like $8 or $9. So in effect what this does is that if you compare to Costco we need to make the adjustment, in to adjust the market based business, to make it comparable with the direct sales business.

So the way I did it is that there are two main adjustments. So for JD base basically, their market base GMV is like half of their total GMV. So and the difference between market, between GMV and like net revenues or like the 1P basis is basically value added tax and a return rate and cancelation rate. So in China the value added tax is 17%, so we can adjust that. And then for the return rate, this is something that's like you estimate it. So when JD like -- earlier in like 2015-2016 JD what they did was they released two GMV numbers so one number was that was orders, basically guest orders, whereas they purchase all just canceled or undelivered or uncompleted, they'll record everything.

So that's for the GMV number and they also release another number for the record called GMV which is basically purchases that's been completed. So if you take the difference between the two and you take out value added tax, you get implied return rate. So basically the way I translate JD's 3P GMV to like 1P basis is I used the 3P GMV number, I adjust for the value added tax and then I adjust for the return rate and that's how I boost up both stores to compare to something like Costco.

DS: But what's the square footage for JD? Is it just their warehouse square footage or what does that consist of?

LG: Yeah so for JD mainly, mainly, mainly their square footage is warehouses. So I mean there is some stuff like at their headquarters that somewhat really is confident and careful but the number I used for JD is basically the warehouse square foot, they put it in square meters so I saw the most recent quarter at around 12 million in square meters of warehouse capacity. And this is roughly 130 million square feet.

And for Costco the reason why I like chose Costco as a comparison is that Costco they are like a warehouse retailer in that they don't really have and not like the Walmart where they sell it through stores, they sell things through their warehouse is still a store, looks like thing is like a much better comparison if I compare it to by Walmart.

DS: Got it, okay, interesting. It's just interesting because they really make -- start with a contrast between online and even with Costco not having a traditional store front, it's still a very sort of physical versus online number to think about.

The valuation I wanted to get into was interesting to me. So first of all one of the things we talked about we're using article from Long Hill Road Capital a Seeking Alpha author to watch our discussion and their article was based on the idea of it really focused on the idea that JD has all these other stakes you mentioned JD Finance, JD Logistics, equity investments.

And I guess my first question is just with normal enterprise value you net out cash, short term investments that are easily liquidated into cash against debt and in this case we're talking about long term investments. And I guess my question is just what's your thought process on netting those out to get to that EV to EBIT number that you talked about?

And then what is the why does JD like from just a business perspective, why does JD have these investments, how does it help their business or what view as a shareholder what do you think about them owning stakes of these other companies that don't necessarily seem related to JD's core business?

LG: Yeah so on the first question like the reason, I guess is like a general issue. So for all other businesses they got very attractive on a SOTB basis. So you got basically nothing else on cash investments blah, blah, blah and then you look at what the market is implying for core business and you look at it, I think it's cheap.

But I think an important distinction to make is whether the management is like focused on -- or management is like on the lookout for actually to monetize these investments. So for some companies, for example locally we have a company, locally as in Singapore, we have a company that has a restaurant consumer business but it also have a very large stake in a few of the local banks and property firms.

And the problem is that it looks like on sum of the cost basis, but if you -- but it's assumed that management will divest those stakes in bank and the property level, but the problem is they're reporting it for 30 years. So there's probably -- they're not probably going to monetize it anytime soon. So for JD in particular I think it's appropriate as good as investment firm EV gross.

If you look at JD, if you look at what management has done like over past few years, it is quite clear to me that they are very focused on monetizing the assets, whenever they can. So for example for JD Finance, in 2017 they did a spin-off and they raised something like RMB14.4 billion, this is in Renminbi, RMB. And for JD Logistics they raised around RMB13 billion, also in renminbi and in most recent quarter they have established a GP LP structure with GIC where they like -- so logistics assets and warehouse assets with GIC and the valuation was around RMB10.9 billion in renminbi.

And basically this situation suggests that management is half way focused on monetizing assets whenever they can. So I think for JD, in particular, given management focus on capital allocation I think it's appropriate to exclude this investment from EV whereas if you give me another company that where management is very reluctant to do so, I would think it would be inappropriate to exclude them.

And on the other question basically of well, if we look at JD they invest in all this equity investment so like be upgraded like Yongwei, Bitauto, Tuniu, VIP Shop, do they invest in this? I think like this investment is like it's meant to augment investment where JD is going. So for example if you look at Yongwei, it's grocery, so JD has a grocery business, fresh foods business.

But it's not something that JD is very good at. I mean it's a good investments, but JD is really known like they are in electronics and so that home appliance business. So I think that JD makes these investments to augment any risk they have. So for their owned base groceries, so they are also easing its costs, fortunately it's like travel and for VIP shop, it's apparel.

So apart from like augmenting any risk where JD is going, I think this all has additional benefit in that, it has lowest cost, it has lowest customer acquisition cost for JD, because all these investors don't really, Tuniu, VIPShop. They have a pre-existing customer base. So JD's like making the investment, making the acquisition of customers through that investment. So I think that's an additional benefit that JD gets through these investments and I think it makes a lot of sense.

But I mean there are some investments that JD makes that I don't think makes a lot sense, but those are pretty small. And so I don't really bother about that. That's absolutely very small.

DS: Okay, interesting. So it's strategic in some ways because they make it -- because they're all primarily e-commerce businesses, either to acquire customers through those relationships, or to learn from different verticals so as to better inform JD's business is sort of how it fits into why do this, is that fair to say?

LG: Yeah, yeah, I think that's fair to say.

DS: Okay, so the other part of valuation I want to hit on is you ended up using, if I understood right, a normalized EBIT once you -- let's leave it there, normalized EBIT enterprise value adjusted for these stakes is your numerator. And my question is for example their free cash flow was negative last year. Did they, I guess my question is when do you think that JD hits that normalized EBIT? When do you think that they achieve sort of sustainable free -- and I know they've been positive free cash flow at some point. But like when did they hit sustained positive free cash flow?

What is the sort of the scope that you're looking at this investment for that valuation to become apparent to the market that it is, as I mean what did you say it was, two times or three times EV, either way it's a crazy number, crazy number for a growing company. So what's your sort of timeframe for when this actually achieves normalization?

LG: So I think for JD in particular, management has guided towards increasing the annual net margin on the consol basis every year. And I mean this is already a hard guideline in the sense that if you -- they find that they can -- they have opportunities to invest they will like delay their margin target by a couple of units.

And I think this has happened in 2017-2018, where they realized that a lot of merchants, a lot of third party merchants in China, they valued a courier that can deliver e-commerce goods and stuff, very efficiently and JD is one of them. So what JD did was they like overbuilt their logistics capacity. So if you look -- and this is all pacing in to why their free cash flow has been like freed up in 2018.

But so basically what JD did was they overbuilt logistics capacity. If you look at over a fiscal '15 to '18 period, they increased their warehouse capacity by like 82% in 2015, 40% in 2016, 39% in 2017 and 20% in 2018. And when you compare this to their sales growth for GMV growth, this is far in excess of their sales force and GMV growth. So they have dealt through that.

They are front loading all this investment. So it's -- one question about that is there are always question of whether it's better to have front loading all these investments where it is paying off and I think it has been, because if you look at their logistics business which they recently separately disclosed or at least their revenues from the logistics business on the third party basis, this business has grown by 37% in fiscal '16, around 60% in fiscal '17 and around 140% in fiscal '18.

So apart from this, apart from like doing the tricky logistics thing, JD has also been doing well in monetize them through GP/LP structure. I mentioned the transaction with GIC. So basically what JD does is they do lease it back to a limited partnership and then they get the GP, their fund and then they have a call option on future asset appreciation.

So that's one reason why JD's free cash flow has been pretty bad. And why its margins has been -- like the margin expansion has been delayed. And other question is like -- or other point I wanted to make which is on free cash flow is that in 2018 or to be more precise, on the back half of 2017 and first half of 2018, what happened in China was that regulators changed the settlement process for market based transactions.

So previously what JD could do and other e-commerce companies could do was that if a consumer paid you before they received delivery of the goods you can process their payment through your own payment company so JD has JD Pay, sometimes they used Visa Pay, Alibaba uses AliPay and TenCent probably use VisaPay. So that was work to do previously.

So but regulators what they did was they came out with regulation, that says that oh you must settle all these transactions through third party payment companies. You cannot use your own payment company. And if you look at the impact on JD on their cash flow and basically in 1Q '18, there was in RMB5.3 billion decrease in advance from customers which is basically representing the customer's paying prior to receiving their goods.

And from 3Q '17 to 2Q '18 which is the period I have mentioned, they had a prepay of around -- cash flow prepay in total around RMB9 billion. So I think these changed the settlement process for market base transactions. And JD's overbuilding of logistic capacity, their CapEx been raised, their free cash flow has been pretty anemic in 2018 and the logistics side it helps explains and why they basically the margin expansion program has been limited.

So I mean for -- regarding sustained free cash flow generation what we say that when will JD that generates cash on sustained basis I think that they have like went through their largest investment phase, the most recent one was them reinvesting at 3P Logistics and they also will let the change in settlement process for market base transactions. And I think this will allow JD to like revert to generating substantial cash flow as it has in the past.

But one point I wanted to make about is that much of -- a lot of JD's cash flow, if you look at the prior years they are -- it is not profit driven and it's not driven by like EBIT or net income. But this is driven by negative working capital short term. So this negative working capital short term is really as the result of merchants funding JD's business.

So if you look at their accounts payable and their cash generated from accounts payable it is a very large portion of their free cash flow. So I think investors when they are looking at cash they should ignore the contribution from the positive contribution or if the cash on this working capital was -- it is something that is -- that I do not believe is sustainable if you look at JD on a steady state basis.

DS: Okay, really interesting. That's helpful. I think I want to get into questions about the reinvestment but maybe I'll do that when we talk about China more globally. But yeah it's just interesting to think about because one of the challenges here is that it is a growth company, and figuring out how to adjust for that and value appropriately.

And then these are the factors that we'll get into in a second of what that means for their growth, that work for the company et cetera. So the first question that I wanted to sort of ask about that, we had a few sort of topics that really sit out to us about JD and what could potentially be risk to the thesis, one of them that I'm -- my favorite sort of question around this is, whether JD is a crowded trade?

Do you worry that, to give a trivial example of this, if you look on Seeking Alpha the last seven authors who have written about the stock are bullish or very bullish. If you look to me, we describe JD as sort of the cooler China play as compared to Alibaba. It's one that, along with -- I would argue along with Tencent, it's one that people who are digging a little bit deeper are investing in, in China.

And so I guess do you ever worry that this is a crowded trade, do you worry that it's a trade which -- by which I mean that maybe there's a consensus that leads to higher expectations or that there is a risk if the story turns of 2018 may have in part an example of this but of the stock falling apart because there are so many people already on the bullish side of the story?

LG: So I think I'd like to call myself a long term investor, and of course a lot of mostly everyone calls themselves a long term investor, but being long term actually doing it is a different thing. But regarding where JD trade is crowded, I think it only matters to the extent that if it effects the value of the company. So of like if the trade crowded it tend to result in like very outsized directions, some moves upside and outside. And I mean this reactions apart from giving investors opportunities to enter and exit, I think this would matter to the sense that it will impact the value of the company if the company in question acquires funding from the capital markets.

So basically if you have a warehouse saturation upside this will allow the company to raise equity more cheaply, more sort of if the valuation is higher and vice-versa. But I think that this, specific to JD, I think that the crowdiness of the trade doesn't really matter, I say it, because it already affect the value of the company. So if you look at JD they have been largely self-funding or to be more accurate their suppliers have been funding their growth.

And so JD already need -- or at least at a point in time, at this point in time JD already need funding from the general markets and I'll foresee it being funding from the general markets in the foreseeable future. I think in JD if you look at JD like thought and read they weren't really cash flow positive I think that will be more of an issue but I think they have last pass that phase.

DS: Okay interesting okay that seems reasonable and sometimes a good example of how one of the challenges I think of our current sort of an environment with Seeking Alpha with Twitter, with other sources of information is that it gets easy to get caught in these sort of short -- as much as like you said everybody says they are a long term investor but then Q4 2018 goes around and everybody is freaking out because they have 10% or 20%. And so how much does the China trade war, the China-U.S. trade war matter.

It's possible by the time we're recording this on Friday, we're posting on Tuesday talks are ongoing. So it's you never know when something could be resolved but what do you -- how much do you think this actually matters to JD irrespective of what happens between the U.S. and China?

LG: So I think for JD, I mean if you look at JD they don't really have much business outside of China. So they have a joint venture with -- in Thailand with Central Group which is a large media conglomerate in Thailand and they have an e-commerce business in Indonesia but these businesses are very small. They are like, I think low single-digit percentage of revenue.

And so on the direct basis, like I don't think the trade war matters as much but indirectly I think the trade war will affect JD in depending on how the negotiations go. So basically if one risk that I do ask something that could come from the trade war is that like if you look in Toronto, what SEC did was they brought proceedings against five audit firms in China. And these five audit firms included JD's auditor and basically what SEC said these auditors they refused to produce documentation that will allow SEC to have like audit, or to like to oversee them.

And in 2014, a few years later the SEC suspend four audit firms from practicing. But this suspension was reversed on appeal and audit firms agreed to pay a fine. And the problem with this is like the SEC wants to be able to oversee auditing in China, but the problem is that Chinese Secrecy Laws prohibit Chinese audit firms from like sharing documents with the SEC. So it's like they are in between the rock and a hard place. And I think that if we look at the trade war, I think if this problem cannot be served as a leverage point in the trade war and if JD is unable to find another suitable auditor then it will face a possible de-listing.

So I think that's one of the situations about JD that could happen depending of how the trade war progresses but I mean right now I don't see any, any discussion or any news regarding the either side the U.S. or China like using this point as the leverage point. And I think the other issue with the trade war include result affecting JD's values like if China chooses to depreciate the remnimbi will of course affect the value of JD gross -- it's traded in U.S. dollars then the translation will just affect their value.

Yeah, so I think on volume basis there's really not much impact, but indirectly it could impact JD a lot by this situation. So they're not really -- I don't foresee them materializing.

DS: So just quickly the JD trades on the obviously on the U.S., but I'll pull up whether it's NASDAQ, they trade on NASDAQ. But you said they're self-funding or they are funded through their negative working capital et cetera. And to some degree I presume that it wouldn't be hard to do the study to find that companies that trade -- the China companies that trade on the U.S. exchanges do better valuation wise as compared to if they only listed in Hong Kong or Shanghai or Singapore or wherever.

But to some degree, I'm just playing out if their auditor was suspended and they were forced to find a new auditor or face delisting. Fundamentally to JD's business how important is it from your perspective that they're on the U.S. Exchange? Is it -- I can see how will it affect the prices of stock, but does it affect the value, does it affect the company's operations if they're not listed on the U.S. market?

LG: I think it -- it could affect I think the effect on JD's businesses is pretty small. I mean imagine if JD is listed in Hong Kong or Singapore or Shanghai for example, the U.S. investors wouldn't really know of JD, whilst it's not listed on U.S. Exchange. And so there is an issue like where JD wants to expand beyond China, they might have small issue you need to educate public about what JD is as a company.

But I think that's small issue but yeah, I mean whatever they choose to list I don't think it has a huge impact on the value of the company. I mean apart from the part where like, you say that it's the valuations in China is especially much lower, the valuation in U.S. is much higher, obviously you have to list in the U.S., so raise the most capital, possible, yeah.

DS: Right, okay. Another -- so how much does it matter when we think of China companies in general and when we think of e-commerce companies, Alibaba is still the first name that comes in mind, I know that they are different models to some degree but they do compete with each other as far as I understand it.

How much does that how do you view that competitive landscape, the competitive issues, how much does that matter to JD.com and to the long thesis?

LG: So regarding Alibaba, I mean this is obviously a very important issue for JD because Alibaba is like as you mentioned the biggest player in China e-commerce. And they reach a lot people, saying that you look at Alibaba they will be able to like destroy across JD very little efforts. Alibaba is in a very dominant market position, they have the largest market share in e-commerce in China.

And if you look at Alibaba they generated a lot, they have a lot points. They earn a lot of money. And if we look at JD it's like JD is already making money and JD from getting cash flow for working capital, they are already there, they're generating much cash and then if you look at Alibaba, they generate a lot of cash.

And so people have -- list investors have viewed and Alibaba basically what it can do is they can use it's profits or use their profits and cash flow to subsidize to party merchants, to a level where JD cannot compete. So basically JD in the entire e-commerce what JD can't offer to consumers is first, store pricing or competitive pricing and very good logistics, very good delivery and obviously they offer quality value and convenience.

I mean the main issue, the main way , like Alibaba how they compete to JD is by like on the pricing portion. So all our people think that Alibaba can basically subsidize at a level where JD cannot compete, price can't compete. But actually I think this is over boarding than or I think it's trap like unwanted growth. I actually think that JD has more capacity to subsidize competitively than Alibaba.

So if you look at Alibaba basically where the subsidies come from this corner and income statement basis, look at income statement is subsidies some of them come from their advertising spending. And then if you look at JD it comes from their advertising but and I think this is a point that a lot of people miss, is it comes from their discount coupons which they issue to customers and these discount coupons are treated as a reduction to revenue.

So basically if you look at Alibaba right, their sales and marketing spending is rightly show that the full year end it's the same as JD. So basically Alibaba did and their fiscal year in March but JD does in December, but if they do it, so they both fell in December, Alibaba for 2018 they basically had sales and marketing spending of around RMB38 billion, all numbers. And in fiscal '17 they disclosed their advertising and promotion expense is basically 60% of their sales and marketing expense.

So basically Alibaba has around RMB24 billion in like capacity to subsidize. And if you look at JD, if you look at JD basically they spent RMB19 billion in 2018 and in fiscal '17, 83% of this was on sports advertising. So basically they spend RMB16 billion on advertising. So all the people calculate that and say that we know Alibaba has spent RMB24 billion compared to JD spending RMB16 billion. So Alibaba like have more capacity to subsidize compared to JD.

But I think as I mentioned just now I think realized the point that on discount coupons that JD provide to its customers, so basically if you look at JD right if you look at their direct sales gross margin so basically if you take their cost of goods and you subtract their logistics revenue, their cost which basically management say that they run their logistics business or it's their 3P Logistics business and breakeven this will give you a direct sales gross margin of around 9%.

And a few months ago Goldman Sachs they came out with a report on Chinese retail and they showed that for Chinese electronics retailers they earn 14% gross margins on electronics and home appliances and if you look at supermarkets they earn around 23% gross margin. And if you look at JD's category mix for their direct sales business, around 70% of this is electronics and home appliance and around 30% of this is general merchandise and others, so basically supermarkets stuff.

So if you include the Goldman Sachs numbers of 14% and 23% on JD's mix basically JD's normalized gross margin or normalized direct sales gross margin will be around 17% and the difference is what I estimate to be the difference between the normalized direct sales gross margin and it's current direct sales gross margin is what I estimate to be the discount coupons that are like given to consumers and that account in their capacity subsidize.

So if you add this number to JD's marketing or advertising spend, JD will basically have been spent a total capacity subsidize of around RMB50 billion and this is like more in price than Alibaba. So actually I think that JD has this more capacity to subsidize compared to Alibaba. And I mean another point I want to make is that like if you look at JD right, when they offer discount coupons or whatever to consumers they basically roll prices and then they get companies of still watching low prices, customers buy more, consumers buy more you can count your skill.

I think that trade off the incremental economy of scale for JD is much greater compared to the benefit for Alibaba. Of course the way Alibaba does their sales consumers is through their merchants. And most of their merchants, well they have around -- on top of the they have 12 billion around tMall, a few hundred thousand.

And but anyone watching Alibaba it's much-much smaller that JD so basically the benefit of incremental economies of scale is much larger for JD compared to Alibaba. And then our ratio is people say that Alibaba is very profitable and they generate a lot of cash. So Alibaba could simply use this profits and cash and like increase their capacity to subsidize, towards a level that JD hardly compete.

But if you look at Alibaba and you look at our profits and cash flow, profits, most of these profits are driven by non-recurring gains, non-recurring income. So basically if you look at their interest and investment income which is mostly investment income and this investment income consist of on disposal of subsidiaries and stuff of that nature.

And these lie in turn basically is accounted for anywhere between 40% to 70% of Alibaba's net profit over the fiscal '14 to nine months '18 period, so basically most of Alibaba's profits or at least a substantial portion has been driven by non-recurring items. And if you look at Alibaba's cash flow, where first they generate a lot of cash.

Most of this cash has gone to their equity investees. So if you look at the fiscal reach of period or towards the fiscal '17 period which I mean, the reason why I go back to fiscal '17 is they don't put out a full cash flow statement in their third quarter '18 reviews.

But if you look at this fiscal '12 to fiscal '17 period, roughly 60% of free cash flow -- of Alibaba's free cash flow has gone to its funding or investing in these equity investees. So basically the point I'm trying to make is while Alibaba has a lot of profits and a lot of cash flow, a lot of these profits are driven by one-time items or non-recurring items and a lot of these cash flow seems encumbered in the sense that they need to go towards like funding equity investees. And that's also the issue of that if Alibaba was stable to like if at all they were able to like crush JD by intervening their subsidies, they would have probably done it over the past few years but I think it is telling that they haven't really ramped it up by that much or as much as the crude has on the important numbers.

So I mean like apart from this other people have also mentioned that if you look at Alibaba and you consider their level of monetization, people say that Alibaba has significant upside with respect to their take rates. So if you look Alibaba's take rate is around 3% versus like their market based peers are like roughly 10%.

So the idea is that Alibaba has significant potential to increase their take rate and this will allow them additional capacity to subsidize against JD. But I think this -- and this is like the root case for Alibaba. But I think this is flawed in the sense obviously this line of reasoning flawed in a sense that it skews that entirety of Alibaba's reported GMV is monetizable. Of course I mean the take rate at 3% is based on their total GMV.

But Alibaba's GMV they count orders and they do not count stuff that they do not comp procedures, instead basically they count everything in orders and they don't differentiate whether the order has been delivered or whether it's canceled in accounting. So if an order is canceled or returned, their GMV is probably not monetizable. And if you look at like -- so basically the idea here is that we are trying to like quantify what portion of GMV is monetizable.

So basically if you look at the state post bureau which in China basically what they see what they do is they report customer complaints for e-commerce transactions. So if you look at JD, over 1 million parcels, JD has 0.2 customer complaints and if you look at the delivery players they deliver for Alibaba, which is your ZTO Xpress, if you look at these players they are customer complaint compared to JD, they basically have customer complaints that are 40 times to 140 times compared to JD. And if you look at JD when they use the disclose their core GMV and GMD and they tried to rate from the entire return and cancelation rate from was 25% and then you look at this customer complaint thing and it's half like oh, Alibaba's return and cancellation rate is pretty much higher than that of JD. So a certain portion of Alibaba's reported GMV is probably not monetizable.

But I mean there are other ways to get at this. So another way to try to like quantify what portion of Alibaba's GMV is actually monetizable, if it's Alipay. So if you look at Alipay, Alipay they are the payment processor for Alibaba. They process maybe all of their e-commerce transactions. So what Alipay does is that Alipay charges Alibaba 13 basis points on their reported GMV.

And if you look at interchange fees in the U.S. they are roughly 80 basis points, if you use a fair data. And if you assume that Alipay is already charging 80 basis points on monetizable GMV then monetizable GMV will be roughly one-sixth of that reported GMV.

And if you do it the other way around where you assume that Alipay is indeed charging 13 basis points on reported GMV of Alibaba and their reported GMV equals monetizable GMV then you imply that Alipay is subsidizing Baba to a large scale. So if Alipay charge 80 basis points on reported GMV, basically Alibaba will be paying Alipay RMB38 billion in payment processing fees instead of the RMB6 billion that it paid in fiscal '17.

And basically this RMB38 billion represents 60% of Alibaba's lending comp in fiscal '17. And also the other issue on my like management or this Alibaba's management has given on this, I think they have given us a hint on the monetization is that in the second quarter in press release, earnings press release what is mentioned was they decided not to increase monetization in the near term due to macroeconomic conditions.

So I mean if you indeed are having a 3% rate and you think that there's upside towards something like level of 10%, I do not think that this like goes well with what Alibaba's management have said, what management suggests, at least what Alibaba's management has said, it also suggest that Alibaba has substantial room to increase monetization.

So I think that there are a lot of issues with the view that Alibaba can generate much larger than JD and therefore they can out compete JD or other things along that same live vision.

DS: Got it that's really, yeah, I think it's a good reminder that -- and I will point the finger at myself for this, as somebody who's coming in as a generalist and you sort of adapt high level, sort of heuristics to try to understand these companies but ultimately when you can drill into these individual levels, into the point about the take rate and how much leverage Alibaba really has over it, I think is really relevant in terms of business analysis going beyond just the oh, well, Alibaba is this sort of third party merchant or whatever and JD is this and so we just take a shortcut.

And so I enjoyed that sort of drill down analysis. So there are two other questions that I think are both elephants in the room. One is the more obvious one, which is Richard Liu faced the rape accusations last year. the charges were dropped but I don't think we need to get into the accusations themselves but what it did highlight was the great degree of control he has over the company and sort of the reliance that the company appears to have on him.

It was the same story with Jack Ma in Alibaba and sort of the Founder, CEO, and the story of a Founder, CEO and just , to be very lazy, you can think of certain CEOs in the U.S. who are in the news for tech stories and how bulls and bears agree that there is a valuation plus for them, because of their sort of image. And so I just wonder what do you think in light of everything that's going on with Liu over the past year, what do you think about his leadership, the fact that he has such an entrenched position? And how does that, how do you deal with that when you think about JD as a company?

LG: So I think that if you know, Richard Liu I think the really big fear was that during the recent scandal was that Richard might be jailed and that he will not be able to operate as Chairman and CEO. I mean that situation has finally cleared up.

But I think the more pressing issue was that, or at least I was worried about and I think some investors also worried was that what would consumer reactions towards this scandal be? So both to the revelation of the scandal and the resolution of the scandal. So when the scandal was broken, consumers were relatively boycotting JD.

So that would affect -- obviously affect their sales and so on. And when the scandal was resolved, consumers could they felt that, they think that Richard Liu is a rich man in China and he was like let off two to three, but I think these issues which obviously impact the business they can be tracked. So the way I look at it was that I look at the WeChat Index, so basically on Wechat They have something like Google trends. So basically they used that to like track traffic or at least track the number of such possible keywords.

So if you look at the WeChat Index in China that's another index which is called the Sogou Index. If you look at that and you realize that there wasn't any sustained decline in like keywords such as for China, for JD's in particular and this indicates that Chinese consumers they are not really changing their shopping habits, as a result of the scandal either with the revelation or the resolution of scandal.

And I think this like -- in fact like, it seems that in China at least the culture or the way consumers reacted to this scandal is that when a scandal has been announced or has been broken people develop all their view very interesting for a few days and then the heat fades off after a while.

I mean regarding JD's especially refresh back to Richard's control of the firm, I think that this, I mean obviously the scandal has hit him personally but I do not think it has like invalidated JD's business like things that are more related to JD. And if you look at, I mean a lot of people were like nervous about just control of JD, he owns a relatively small amount of shares compared to his voting rights.

So basically Richard can basically do whatever he wants and if you look at the quorum that's required for board of Director's meeting Richard is going to be there. So basically, he has nearly complete control over JD but I think this issue is like mitigated by the fact that if you look at opportunities where Richard could have treated minority shareholders poorly, the first opportunity is like the JD Finance spin-off.

So I mean if you recall when Alipay was like spin off, there was a lot of controversy over that. I think a lot of people were benefited from that. But JD Finance, the spin off there was no controversy. It was the way he did was in my view pretty fair. And if you look at, if you go by a bit earlier and I think that is like important to go towards the earlier sort of JD of course, it was, if you compare the earlier sort of JD to what's now, the earlier years was like really -- there was much larger possibility of failure.

Whereas compared to now there's much lower possibility of failure. Not saying that JD can't fail once, but so much low possibility. And therefore I think you want to assume that if Richard would wanted to like treat minority shareholders poorly he would probably have shown it in the earlier years and if you look at the earlier years basically there was a situation where Tiger Capital which is a reputed fund, they offered to invest 200 million in JD and Richard what he did was he countered with 250 million and then Tiger immediately accepted.

And then Richard realized he was like low balled by Tiger and because he had 300 million offer from another firm. And even though one of Richard's executives urged him to renege on the Tiger deal and because the deal was renegable -- the agreement Richard chose to accept the Tiger's offer once he believed that he should honor his word.

So I think that has shown that the issue with, like firms that are like controlled by a Founder or management team who has basically full control, the worry is that they might treat minority shareholders very unfairly. But I think Richard has treated minority shareholders fairly and I mean it's just because he has treated them fairly in the past, he would do so in the future. But I mean somebody keep watch for, but it seems that, on that side, or at least on that basis, he has been ok.

But in more generally the point that I'm sure investors are facing is that if you have a thesis where the Founder or the management is like the largest part of the main part, otherwise underpinning your thesis I think they are problematic.

Because usually investors are attracted to strong management, strong founders and they place a premium in a valuation of this company, watching how well they have strong management. I mean the issue with this is of course double counting, because exceptional management would have already been reflected in the financials.

And also investors when they have review that it's very management or founder driven they tend to invest with management and founders with strong credit records and they'll continue to invest in them, in view of their track record, but this has flaw or a little weakness in mix and investor were sustainable to selling your position, or using your position.

When there is a temporary issue, in the track record because like circular reasoning where the reason why you invest in these companies was because of management and we then want to continue to invest because of the management so if anything change in the management then you are very susceptible to adjusting your opposition.

And I think more generally like there's a book that I think many of us, many of the listeners have read, which is the outsiders book where we cover 8 CEOs who were very good at capital allocation. I mean I read the book, I liked the book, but I think the flow of the book is like survivorship bias. So most basically the author looks at this book and looks at his managers and show that how they can -- how they are very creative at capital allocation but there has been many companies where management has adopted similar capital allocation strategies and where it has not worked out.

So I mean there is a blog that I occasionally read. So it's a Young Money blog. So it's like in one of his tools, this blog is basically chronicle companies which follow the strategies that are outlined in the outsiders book, and where they have failed. So I think if you want a thesis on the companies based on having good management, having a good founder, or founder have a very good track record is problematic.

So I mean if you look at my thesis for JD, it's not really driven by the founder. I don't say that I think Richard Liu is a visionary who can whatever, but instead I focus more on the business because I think it is you face less issues or at least you don't have to face the double comping issues and the secular reasoning issues if you have a thesis that is driven by something that's more based on management.

DS: I like that so it's a balance of on one hand, you do look at the track record and arguing that Richard's motives, he's had chances to abuse his position, and to his point hasn't really abused it. So track record is worthwhile but otherwise the numbers are really, if there's some edge being delivered by management it should be showing up in the numbers and you should be able to understand.

And obviously you've spent a lot of time with the various numbers here in JD's business to understand why not just some force of super human effort, but the actual business drivers that are causing the numbers to work. And so if you can understand those you can then understand when they go wrong and that gives you a stronger footing for your thesis then just Richard Liu is a genius or whatever else. That's sort of seems like the mix.

The one last big question I have for you is just around China itself, because I think it's two things, the first that it seems to be going through macro issues, it seems to be -- they just recently lowered their growth targets and I think many people who watch China closely are suspicious of the numbers that they are posting and point to different concerns that might cause China to really struggle in coming years, is the first part of that.

And then also sort of as part of everything else we've talking about whether it's specifically to Richard Liu's position or even you're talking earlier about them over investing in logistics and I can recall stories around VIPShop, for example where some people believed that their over investing was not really credible in terms of what they were doing. I don't remember the exact specifics, so I don't want to draw a parallel too fine but the questions are raised about China companies. People criticize, investors criticize China companies, finances. I can recall there are a lot of bears out there about Alibaba. I mean really there is the big companies even though they seem to have a -- this is not Sino-forest or the companies of the early 2010s.

But still there are questions raised about these companies and investors have suspicions and I guess I wanted your take having studied JD so closely, how do you feel, both the macro climate as economic cycle for China and the sort of business climate of governance and of these sorts of concerns. How does that play into how you think about JD?

LG: So on a macro environment, I mean having a tough macro environment and I think obviously the results in share prices is going down and valuation going cheaper. But I think it's something that presents an opportunity and still that something that should be rated in another way.

But I think more generally on a point that China, there's a lot of criticism on the corporate governance, on the legitimacy, I mean they are definitely true. So you mentioned a lot of skeptics about Alibaba and I think a lot of people call me a skeptic of Alibaba but I have -- it's not that I think they are doing anything completely wrong but it's more like I think that there are some points that about Alibaba that is like misleading, and there are some issues with their accounting particularly especially relating to the investment, the one that I mentioned earlier the investment income accounting for a lot of their earned income.

And the one I also mentioned earlier about them funding equity investees. So that they have certainly gained all this range they can use such transactions as way to make things look very nice towards investors where the reality is not -- is a very different picture. But I think this is something that is not only limited to China. I think this is something that's like a global issue.

But it's always government issues and legitimacy issues is not -- it doesn't only occur in China. I mean I guess the best example that I can give for in the U.S. is if you look at General Electric, it has run through a lot of CEO, and their most recent CEO is a guy from Danaher, probably the best guy they could have hired. But many people regard like John Welch is like best CEO and best manager of the 20th Century.

But I mean now I think if you look at General Electric closely you can like discern that much of GE success has been largely driven by aggressive [accounting] and so has most of his successors. And I mean to give another example in the U.S. there's a bank that's called The Bank of OZK. So there -- it's previously called Bank of the Ozarks. So this is a bank with 80% of its loan book in real estate and construction and then the General loans.

And it has industry leading interest margins and it claims that its industry low loan loss provisions are sufficient but I mean if you look at banking, is commodity business. You can't have both industry leading net interest margins and industry low loan loss provisions. That doesn't make sense but if you had something like that, Wells Fargo or Bank of America or some other big banks will compete with you to like narrow the margins and that stuff.

I mean you can have that but not on the scale -- not when the scale goes up. Bank of OZKs up for most of -- for some of the U.S. base, they are basically the largest lender in construction. And I mean management are defend this by saying that we take a lot precaution such as we sustain it. You know the bank should take the total loss position and et cetera, et cetera, et cetera.

But I mean this is like management is trying to reduce their risk and if you are reducing your risk it comes with a trade off in that you should have the lower net interest margins. So you know Bank of the Ozarks is another example where there are some questions around their accounting, around the legitimacy that you can raise.

And I mean I guess the most famous recent example on is I think it's recent as Valeant Pharmaceuticals like this was a basically a follow up company which we see if that's the better operating, but they are like placing ordinary expenses into one off market, they do R&D through acquisitions and this allowed them to inflate their cash flow, but most people don't include acquisitions in their calculation of free cash flow.

And they should have many acquisitions where they kitchen sunk expenses, pro forma the revenue, Salix in particular and they view this on their acquisitions stuff period like when their financials were better than they are and the consolidation also it's lot like aggressive in pricing techniques through that especially pharmacies, especially made from pharmacies and I think I mean like John Hempton who writes the Bronte Capital blog has covered this much better than I can.

I mean the general point I'm trying to make is that in China of course there are audits in anyway there are questions about governance, there are questions about legitimacy, but this isn't something that's limited to one region, one country, yeah, I mean there's investors I think that you should classify countries into like although China is a bit suspicious. So you know about China.

And the rest U.S. it's a bit like less suspicious in a sense and you choose to concentrate on investment in U.S. but I don't think that's appropriate action to take. I think you should consider all companies as like standalone and if you feel in your analysis, in your research you find that they are engaging in stuff that or they are basically not legitimate.

I think that is something that you should watch out for, but not only China but also in other places that are not China like U.S., Europe or whatever.

DS: That's great. That's a good reminder to not be so provincial in the way we think about or I think about investing in and to remember that we all live in glass houses. That's so interesting when you think about the recent article Carson Black from Muddy Waters wrote about Germany wirecard…

LG: Yeah, yeah, I've read it.

DS: Relating to wirecard and Canada is a country that gets a lot of questions for the listed companies there but yeah, also in the U.S. of course there are both in the past and in the present, lots of companies that raised questions so I think that's a well-made point.

So my last question to you is you've held this position for a while. Let's say that you came to the story fresh. You had done -- you've still doing the work. So I'm not saying trying to pretend you don't remember but let's say you don't have the anchoring of where you opened your position. You haven't gone through the ups and downs of the past couple years what would you -- like what would you bring to the table now or what would your thoughts be on JD? Are you able to separate yourself from your position and think about what sort of company would you -- I mean I presume you would still open a position if you're still holding your position. But like would you what would you think about JD or what would you change in your process based on what you've learned over the last 18 months of holding the stock and as you've grown as an investor generally?

LG: So I mean, as it relates to JD obviously more generally efforts, so basically in investments or the type of investments I look for, so basically I look for companies where the reality and the consensus or better expectations are like firmer. So to consider that from JD specifically if you look at the valuation I gave just now where the markets are basically valuing their core at a very-very low multiple of number, I see that.

And if you look at accounting in top line it's what I'm looking for. So wide gap between better expectations and reality, or at least my perception of reality, which I mean my perception could always be wrong. But I'm not flawless in accounting. So but I mean as it relates to JD I mean I would still invest in JD most like I have much more conviction right now that where I started.

So when I started looking at JD was -- it was 2017. So I was interning at a friendly office. This friendly office basically what they did was they did special situations. So basically whatever Joel Greenblatt wrote in his book, although the name is terrible, terrible name on the book. So whatever he wrote in book we did and I was attracted to JD Group and did analysis of JD Finance.

And if you look at the situation then, JD Finance was still consolidated in JD so what impact JD Finance had on JD was it was like depressing it's cash flow by a significant amount was, what it did was they booked the loans that JD Finance issued, they booked it through operating activities.

So obviously that seriously depresses your cash flow. And if you excluded these rules from operating cash flow you will realize that JD was churning a lot of cash, although most of its cash is from suppliers. So I mean this is the first was like once they set up JD Finance, the investors will realize that this is a very cash generating business and reprice the shares. But as time went on, I did more work and I I looked at and did more, I guess I'll put it as I analyzed the business mode and I analyzed the special situation and over there I have I gained more conviction in that JD is something that's really mispriced.

And I mean if you look at the present right now JD is at low valuation, slightly lower valuation compared to slightly lower price compared to [indiscernible] and but it's sales and it's potential profitability are much higher. So I don't see a reason to like not invest in the stock. But I mean like all this is based on like I mean you mentioned that a part of how like prudence in investor.

I think one of the big realizations that I have had when as I like progressed was that there is a difference between wanting to make money and wanting to be right. So I mean a lot people have tied themselves, tied entity towards being right, no matter whether they make money or not and this is big issue and there is stuff like it help reinforces confirmation by us that you want to be right so much that you just look for stuff that will present you right and you don't really consider whether you are wrong.

So I think George Soros has really good quote where he mentioned that he doesn't make money, he makes money because he identifies listings. so I mean I'm paraphrasing but I think that is a much better way to approach like potential investments and that is the way that I approach potential investments now so basically instead of looking at only -- or instead of only focusing on what can go right, I'll focus more on what can go wrong.

I won't look at what makes this a good business, I will look at what makes a bad business and competitive business I'm looking at. So I mean more generally I have like detached myself from all these things that I have progressed in detaching myself from being right and more having a mindset where I have a view right now.

But if evidence or analysis of really smart business, of this all stuff I realized that there's an error in my analysis then I would be very wrong. And then I would be very happy to like realize I'm wrong, it would save me money. So I think my approach or at least my view towards potential investment has changed from I want to be right towards like I have this view do know but I could potentially be wrong but until evidence surface that's all right I realize that some part of my analysis is half wrong, I would still take position.

So I mean that is like I have I guess progressed throughout the years. I mean I am still very young right I'm currently a college freshman. So I mean I still have a lot to learn, and I'm very glad that especially like just now I mentioned that I posted a lot of stuff, my stuff on Twitter. So I think that Twitter is probably one of the best -- at least Fintwit it's one of the best places to learn.

So I mean I've learned a lot from there. And I used to write at Seeking Alpha and I think one of the editors that edited my work the most was Jeffrey Fischer. He gave me a lot of advice to offer me on how to think about companies, how to think about some basic techniques, that I really appreciated and yeah, it's all learning process and I think I still have a lot to learn, yeah.

DS: Okay, fantastic. We had shout outs there for [indiscernible] we had shout-outs there for colleague Jeffrey Fisher who we've called out before on the podcast, and yeah I think that's I think it's hard for anybody who is listening to this. I think it's hard to say that you have, whether or not your analysis and your conclusions are right. It's hard to say that you have that much more to learn about JD because it just seems like you really have thought through this very thoroughly and understand the company really well.

And so I really appreciate you taking your time today to talk about it Lester and best of luck for your position. Thanks so much. Having this is a lot of fun.

LG: Yeah, thanks for having me.

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. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Daniel Shvartsman has no positions in any stocks discussed. Lester Goh is long JD. Nothing on this podcast should be taken as investment advice.