JD.com Leading The Way For Drone Delivery

By James Sands for Seeking Alpha

Summary

Review

A quick caveat – JD.com is the largest e-commerce retail platform in China, as measured by net revenues. Alibaba Group Holding is the largest e-commerce retail platform in China, as measured by gross merchandise volume (GMV).

The JD-Alibaba relationship is akin to the Amazon.com and eBay Inc. history, where one company has looked to invest and grow through fulfillment facilities and transportation through the incorporation of technology, while the other has focused on technology infrastructure to develop a robust marketplace platform.

It is to this point that JD has embarked on a key milestone, not just for its own sake but for an important future global market. JD recently reported that it is developing a low-altitude drone logistics network, which will cover the province of Shaanxi.

Source: Google Maps

The province of Shaanxi has an area of nearly 80,000 square miles, ranking 11th in China per Wikipedia. As of 2010, the province’s population ranked 16th, with 37.3 million people. Gross domestic product in 2016 was 1.9 trillion Chinese Yuan ($289 billion), ranking 17th; and GDP per capita was 50,500 Chinese Yuan ($7,600), ranking 15th.

JD’s drone network will included hundreds of routes and air bases throughout the province for e-commerce shipments. Drones are anticipated to be able to carry more than a ton, transporting both high-quality and agricultural produce products to remote areas.

An agreement has been created between JD and the provincial government of Shaanxi. Benefits for the Shaanxi province will include a research and development campus in partnership with the Xi’an National Civil Aerospace Industrial Base, for drone system development, manufacturing and testing. This is expected to promote further economic development for high-tech industries.

During the first quarter of 2017, JD reported very strong results that outperformed average analyst estimates (most importantly on the bottom-line). This was driven by robust growth from last year for active customer accounts (40 percent), fulfilled orders (52 percent total, 71 percent mobile orders fulfilled) and GMV (47 percent). This translated to a 41 percent increase for net revenues to 76 billion Chinese Yuan ($11.1 billion).

Non-GAAP diluted earnings attributable to ordinary shareholders improved to $0.55 per share from -$0.07 last year. Operating and free cash flow increased by 86 and 42 percent respectively. On an adjusted basis, JD is approaching a 4 percent profit margin. This is an important metric for investors to monitor as broad retailers, whether predominantly e-commerce of physical-based, have struggled to generate profit margins near or greater to the 5 percent level.

JD’s newly established JD Logistics unit fits well into the company’s overall business model. JD provides online direct sales, provides an online marketplace, as well as other services. The company has strategic partnerships with Tencent Holdings  and Wal-Mart Stores.

In a time where there is skepticism of the quality of e-commerce third-party goods, and specifically Chinese e-commerce goods, JD is strategically aligned with the largest retailer based in the U.S. Additionally, the company recently became a certified member of the American Apparel & Footwear Association (AAFA) as a first Chinese e-commerce company. JD through its partnerships has provided access to Chinese consumers for many Europe and U.S. branded products through distribution channels and directly from retailers.

JD’s competitive advantage lies in pricing and customer service. At this token, the company has invested significantly into fulfillment centers nationwide, warehouses, sorting centers, delivery/pick-up stations and transportation services throughout the fulfillment process. JD has extensive training programs for its delivery personnel, as customer experience is the top priority. Customers are able to effortlessly make payments, return items and/or packaging as desired through these interactions. Looking to the next step using unmanned drones, JD will still be able to provide these same services.

Summary

I know that investors will automatically look to pit JD against Alibaba. This is where the interest is as to where capital should be deployed. I will appease this desire by saying that Alibaba offers investors a potentially better return, based on today.

JD has run up by nearly 60 percent year-to-date. Currently Alibaba is up around 13.5 percent. This gives Alibaba much more upside potential out to 2018, as I would view JD as close to fair value for the same period. That being said, JD anticipates that the JD Finance reorganization may potentially be completed in the second quarter of 2017. This reorganization will still allow JD to receive approximately 40 percent of JD’s pretax profit, while JD Finance, being fully owned by Chinese investors, will be able to expand its operations in certain licensed financial services businesses in mainland China.

Long-term, JD has strong upside potential based on its business model. The company has created the leading e-commerce platform by net revenues. By 2018, JD’s net revenues are projected to be 65 percent greater than Alibaba (trailing twelve-month GMV for Alibaba was 3.8 billion Chinese Yuan versus JD’s $700 million Chinese Yuan).

The successful development, manufacture and deployment of a drone network in the Shaanxi province will be a major milestone for JD and the global e-commerce community. JD continues to make moves that are beneficial for both its U.S. and Chinese investors.

Disclosure: I am/we are long AMZN, JD.

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.