JD.com Inc. Outlook Revised To Positive On Improving Operating Performance And Cash #BBB-# Rating Affirmed

Stocks and Financial Services Press Releases Tuesday November 14, 2017 16:19
HONG KONG--14 Nov--S&P Global Ratings

HONG KONG (S&P Global Ratings) Nov. 14, 2017--S&P Global Ratings revised its outlook on China-based online retailer JD.com Inc. to positive from stable. At the same time, we affirmed our 'BBB-' long-term corporate credit rating on JD.com and our 'BBB-' long-term issue rating on the company's senior unsecured notes.

We revised the outlook to positive to reflect JD's better operating performance than we expected so far in 2017. We also anticipate that the company will maintain its good business growth, increase market share, and stabilize its profitability over the next 12-24 months. We also expect JD's expanding scale to strengthen its bargaining power over suppliers and improve its operating cash flow.

We expect JD to maintain a net cash balance over the next 12-24 months even after factoring in the company's aggressive capital expenditure and potential acquisitions. We also anticipate that JD will reduce its residual loans from its now-sold finance operations over the next two years and therefore reduce contingent risks.

We affirmed the ratings because we expect JD to remain the largest online direct sales retailer in China, supported by its improving product and service offerings and a highly scalable technology platform. China's highly fragmented and competitive retail industry and the company's low profitability temper these strengths.

JD is the second-largest B2C (business-to-customer) online retailer in China, with a market share of 34.7% by gross merchandise value (GMV) as of June 30, 2017, according to iResearch. It is also the largest online direct sales retailer in China. JD has improved its market position in the last two years despite intense competition in China.

We expect JD's expansion of its product offerings will continue to support growth in customer traffic. JD's revenue and active user base have grown by 41.0% and 34.0%, respectively, year-on-year in the first nine months of 2017. For the third quarter of 2017, JD's revenue from general merchandise categories grew 67.0% year-on-year. General merchandise accounted for 24.4% of its total direct sales revenue in 2016, increasing from 15.7% in 2012.

JD's profitability is likely to remain weak as the company continues to invest in marketing and fulfillment expenses in the highly fragmented and competitive operating environment. We expect adjusted EBITDA margins to remain marginally positive at 1.8%-2.3% over the next 12-24 months, from about 2.3% in 2016. We expect the company's diversification to higher-margin businesses, including category expansion within its direct sales business such as fast-moving consumer goods, and growth in marketplace operations to support its gross margin. However, rising marketing and fulfillment expenses will constrain profitability. JD's improving economies of scale will partially offset the impact of the increase in operating expenses.

JD is likely to have a smaller scale than that of global retail peers and e-commerce providers. Nevertheless, we expect the company to benefit from positive industry fundamentals in China, including increasing penetration of online retailing, driven by acceleration of internet penetration and the rise of mobile retailing.

In addition, we believe JD's nationwide logistics network, with its in-house last-mile delivery, gives the company a differentiating edge to more effectively manage its delivery process and enhance the customer experience. However, the higher expenses incurred and capital expenditures required to meet these investments could weigh on the company's financial position. We expect JD's capital expenditure to increase to Chinese renminbi (RMB) 10 billion-RMB12 billion annually in the next 12-24 months, from RMB4.5 billion in 2016. We also anticipate that the company may make strategic investments and acquisitions of RMB10 billion annually in the next 12-24 months to expand its service offering.

We expect JD to generate positive free operating cash flows over the next 24 months due to improving working capital management and profitability. These cash flows should help the company meet its investment and capital expenditure needs. The company has a reported cash balance of RMB41.8 billion at end-September 2017, partially supported by cash proceeds of RMB14.3 billion from the disposal of JD Finance. We also expect the company to make progress in the deconsolidation of the consumer finance liabilities as it refinances the loans in the next few quarters.

The positive outlook on JD reflects our expectation that the company will maintain its good business growth, increase market share, stabilize profitability, and improve cash flows over the next 12-24 months. We also expect JD to maintain a net cash balance over the period.

We could raise the rating if JD continues to improve its competitive position through better product diversity, stronger delivery capability, and increasing bargaining power with suppliers. This could be reflected in continued strong business growth, greater free cash flows, and stabilizing profitability, while leverage remains low.

We could revise the outlook to stable if JD's operating performance deteriorates significantly such that the debt-to-EBITDA ratio exceeds 1.5x without signs of improvement. This could happen if: (1) the company's profitability is worse than we expect due to more intense competition in China; (2) JD undertakes more aggressive acquisitions or capital expenditure than we expect; or (3) the company has difficulty executing its expansion strategy or faces more severe competition than we expect, which would limit its growth.


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