JD.com’s share jumped by ~17% to ~$25 on 6 March 2024, after its earnings release and announcement of a $3 billion share buyback program.
Unsurprisingly, a friend who has been trying to look at JD’s business for some time messaged me, asking “What do you think of the earnings? And I don’t get it. JD has a total cash amount of RMB 198b, which is about US$28b, which is about 75% of its market cap of ~$36b? What’s going on? Why doesn’t JD repurchase 75% of its shares, but instead go for a buyback plan of only $3b? Is its share price ridiculously undervalued now?"
If you are not an accountant, or well-versed with consolidation accounting, you might have the same questions too, and think that you have just found a gem!
Is it really the case?
Let’s debunk this question/ narrative in this article, together with some other comments on JD’s performance and valuation.
How Much (Consolidated) Cash Does JD Actually Have?
Let’s start with the big cash mystery first.
$28b (RMB 198b) of cash, versus $36b (~RMB 260b) of market cap… Really?
Indeed, JD’s press release (shown above) mentioned that it had cash and short term investments totalling RMB 198b, which was equivalent to $28b.
However, as many of you would know, we would need to see if the company has any debt too. If we sum up JD’s debt and lease liabilities (both short-term and long-term) as of end 2023 (highlighted in yellow in the screenshot below), we get a total debt of RMB 68b.
So, that brings down the net cash to RMB 130b (= RMB 198b cash, minus RMB 68b debt) as of end 2023.
That’s still ~50% of the market cap (~RMB 260b), which is still huge, but lower and makes a bit more sense now.
Mystery solved?
Not so fast… One tricky part about reading or interpreting JD’s financial figures is that they are affected by the consolidation accounting adopted by JD.
Some of you would know that JD used to be mainly an e-commerce business in China, but as its business grew, it has gradually built up several other businesses to massive scale, like its logistics business (JD Logistics), healthcare business (JD Health), property business (JD Property), etc.
And it has spun off some of them, like JD Logistics and JD Health, which are now publicly listed businesses on their own, although JD is still the majority shareholder in them.
Because JD still has majority control over these subsidiaries, for its accounting, JD has to “consolidate” 100% of the subsidiaries’ financial figures, even though it no longer owns 100% of them.
For example, JD owned ~68% of JD Health’s shares as of 2023. If JD Health has RMB 50b of net cash, then for JD’s (consolidated) cash amount (shown in its consolidated balance sheet, per the earlier screenshot), it has to include the full RMB 50b of it in the total cash amount, instead of just the 68% of the RMB 50b that it has economic right to.
Therefore, to figure out how much net cash a shareholder of JD actually has “access” to, we have to see, of the total RMB 130b consolidated net cash that JD records in its balance sheet, how much of it actually belongs to the various subsidiaries of JD (which JD does not have 100% economic interest in). If that amount is significant, then the net cash that JD’s shareholders have access to (theoretically) can actually be quite lower.
So, let’s look at the financial accounts of JD Logistics and JD Health, which are publicly listed so their financial accounts are available publicly.
Tough work huh? (And who says investing is easy…)
As of end 2023, JD Logistics had a net cash of ~RMB 6b, so relatively small.
However, JD Health had a net cash of ~RMB 48b (using its balance as of 30 June 2023 as a proxy, as the year end accounts are not available yet, as of the time of writing), which was relatively significant, at ~37% of JD’s consolidated net cash of RMB 130b. And JD owned only ~68% of that net cash.
So, after excluding the net cash of JD Logistics and JD Health, JD’s net cash actually dropped to RMB 75b, which was ~29% of the RMB 260b market cap. This is now much lower than the 75% of market cap (based on consolidated gross cash) which my investor friend got confused with (at the start of this article).
Theoretically, for the large chunk of ~RMB 48b net cash held by JD Health (which was ~18% of JD’s market cap), by right, JD as a majority shareholder should have ~68% of economic rights to it, so that makes up another ~13% of JD’s market cap (bringing the total net cash potentially accessible to JD’s shareholders to ~42% of JD’s market cap). However, practically, JD (and by extension, the shareholders of JD) would only have access to it, if JD Health does not intend to use that cash and decides to return it to JD and other minority shareholders, e.g. through a dividend distribution.
Now that we know that JD’s net cash, after excluding the minority interest portions of cash of JD Logistics and JD Health that it did not own economically, made up ~42% of its market cap, what does it mean for JD’s valuation? Is it still undervalued?
Let’s explore this, along with JD’s financial performances and capital allocation (including its increased dividend distribution and newly announced buyback plan) next.
JD’s 2023 Performance, Capital Allocation & Valuation
These sections of the article are reserved for subscribers of our Multibagger Research Series platform, which can be accessed here.
Conclusion of JD 2023 Earnings
The bottom line? When reading a company’s financial statements, if you are reading it not just for fun (oh… who does that?) but for investment purposes potentially, be extra careful with all the accounting policies and nuances, e.g. for companies that have many large subsidiaries and hence adopting consolidation accounting.
(Note: For subscribers of our Investing Fundamentals and Multibagger Research Series programs, we have discussed consolidation accounting in more detail, in particular, how to value companies with subsidiaries, associates & investments, here and here respectively.)
Let us know if you have any questions!
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