JD.com doesn’t belong on the buyback bandwagon

September 10, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

JD.com doesn’t belong on the share buyback bandwagon. China’s second largest e-commerce group has set aside up to $1 billion to repurchase shares. After a selloff, JD understandably wants to signal it is undervalued. But this is not a mature business throwing off cash: it’s still growing and investing, and only last year raised over $2.8 billion by selling new shares.

Just three months ago, shares in the New York-listed company hit a high of $38. Since then, amid a broader rout in Chinese stocks, the stock has fallen 35 percent, erasing more than $18 billion in market value. Now it is joining other Chinese tech firms, like larger rival Alibaba and search giant Baidu, in unveiling a buyback programme.

Yet JD is still investing heavily in its barely profitable, fast-growing business. The group’s Amazon-like direct sales model requires financing and holding a lot of inventory, while maintaining a logistics and delivery network across China.

Revenue for the quarter ending June jumped 61 percent year-on-year to $7.4 billion, but fulfillment expenses increased just as fast to $500 million. Stripping out share-based expenses and other items, net margins are basically at zero.

And JD is also spending heavily on acquisitions to broaden its business. In January, JD invested $400 million in cash and $750 million in resources in a car website. It spent another $350 million on a travel website in May, and about $700 million on a supermarket operator in August.

Almost $4 billion of net cash, as of June, is a decent warchest. But JD is not generating huge amounts of fresh cash. While free cash inflow in the second quarter was $762 million, that strips out $820 million extended to customers and suppliers via “internet financing activities”.

At least JD has unveiled this programme after a slide in its shares: too many companies buy at the top of the market. And it may not use all of its allowance. But at this stage, JD has better ways to deploy capital.

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