Rating Action: Moody’s upgrades JD.com’s ratings to Baa1; outlook stable
Global Credit Research – 28 Aug 2020
Hong Kong, August 28, 2020 — Moody’s Investors Service has upgraded JD.com, Inc.’s issuer and senior unsecured ratings to Baa1 from Baa2, and has revised the rating outlook to stable from positive.
“The upgrade reflects JD.com’s consistently improving business and financial profiles despite sizeable investment needs, as well as its prudent financial policy that underpins low leverage and a robust cash position,” says Lina Choi, a Moody’s Senior Vice President.
“The upgrade also considers JD.com’s prudent approach towards investment and expanding funding channels, leaving it with ample buffer for future investment needs and potential volatility,” adds Choi.
JD.com’s Baa1 ratings reflect the company’s (1) growing and sizeable operations in China’s e-commerce market, (2) unique business model with deep supply-chain capability and economies of scale, and (3) track record of growing active users, leveraging both internal and external online traffic channels.
The ratings also take into consideration the solid financials of the company’s retail business, as illustrated by its increasing scale, strong cash flow and efficient working capital management and improving profitability.
JD.com’s ratings are constrained by the execution risks and capital requirements associated with (1) the development of its in-house logistics network, and (2) the investments required for new business development.
Benefiting from the accelerating trend towards digitization and online purchases following the coronavirus outbreak, Moody’s expects JD.com to grow its revenue by 15%-20% per year over the next 12-18 months. Cash flow will grow at similar rates, supported by stable profit margins for its retail business and improving profitability for JD Logistics. JD.com’s adjusted EBITDA margins improved to around 3.5% for the 12 months ended 30 June 2020 from 2.6% in 2018, based on preliminary results announcement.
JD.com has improved its financial profile, with leverage — as measured by adjusted debt/EBITDA — steadily declining to 2.3x at 30 June 2020 from 3.7x at 31 December 2018. The company also achieved a net cash position of RMB55 billion at 30 June 2020.
JD.com has achieved this improvement mainly through robust cash flow growth, which Moody’s expects to continue over the next 12-18 months. Solid revenue and cash flow growth will allow JD.com to keep its leverage around 2.0x and maintain a robust cash position. These strong metrics appropriately position JD.com at the Baa1 level when compared with its domestic and global rated peers.
JD.com has generated free cash flow in three out of four fiscal years since 2016. Consequently, the company has been able to fund most investments from operating cash flow, reducing its reliance on debt.
JD.com has also maintained excellent liquidity. Its $1 billion senior unsecured note issuance and secondary listing in The Hong Kong Stock Exchange completed in the first half of 2020, along with its strong balance sheet, net cash position and expanded funding channels, have enhanced the company’s financial flexibility.
As of 30 June 2020, JD.com had cash, restricted cash and short-term investments of RMB108.8 billion. Together with estimated annual operating cash flow of around RMB30 billion, these cash sources are more than sufficient to cover its short-term borrowings (including current portion of operating lease liabilities) of RMB16.4 billion and investment needs.
JD.com has also acquired a 36.8% equity interest in JD Digits by converting its prior profit-sharing rights with respect to JD Digits. JD Digits is a private company that provides technology-enabling services to consumers and companies across various sectors, including financial services, such as consumer loans and wealth management products. Moody’s has considered the potential contingent liabilities and reputational risks associated with JD Digits, and believes such risks are partially mitigated by the latter’s track record of raising new capital from a diversified shareholders base. JD.com’s strong financial profile provides an additional buffer against these risks.
JD.com’s ratings also take into consideration the following environmental, social and governance (ESG) factors:
In terms of social factors, JD.com handles vast amounts of personal data, exposing it to the risk of a data breach. However, this risk is mitigated by JD.com’s compliance with legal and regulatory requirements for the collection, processing, retention and protection of personal data, supported by an up-to-date data security system.
In terms of governance considerations, Moody’s has taken into account JD.com’s prudent approach towards investment and expanding funding channels, leaving it with ample financial buffer. Today’s rating action reflects the company’s improved financial profile arising from this prudent financial strategy.
Moody’s also considers the high concentration of voting power in the company’s key shareholder, Richard Liu. However, this risk is mitigated by (1) a balanced board, with most of the members being independent nonexecutive directors and only independent directors in its audit committee; and (2) the company’s long track record as a listed and regulated entity and the presence of other strategic shareholders, such as Tencent Holdings Limited (A1 stable) and Walmart Inc. (Aa2 stable).
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable rating outlook reflects JD.com’s strong business profile, stable profit margin and sustained solid cash flow.
Given JD.com’s investment needs, an upgrade is unlikely in the near term. However, JD.com’s ratings could be upgraded over time if it (1) continues to grow revenue and profits, (2) remains prudent in its investments, and (3) maintains controlled growth in JD Digits’ receivables securitization with good loan-quality management.
Financial indicators that would lead to an upgrade include (1) adjusted debt/EBITDA remaining below 2.0x, and (2) continued growth in operating cash flow and a net cash position, both on a sustained basis.
Moody’s could downgrade the ratings if (1) JD.com fails to maintain stable profitable operations, (2) it engages in acquisitions that strain its balance-sheet liquidity or raise its overall operational or financial risk, or (3) JD Digits aggressively grows its receivables securitization, raising the risk of additional financial requirements from JD.com if nonperforming loans rise.
Financial indicators that would lead to a downgrade include (1) adjusted debt/EBITDA remaining consistently above 2.5x, and (2) negative operating cash flow or a reversal to an operating loss on a sustained basis.
The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
JD.com, Inc. is the largest retailer in China in terms of revenue, both online and offline. The company offers a wide selection of products, including communications, computers and consumer electronics, home appliances, apparel, food, books and other household items.
The company provides an online marketplace for third-party sellers to sell products to customers through its website and mobile applications. As of 30 June 2020, JD.com owned and operated an in-house end-to-end fulfillment and delivery network that covered almost all counties and districts in China.
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Lina Choi Senior Vice President Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Clement Cheuk Yiu Wong Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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