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.
RATINGS RATIONALE
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.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
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The first name below is the lead rating analyst for this Credit Rating
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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
