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
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.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
noted in the Regulatory Disclosures as a Non-Participating Entity,
the rated entity is participating and the rated entity or its agent(s)
generally provides Moody's with information for the purposes of
its ratings process. Please refer to www.moodys.com
for the Regulatory Disclosures for each credit rating action under the
ratings tab on the issuer/entity page and for details of Moody's
Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
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