Moody's Says JD.com's (JD) Q2 Results Support Ratings

Moody's Investors Service says that JD.com, Inc.'s (Nasdaq: JD) results for the second quarter of 2016 support its Baa3 issuer and senior unsecured debt ratings, and the stable outlook on the ratings.

"JD.com's strong cash flow generation from its retail business was in line with our expectations, and reflects the progress the company has made in raising its profitability and growing its scale, as well as in reaping benefits from its product category expansion," says Lina Choi, a Moody's Vice President and Senior Credit Officer.

"JD Finance achieved self-financing in 2Q2016, meaning that its loan book growth was financed primarily through the securitization of receivables, along with series A funding and short-term borrowing," adds Choi, who is also the Lead Analyst for JD.com. "This development will reduce the Finance unit's reliance on cash flow from core retail operations."

JD.com's net revenue grew 42% to RMB65.2 billion in 2Q2016. The gross merchandize value (GMV) of its direct sales platform grew 46% to RMB94.7 billion over the same period, while its marketplace platform recorded 62% growth in GMV to RMB62.5 billion, excluding virtual items.

Looking ahead, Moody's expects that JD.com's net revenue will grow 35%-40% in the next 12 months, driven primarily by continuous growth in the number of active customers and fulfilled orders.

The company's reported non-GAAP EBITDA margin rose to 1.3% in 2Q2016 from just breakeven in 2Q2015. This improvement was driven by an ongoing structural shift towards a marketplace model -- which has a higher gross margin because JD.com does not take inventory -- as well as by higher gross margin in some of its key direct sales categories, such as computers, and communication and consumer electronics. The latter in turn demonstrates JD.com's strengthened bargaining power as a result of its growing scale.

Moody's expects JD.com's reported non-GAAP EBITDA margins will trend toward 2% in the next 12-18 months.

The total loan book of JD Finance stood at RMB27.5 billion at end-June 2016. The Finance unit reported net cash inflows of around RMB6 billion in the first half of 2016, implying that funding from receivables securitization, along with series A funding and short-term borrowing, has outpaced loan origination.

Moody's expects JD Finance to continue growing its loan book in a measured manner, without a need for further capital injections from its core retail operations.

Moody's estimates JD.com generated RMB1.4-1.5 billion adjusted EBITDA from its core retail business in 2Q2016, almost double the amount in 2Q2015.

At the same time, its total cash of RMB40 billion was more than sufficient to cover its short-term debt and securitization of RMB10.8 billion, as well as its business expansion plans.

Accordingly, Moody's expects JD.com will maintain adjusted debt/EBITDA below 3.5x for its retail business, and a consistent net cash position over the next 12-18 months.

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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