Moody's Sees JD.com's (JD) Potential Deconsolidation of JD Finance as Credit-Positive Development
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Moody's Investors Service says that JD.com, Inc.'s (Nasdaq: JD) potential deconsolidation of JD Finance is credit positive for its Baa3 issuer and senior unsecured debt ratings, and the stable ratings outlook.
"The potential deconsolidation of JD Finance will reduce contingent credit risk, and will also improve JD.com's profitability because the finance unit has been loss making," says Lina Choi, a Moody's Vice President and Senior Credit Officer.
JD.com disclosed in its 3Q2016 results announcement that the company has received board approval to explore the disposal of its equity stake in JD Finance, its in-house finance unit, which provides credits to consumers and suppliers. JD.com expects to deconsolidate JD Finance if the transaction materializes.
We estimate a high portion of JD.com's consolidated reported debt, which stood at RMB30.9 billion as of September 30 2016, relates to JD Finance.
We are concerned that the small scale, short operating history and evolving funding structure of JD Finance will add credit risks to JD.com.
At the same time, JD Finance's operating loss has dragged down reported consolidated EBITDA to around RMB3 billion year to date. The deconsolidation of both the debt and losses from JD Finance will therefore improve JD.com's credit quality and provide higher transparency for its core retail business.
"At the same time, we expect uncertainties -- including timing, valuation, as well as regulatory and board approvals -- before the sale and deconsolidation can be finalized," adds Choi, who is also the Lead Analyst for JD.com.
JD.com is at a preliminary stage of identifying investors for its JD Finance stake.
Moody's will monitor developments in the search for potential investors, the valuation of JD Finance, any cash injections into JD.com when the transaction materializes, as well as whether approvals are obtained.
The principal methodology used in this rating was Retail Industry published in October 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
JD.com, Inc. is the largest online direct sales company in China. It offers a wide selection of products, including communications, computers and consumer electronics, home appliances, apparel, food, books and other household items.
It also provides an online marketplace for third-party sellers to sell products to customers through its website and mobile applications. JD.com owns and operates an in-house end-to-end fulfillment and delivery network that covered 2,646 counties and districts in China as of 30 September 2016.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
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