JD's (JD) Acquisition of Yihaodian is Credit-Positive Development - Moody's

Moody's Investors Service says that the announcement by JD.com, Inc. (Nasdaq: JD)(Baa3 stable) that it will acquire the online marketplace platform assets of Yihaodian (unrated), an e-commerce company focused on the fast-moving consumer goods vertical, and form a strategic alliance with Wal-Mart Stores, Inc. (Aa2 stable), is credit positive, but will have no immediate impact on JD.com's Baa3 issuer rating and stable outlook.

JD.com will fund the transaction entirely by equity through the issuance of approximately 5% of its enlarged capital to Walmart.

"Because the transaction is equity funded, it will have no impact on JD.com's financial profile or liquidity," says Lina Choi, a Moody's Vice President and Senior Credit Officer.

Based on the most recent closing share price of JD.com, the total consideration for the transaction amounts to approximately $1.5 billion. Moody's estimates that Yihaodian's marketplace has a total gross merchandize value (GMV) of around RMB20 billion, and it generates an operating loss.

These figures compare with JD.com's own retail business with a total GMV of over RMB400 billion and EBITDA of RMB2.4 billion for calendar 2015.

Moody's therefore believes Yihaodian's operating loss will not have material impact on JD.com's profitability.

"The equity-funded acquisition and strategic cooperation with Walmart will -- via access to Walmart's comprehensive product portfolio and brand name -- enhance JD.com's product offerings. For JD.com, it is also a significant step towards category strengthening and the enhancement of user stickiness," says Choi.

Moody's forecast JD.com's total revenue will reach RMB250 billion in 2016, driven in part by its ongoing category expansion on both direct sales and marketplace platforms.

JD.com's geographical coverage and product categories will be complemented by Yihaodian's strong presence in Southern and Eastern China and focus on fast-moving consumer products.

In addition, JD.com's user base will gain access to Sam's Club China (unrated), Walmart's imported goods business, and Walmart's China stores, which will be listed as a preferred retailer on Dada (unrated), JD.com's online-to-offline joint venture set up in April 2016.

As part of the strategic cooperation, Sam's Club will open a flagship store on JD.com, and have its orders fulfilled through JD.com's nationwide warehouse and delivery network.

JD.com's liquidity remains strong. At end-March 2016, the company reported total cash of RMB34.4 billion. Together with the RMB5-7 billion in funds from retail operating activities, we estimate JD.com will generate from its core retail operations, it has more than sufficient cash resources to support its capital expenditure of RMB5-6 billion and short-term debt of RMB5.2 billion in the next 6-12 months.

The principal methodology used in this rating 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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