JD & Walmart: Since 2016

Walmart and JD.com first joined forces on June 20, 2016, when Walmart traded its Chinese e-commerce business called Yihaodian for a 5 percent stake in JD.com (145 million shares) valued at $1.5 billion when JD.com’s U.S. listing was at $21.06. The stake was increased to a total of 289 million shares, or nearly 10 percent of the company. The mutually beneficial partnership allowed Walmart stores to use JD.com’s logistics for delivery while JD.com took over the website. Walmart sold its stake at $24.95, up from yesterday’s closing price of $28.19 and Monday’s price of $29.54. Walmart made money on their investments, but considering JD.com’s peak was $106.88 on February 17, 2021, they clearly left money on the table by selling near their entry point. Why did they sell? According to Reuters, Walmart explained the following (apparently only to them, as I don’t see the explanation anywhere else):

• “This decision allows us to focus on our strong China operations for Walmart China and Sam’s Club and deploy capital for other priorities”
• “Last quarter, Walmart reported a 17.7% year-over-year increase in sales in China to $4.6 billion, driven by strong growth in its Sam’s Club warehouse chain and its digital offering.”
• “Walmart added that membership revenue from its Sam’s Club business in China rose 26% as membership continues to grow. The company has about 48 clubs in China.”

The block sale was fully subscribed, which I view as a positive as it suggests buyers were ready. JD.com reported it had purchased $390 million worth of shares, which used up the remainder of its share repurchase plan. This suggests JD.com may not have been given much notice about the sale as it could have otherwise asked its board during its second-quarter results to expand its buyback. JD.com did not do so, so was it caught off guard? That’s impossible to know. While the WWII adage goes, “Unintelligible words sink ships,” unintelligibility clearly weighed on U.S.-listed Chinese stocks yesterday. We would suspect informed investors knew a block sale was coming, that the space was being sold outright, or that selling the space clearly freed up cash. Yes, Vipshop’s weak Q3 guidance weighed on the e-commerce sector, but sales, especially in Tencent’s unsponsored ADR TCEHY due to the immensely successful launch of Black Myth: Wukong from Game Science, which is backed by Tencent, made little sense to me.

What happens next?

• I would look for JD.com to ask the board to expand its share buyback, as the company has enough cash to buy shares at this level. According to its second-quarter financial results, the company has $28.8 billion in cash and short-term investments on its books.
• In the second quarter of June 2016, JD.com reported revenue of $9.9 billion, up +35% year-on-year, and adjusted earnings per share of $0.04. In the second quarter of June 2024, JD.com reported revenue of $41 billion, up -2% year-on-year, and adjusted earnings per share of $1.29.
• JD.com’s P/E ratio is 7.43 and its forward P/E ratio is 7.84.
• Remember that JD.com’s second-quarter results were better than expected.
• Remember that MSCI indices will reduce China’s weight in the MSCI Emerging Markets Index as part of a routine month-end rebalancing, so China’s weight will drop to 24% despite the country’s GDP of $18 trillion. India will have a weight of 20%, with a GDP of $3.5 trillion. MSCI released these new weightings a few weeks ago, so any active positioning prior to the rebalancing is likely already in place. They are not ringing the bell either at the top or bottom, although there are signs.

Important news

Asian stock markets showed mixed results ahead of Jackson Hole on low volumes and little news. According to Google, the Philippine Stock Exchange was closed on Ninoy Aquino Day, the commemoration of the assassination of former Senator Benigno “Ninoy” Aquino Jr.

Hong Kong was down as Walmart’s sale of its JD.com stake appeared to spook investors, but not nearly as much as China ADRs listed in the US yesterday. Hong Kong’s most heavily traded stocks by value were JD.com at -8.74%, Tencent at +0.32% up on its ADR which fell -2.04% yesterday, Alibaba at -0.56% down on its ADR which fell -3.42%, Kuaishou at -9.91% down after yesterday’s better-than-expected results although weak gross merchandise value (GMV) was cited as the reason for the decline, and AIA at -1.34%. Other Hong Kong stocks saw similar price action against their U.S.-listed ADRs: Baidu HK fell -1.9% against its ADR, which fell -2.44%, Trip.com gained +0.06% against its ADR, which fell -2.68%, and NetEase lost -1.4% against its ADR, which fell -2.52%.

Online travel company Tongcheng Travel (HK780) gained +5.95% following yesterday’s financial results. The Hong Kong Stock Exchange’s intraday financial results were marginally lower, sending the stock down -1.47% from intraday lows, while Geely rose well below intraday lows following a +0.13% increase in sales. Electric vehicle stocks showed mixed results due to EU tariffs, as BYD gained +0.18% while Li Auto fell -0.61%, XPeng fell -2.18% and NIO fell -1.89%. Short volume in Hong Kong increased overnight in JD.com, Kuaishou, Alibaba and Tencent, but if there is a bounce in US ADRs, it could be problematic for shorts tomorrow. Mainland China remains mired in crisis, posting small losses on low volumes despite rising volumes in the National Team ETFs. 9 mainland stocks hit 52-week highs versus 424 52-week lows as investors reject government policies. It’s hard to ignore that Shanghai is approaching key support after Shenzhen fell below that support yesterday. In my opinion, it’s time to step on the gas on stimulus measures.

Hang Seng and Hang Seng Tech fell -0.69% and -1.82% respectively on volume increase of +25.89% from yesterday, representing 92% of the 1-year average. 148 stocks rose while 314 fell. Short turnover on the Main Board exchange rose 24.49% from yesterday, representing 102% of the 1-year average as 19% of turnover was short turnover (Hong Kong short turnover includes ETF short volume driven by market makers’ ETF hedging). Large-cap stocks and value stocks fell less than small-cap stocks and growth stocks. Materials and energy sectors gained +0.46% and +0.04% respectively, while real estate fell -1.64%, financials fell -1.15% and consumer discretionary fell -1.05%. The main subsectors were food/consumer staples, consumer durables and telecommunications, while retail, insurance and real estate were the worst performers. Turnover on Southbound Stock Connect was light as mainland investors bought $36 million worth of Hong Kong stocks and ETFs, with Tencent making a very small net purchase and Kuaishou making a very small net sale.

Shanghai, Shenzhen and the STAR Board fell -0.35%, -0.28% and -0.27% respectively on volume -8.6% less than yesterday, 64% of the 1-year average. 1,777 stocks rose while 3,044 fell. Large-cap and growth stocks fell less than small-cap and value stocks. The top sectors were materials (+0.48%), technology (+0.27%) and consumer discretionary (+0.24%), while communication services (+0.67%), consumer staples (+0.59%) and real estate (+0.55%) fell. The top subsectors were motorcycles, computer hardware and electronic components, while agriculture, internet and diversified financials were the worst performers. Northbound Stock Connect volume was light, although buy/sell data is no longer available daily. CNY and the Asia Dollar Index gained against the US dollar. Treasury bonds recovered. Copper fell while steel rose.

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Performance from last night

Last night’s exchange rates, prices and returns

• CNY per USD 7.13 vs. 7.14 yesterday
• CNY per EUR 7.93 compared to 7.91 yesterday
• Yield on 10-year government bonds 2.16% compared to 2.17% yesterday
• Yield on 10-year China Development Bank bonds 2.24%, up from 2.24% yesterday
• Copper price: -0.30%
• Steel price: +1.27%