It's been an ugly year for JD.com (JD +0.39%), the second largest e-commerce player in China after Alibaba (BABA 0.29%).
First, it missed earnings estimates for two straight quarters as its operating expenses climbed and its losses widened. CEO Richard Liu was then arrested in the U.S. on a rape allegation in late August, causing the company's stock to stumble to fresh lows. Liu wasn't charged, but the incident raised concerns about Liu's super-voting stake and the potential fallout for JD's brand.
JD.com CEO Richard Liu at World Retail Congress in Madrid. Image source: JD.com.
Liu was also notably absent from a recent high-profile state-sponsored tech forum in Shanghai, where he was originally listed as a guest speaker alongside Tencent's (TCEHY 2.67%) Pony Ma, Alibaba's Jack Ma, and Baidu's Robin Li.
All these headlines have likely tested the faith of investors, although the stock looks dirt cheap at less than one times this year's revenue estimate. I personally believe that JD might win back some investors if it makes four important moves.
1. Increase the board's power
Liu holds an 80% voting stake in JD through his super-voting shares. Moreover, an unusual rule stipulates that JD's board can't make any executive decisions if Liu isn't present, so the board was technically powerless during Liu's brief incarceration.
This reveals a glaring "key person risk" in JD's business model. If Liu is serious about winning back investors, he should reduce his super-voting stake to under 50%. If he's unwilling to do that, he should at least eliminate the rule that bars the board from making decisions in his absence.
2. Hire a new COO
JD hasn't had a chief operating officer since Shen Haoyu, who held the position from 2011 to 2016, stepped down. As a result, Liu doesn't have a second in command -- which JD's critics argue is a major problem.
Speaking at a conference in Hong Kong this May, APS Asset Management founder Wong Kok Hoi stated that investors "see only Richard Liu's footprints all over the company." Wong, whose firm is shorting JD, asked the audience: "Can you name the number two in JD?"
If JD hires a new COO -- preferably an outsider who would bring fresh ideas to the table -- it could silence that criticism. JD could even consider hiring C-suite executives from overseas markets, as Tencent did when it hired Goldman Sachs' managing director James Mitchell as its chief strategy officer.
JD.com CEO Richard Liu delivers a package. Image source: JD.com.
3. Liu needs to engage JD's investors
For someone who wields absolute power over JD, Richard Liu makes no effort to engage the company's investors. Liu only issues brief prepared statements in JD's earnings press releases, and sits out from its conference calls -- which are usually fielded by JD's investor relations executive Ruiyu Li, chief financial officer Sidney Huang, and chief strategy officer Jianwen Liao.
JD also doesn't hold regular analyst or investor days like Alibaba, which holds investor days every year. Alibaba shared a large amount of information about its main marketplaces, brick-and-mortar efforts, and investment strategies at this year's investor day, while JD's investors were left fumbling in the dark. It's bizarre that Liu, who maintains such a high-profile "celebrity CEO" status in China, doesn't think that it's important to engage JD's investors and discuss the company's future.
4. Long-term plans for the logistics business
The biggest difference between JD and Alibaba is that JD takes possession of most of the products sold on its platform, and handles fulfillment and logistics tasks through its JD Logistics division. Alibaba doesn't take possession of most products sold on it platform, and mainly relies on third-party logistics services.
That's why JD actually generates more revenue than Alibaba (making it the largest direct retailer in China), but has much lower operating margins.
JD Operating Margin (TTM) data by YCharts
JD believes that using first-party logistics helps it maintain tighter quality control standards than Alibaba. It also believes that it can monetize JD Logistics by serving other retailers, and that those revenues should offset all of its heavy tech spending over the next two years.
JD noted that its "logistics and other services" revenue more than doubled annually to 5.11 billion RMB ($772 million) during the first half of 2018, but that only accounted for 2% of its top line. If JD believes that it can recoup the costs of its logistics investments, it should present a clearer roadmap for investors to follow.
Will this company listen?
JD has great growth potential, but it also exhibits some of the worst traits of Chinese tech companies, and tech companies in general: It's firmly controlled by a single person (rendering its board and top investors useless), and has a CEO who has little interest in engaging investors.
If JD addresses these shortcomings, it might win back some investors. Until then, the stock will be stuck in the doghouse as investors question the company's leadership and long-term strategies.
