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Morningstar | JD’s CEO Issues Present Buying Opportunity in the Stock FVE

No-moat JD.com’s founder, chairman, and CEO Richard Liu Qiangdong was arrested on a rape accusation in the U.S. on Aug. 31 and has been released back to China while the U.S. police investigate the allegations. As a result, JD.com’s stock price was down 6% on Sept. 4. We believe associated share price weakness presents a buying opportunity, with the stock trading 28% below our unchanged USD 41 per share fair value estimate. Liu founded JD.com in 2004 and has been the chairman and CEO since inception. Despite owning only 16% of outstanding shares, Liu controls 80% of the votes, owing to the company’s dual-class share structure.

Some previous allegations against similarly famous people have been dismissed and settled out of court, and pending further information, we believe this is the most likely outcome in this case. In this case, we would expect near-term share price recovery. However, the worst case for the company would be a guilty conviction that forced Liu to step down from the board. In this case, we believe Liu’s voting rights would potentially be passed onto relatives who would represent his interests. We do not expect this would affect the long-term prospects for the company, but there is some chance that company’s reputation with customers would be tainted in the short to medium term. New business development and monetization for a few new initiatives may also be affected, owing to slower decision-making for the company as a whole during the subsequent board and senior management reshuffling.