Home > Thought Leaders > Show Me the Fundamentals

Show Me the Fundamentals

Show Me The Fundamentals is a series of papers presenting APS’ investigative research into companies throughout Asia. Our original, sometimes contrarian, analyses and views result from studying financial statements, industry and company fundamentals, as well as regulatory issues that meaningfully affect the company.

Synopses of the Show Me the Fundamentals papers are presented here and registered users may access our thought pieces here.


23 March 2020

JD.com - A Washout?
Falling margins. Reckless capital management. A police investigation. An auditor replaced. A CFO retiring. Related party lending. Formidable competitors. 

We at APS Asset Management have seen the parade of horrors before, and we know how it will end. Once investors connect the dots, JD.com’s stock will price in all these risks in a flash. To quote the uncannily prescient 2011 medical thriller movie Contagion, “nobody knows, until everybody knows”.

27 NOVEMBER 2018
JD.com – An Update Post Its 3Q FY18 Results

On 19th November, JD.com hosted an earnings call to discuss their reported 3Q FY18 results. For anyone listening to the call, it was clear that JD’s mascot - dog named Joy - was not very joyful. We have attended almost every one of JD’s prior calls, and this was the most downbeat of them all. The management’s prepared remarks lasted less than seven minutes, much shorter than the usual 15-30 minutes.  In this note, we provide our take on the reported 3Q18 results and the management’s remarks made during the call. Again, we felt management was not candid and prone to dissembling. When management cannot talk straight, investors had better think straight. 

The stock might have declined 60% from its January 2018 peak, but it is still grossly overvalued, as there is no chance that the company can make a profit in the next 2-3 years. This piece takes a look at how silence is not always golden, and the rough road ahead for JD.com.

1 JUNE 2017

JD.com - $60bn Market Cap - Tulips Anyone?

To do a thorough analysis, APS’ team analyzed JD.com’s financial statements and regulatory filings as well as spoke to JD’s former employees, competitors and other industry experts. Our business franchise, industry and competitor analysis show that JD’s value is nowhere near commensurate with its $60 bn market cap. 

We explain why JD is not the Amazon of China; how accounting engineering has turned negative operating cash flow positive in 2016; and why JD is trapped in a ‘product black hole’ which makes it difficult to produce a decent profit. The sale of JD Finance is packaged with a free put option granted to new shareholders which could subject JD to a financial risk in the future. We have also been tracking insider selling and find it to be incongruous with the very optimistic future JD paints. 

There is a lot of fake news and fake data in the ecommerce world. We advise our investors  to be vigilant and discerning. When things like the  potential of internet finance GMV are too good to be true, they often are not true, especially in the investment world. Having a million convenience stores in 5 years and producing a profit from day one sounds very exciting but how realistic is it to sign on 548 franchisees a day, 7 days a week for 5 straight years?

In the final analysis, how much should investors pay for a pure online retailer with a low-margin 1P business model, a poor track record of capital allocation, rising wages in a labor-intensive business model, high senior management turnover and zero prospect of transforming into an Amazon? Going by JD’s Q1 $35 mm profit and the CFO’s guidance that upcoming quarters will not be as good as Q1, making $140 mm in 2017 would be a stretch. Assuming it did, its PER would be 410x. And if earnings were to double annually over the next two years, its PER would still be 103x in 2019. As the growth rate assumptions are already very generous for a company with practically no economies of scale, JD’s stratospheric valuation is incongruous!

To us, this looks more like mania and when reality hits, it won’t be pretty.

15 FEBRUARY 2017

Wynn Macau 
4Q 2016 Earnings Are Tellingly Weak  
Wynn Macau (1128 HK) reported 4Q 2016 adjusted property EBITDA grew +28% QoQ and +41% YoY. At a cursory glance, the numbers suggest a strong recovery. But on deeper investigation of the fundamentals, we concluded that they are weak and stronger headwinds may emerge up ahead. In our first paper under the “Show Me the Fundamentals” series, we analyze why Wynn Macau’s 4Q 2016 fundamentals are tellingly weak.  

Firstly, investors must take into account that Wynn Palace, the US$4.4bn new casino on the Cotai strip, was opened on 22 August 2016. Therefore the Q4 number includes 2 casinos. On a YoY basis, we’re comparing 2 casinos with 1 property a year ago—an inaccurate and meaningless comparison. The QoQ comparison is again meaningless because the new casino operated for only about 40 days in 3Q 2016. 

The 4Q 2016 results can only be correctly understood by looking at the operating performance of the 2 casinos separately. The older Peninsula property’s 4Q 2016 gross gaming revenues (GGR) declined -10% when the industry GGR grew +10% (refer to Exhibit A4 in the appendix). This suggests that it lost market share and the new casino may have had a cannibalization effect.