JD.com In Midst Of This 'Robust' Trend

Daiwa has upgraded China's online retailer JD.Com Inc (ADR) (NASDAQ: JD) to Buy from Outperform as it sees improving visibility on both the revenue growth and net profit margin improvement in 2016.

"We recommend investors to buy into the strong results, and after talking to management believe that our market-share-gain thesis on JD.com remains intact," analyst John Choi said in a client note.

Choi senses a strong commitment from management on raising profitability levels as they clearly indicate that the core e-commerce business should see "meaningful margin improvement in 2016." The results are likely to be driven by the rising first party (1P) gross margin and increasing high-margin commission revenue contribution.

Meanwhile, user growth is still in the sweet spot. As of Q4 2015, the 155 million annual active customers of JD.com account for only 35 percent of Alibaba's annual active-customer base.

In addition, JD.com's GMV (Gross Merchandise Value) is only 15 percent of Alibaba's China retail GMV and 36 percent of Tmall's GMV, suggesting a big potential for JD.com to grow further in terms of both user coverage and spending per user.

"We expect healthy user takeup momentum to persist in 2016E," said Choi, who raised his price target on the stock to $34 from $32.

"The stock's valuation looks attractive at a 0.9x 2016E price-to-sales ratio (we forecast a 26% GMV CAGR in 2016-18), close to the historical trough of 0.8x," Choi added.

JD.com's ADRs were down 4 percent at $25.69 on Wednesday afternoon.