Forensic Accounting Analysis on JD.com

This report investigates potential downside risks to JD.com’s shareholders extending from its accounting and corporate governance practices. Our accounting diagnostic review identified several red flags pertaining to revenue quality, off balance sheet liabilities and undisclosed investees in the company’s financials and notes to financial statements.

We have concerns about the quality of JD.com’s revenue. Our analysis shows that c.15%-20% of JD’s revenue is coming from accrual accounts, but this is not reflected in the financial statements since the company is moving its accounts receivables off balance sheet in a “factoring-like” arrangement through a related party.

We also think that the company may be indirectly assuming the solvency risk of some of its related parties like JD Digits and JD Logistics Properties Core Fund L.P (JD LPC) but this liability is not recognised in the balance sheet. The size of these “indirect” liabilities seems quite large; JD.com’s exposure to JD LPC’s debt is currently c.35% of the company’s net cash.

We are also not satisfied with the depth of the company’s disclosure on its equity investees. Equity investees are responsible for c.40% of JD.com’s net loss but there is little to no disclosure about them in the company’s financial statements.

Moreover, we believe that the impact of JD.com’s accounting issues are exacerbated by its weak corporate governance practices. The company’s founder, CEO and chairman, Mr. Richard Qiangdong Liu, has extensive influence on the company through his c.79% voting power, which puts minority shareholders at risk. We also observe that the company often adopts the Cayman Island’s corporate code instead of instituting the typically stronger corporate governance practices recommended by the NASDAQ exchange.

We don’t see the impact of these accounting and corporate governance issues materialising in the short-term. However, we find the potential income statement and balance sheet impact of these issues to be large enough for investors to pay close attention.