Bond View - Maintain Buy on 2026s & Upgrade 2021s to Buy.

　　JD 2026s (G+250bp offer as we write) have tightened around 20bp in the pastcouple of weeks, having traded at about 270-275bp for the two weeks prior. Inthe current environment, we think they have another 15-20bp upside left andmaintain our Buy recommendation. JD 2026s are still amongst the widesttrading BBB bonds in Asia, and offer more than 90bp pick up over the Alibaba2024s (closest comp in the China tech sector - Figure 1) and 110bp over Ebay2024s (lowest rated US tech comp - Figure 2). The gap with Alibaba and Ebaywas approx. 80bp and 90bp respectively at the time of new issue. Recollectthat these bonds were issued at T+220bp and with just 30bp spreaddifferential versus the 2021s. The 5/10yr spread curve has flattened from 50bpto 35-40bp in recent weeks and is now in line with the rest of China IG. Hence,we also upgrade the 2021s (G+215bp offer at the time of writing) to Buy fromHold. Key downside risks are negative rating actions (though not expected inthe near term), competitive operating environment and thin margins, largedebt funded acquisitions, lack of complete transparency into JD Finance, etc.

　　2Q16 Results - Strong overall.

　　Please see Figures 3 to 9 for a snapshot of 2Q results. We won't go throughthe details, but many of the old trends have continued - slowdown in GMV andrevenue growth, revenue composition of home appliances & consumerelectronics vs. general merchandise, positive non-GAAP consolidated EBITDA,positive EBIT for JD Mall, strong OCF and FCF (pre JD Finance), net cashbalance sheet, and self funding of JD Finance. Major surprises for us were thesharp increase in consumer financing (balance of RMB17.7 billion vs. RMB11.5billion at end of 1Q) and supply chain financing (RMB9.4 billion vs. RMB6.2billion) from JD Finance, significant improvement in EBITDA margin (1.3% vs.

　　0.4%) & FCF (RMB8.1 billion vs. RMB2.9 billion pre-finance), and consolidatednon-GAAP EBIT turning positive for the first time. We highlight that JD’s O2Obusiness was deconsolidated following its merger with Dada from Apr 26,hence it’s losses were included only for a month during the quarter, thoughthis entity will raise its own funding in future.

　　What's next?3Q revenue guidance is RMB59-61 billion, implying a 34-38% yoy growth. Thismeans growth will continue to slowdown on the back of anti brushingactivities and discontinuation of loss making smaller merchants, albeit it's stillhealthy on an absolute basis. Growth rate could start stabilizing / picking up in4Q as new merchants (brought on the platform in lieu of those discontinued)start contributing. It's also good to see management's commitment forprofitability over growth. We will watch for more acquisitions/deals in theFMCG space like the Yihaodian one, which is expected to lead to an operatingloss of about RMB1 billion in 2H. Similarly, investments in cloud computingwill need to be watched as it is forecasted to be a focus area per management.

　　On JD Finance, it had obtained approval for issuance of RMB10 billion ABS inMarch and another RMB2 billion in May, of which RMB7.6 billion has alreadybeen utilized in 1H. It will be interesting to track future fund raising activitiesfor this business. Separately, we don't foresee any immediate rating actionsbased on our estimates, though we caveat that we don't have all the numbersfor exact calculation of downward rating triggers. Last but not least, JD hasstarted buying back equity – USD51.5 million spent till June 30 and a furtherUSD100 million paid for capped call options to be settled in 3Q.