Should Amazon 'Leave' China? This Firm Suggests A Stake In JD To Restructure Operations

In a report published Thursday, analysts at UBS try to answer the question: should Amazon leave China? Over the past year, the analysts have taken a neutral stance on Amazon.com, Inc. AMZN on the belief that "the current investment cycle will be longer in duration and more defensive in nature (no revs re-accel)."

The report points out that the stock has rallied since the begging of the year "on a sentiment bounce (had approached trough EV/Sales) and investor comfort that the investment cycle could be nearing an end (as evidenced by a slight beat of CSOI Q4)." While the analysts don't see a slowdown in general investments, they "acknowledge that one area that could validate a more conservative approach to investments would be any decision by Amazon to restructure its operations in China."

What Would A China "Exit" Look Like?

UBS thinks that Amazon's attempts to compete against the duopoly of Alibaba Group Holding Ltd BABA and JD.Com Inc (ADR) JD have been futile, as these two companies have roughly a 90 percent share of Chinese e-commerce. The firm frames "the opportunity for Amazon to value its China operations on a sales multiple and/or the replacement value of its fulfillment centers as a tool to "exit" China and swap its operating role for an equity stake in JD. Our analysis suggests Amazon could translate its China operation into a range of 3-9% of JD equity."

For Amazon, benefits would include:

• Turning a poor operating position into an equity stake in the second-largest ecommerce player in China.
• "Likely eliminating a profitability drag from China."
• Demonstrating a shareholder-friendly level of capital prudence.

UBS rates Amazon and JD at Neutral, with respective price targets of $355 and $32.