JD.com Eyes Tricky Consumer Finance Business With Pending Acquisition

Key Takeaways:

• JD.com is reportedly close to buying Home Credit Consumer Finance, China’s first wholly foreign-owned consumer finance company that has been struggling recently
• The deal could help JD.com round out its financial services offerings but also brings various risks, including difficulties in boosting loans and controlling delinquencies

By Warren Yang

As its core e-commerce business stagnates, JD.com Inc. JD is looking further afield for new challenges in its smaller financial operation.

The internet giant is closing in on a deal to buy Home Credit Consumer Finance Co. Ltd., China’s first wholly foreign-owned consumer finance company that has been struggling for quite some time, financial media Caixin reported last Friday, citing unnamed sources. The deal is already supported by the government of Tianjin, where Home Credit is based, but still requires approval from the National Financial Regulatory Administration, according to the report.

At a quick glance, the deal makes a lot of sense for JD.com. It will immediately add a consumer lending arm to its financial services unit, which it can use to make its vast e-commerce ecosystem more complete. JD.com’s financial services arm, JD Finance, currently offers payment services, microloans and factoring, and also sells funds, so consumer finance would be a nice addition to complement those offerings. In particular, it’s not difficult to imagine the company would use such consumer loans to help its core e-commerce customers finance their purchases.

But the foray into consumer finance could also create new headaches for JD.com if the unit has difficulty managing defaults, something that’s difficult even in the best of times and is becoming more so in China’s current gloomy economic environment. Risk management is becoming increasingly challenging for China’s other privately owned consumer lenders, which are having to balance their desire to keep growing with keeping bad loans in check. 

Like many consumer-facing companies, JD.com is having trouble growing its profit, with its revenue increasing by a scant 1.2% in the second quarter. That likely reflects shaky Chinese consumer finances, which is leading many to curb their spending. JD.com doesn’t break out results for its JD Finance unit in its quarterly financial results, implying its contribution to the company’s overall business is relatively small.

Two big questions for JD.com will be how cheaply it can buy Home Credit, for which there isn’t much information yet, and how it can get the most out of the new finance business without getting hit by the company’s loan losses.

Home Credit was once a leading consumer finance company in China, but it’s not clear how the company is doing lately since it hasn’t reported anything about its performance since releasing its financials for 2020. And its last disclosed results weren’t so pretty, with its net profit plunging 88%.

Home Credit hoped to leverage its entrepreneurial background to build a major consumer finance company in China when it started operations at the end of 2010 as the economy was booming. Such companies were notably lacking in China at that time, with the financial services industry dominated by state-run banks with little or no experience lending to individual consumers.

Consumer Caution

But the company and its peers are now learning a lesson in the importance of risk management, as China’s economic growth has slowed significantly in the last few years amid a big real estate slump made worse by the country’s draconian restrictions during the pandemic.

The situation has resulted in rising unemployment and stagnating personal income, making consumers more reluctant to buy new things and take on fresh debt. New and existing borrowers also become more prone to defaults as their finances worsen. As that happens, lenders are forced to boost their loan impairment provisions, eating into their profits. Lastly, low interest rates, the result of policy efforts to stimulate the economy, limit the interest income for lenders.

All these factors seem to have left Home Credit on shaky footing. In addition to its deep profit decline in 2020, the company has sold two packages of nonperforming loans totaling $6 billion in book value at sharp discounts, according to the Caixin report.

Home Credit has been caught up in some geopolitical complications as well. Its ultimate parent, PPF Group, is based in the Czech Republic, where its cyber-security watchdog has scrutinized Huawei Technologies over potential national security threats. PPF controls four leading telecommunications operators in its home country, which have sought to avoid using Huawei to develop their 5G networks.

So it’s not hard to see why PPF has plenty of reasons to sell Home Credit and leave that part of its China business behind it. The company may also just be pulling out of Asia in general anyway, given that it has also sold it operations in Thailand, Indonesia and the Philippines in recent years.

JD.com, on the other hand, could benefit from owning a consumer finance business. Such an asset could help to attract new customers and retain existing ones by helping them finance their purchases, improving the company’s competitiveness against rivals like Alibaba BABA, whose affiliated Ant Group is now a formidable player in China’s financial sector. JD.com can also leverage its own vast customer databases to help it manage credit risk if and when it completes the Home Credit purchase, addressing a key issue with the company.

JD.com also has plenty of cash, with more than $28 billion at the end of June, so it could probably easily afford a distressed business like Home Credit.

Still, investors seemed more focused on potential risks from such a deal than benefits, at least based on a drop in JD.com’s shares in both New York and Hong Kong after the Caixin report’s publication. The company’s stock trades at a decent price-to-earnings (P/E) ratio of about 9 in both markets, though that’s still a far cry from the multiple of more than 20 for Alibaba.

The Home Credit acquisition won’t provide a big lift to JD.com immediately after the deal closes, as it will likely require some time to clean up and integrate Home Credit’s business into JD.com’s own operations. But the acquisition could ultimately help it to narrow the gap with rivals if JD.com can navigate the many difficulties associated with running a consumer finance company in the current difficult environment.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.