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

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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. (NASDAQ: 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 (NYSE: BABA) and JD.Com Inc (ADR) (NASDAQ: 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.

Latest Ratings for AMZN

DateFirmActionFromTo
Dec 2017Evercore ISI GroupInitiates Coverage OnOutperform
Dec 2017Moffett NathansonInitiates Coverage OnBuy
Nov 2017NomuraMaintainsBuy

View More Analyst Ratings for AMZN
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