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Investors worry about impact of JD.com founder's arrest

US-listed shares of Chinese online retailer poised for further declines

An employee works at a JD.com logistic centre in Langfang, Hebei province.    © Reuters

SHANGHAI/HONG KONG -- American investors in Chinese online shopping site JD.com are showing worry over the company's future as Minnesota police continue to investigate rape allegations against Chief Executive Richard Liu Qiangdong.

News of Liu's arrest in Minneapolis emerged during the three-day Labor Day weekend in the U.S. Though he was released without charge or bail and allowed to return to China, JD.com's shares fell 6% to $29.43 on Nasdaq when trading resumed on Tuesday.

Some analysts believe the shares could fall a good bit further, and, indeed, the shares were down 5.2% to $27.89 in premarket trading on Wednesday.

"We think that this incident, true or false, will likely undermine the stock's near-term performance as investors re-examine the CEO's credibility, ethics and corporate governance," Junheng Li, chief executive of stock research firm JL Warren Capital in New York, wrote in a note before Tuesday's trading.

JD.com has already fallen 44.8% since peaking at $50.50 in late January, but Li predicted that the shares will sink to $22. While noting concerns about executive turnover and possible conflicts of interest, she sees bigger business issues for JD.com.

Transaction growth is slowing on its platform and Li forecasts that profit margins will narrow this year and next as JD.com invests in new initiatives in an effort to defend market share from Alibaba Group Holding and newer social shopping services like Pinduoduo. "Market expectations are still ahead of underlying fundamentals," she said.

Others see the market fall as likely to be temporary. "Unless he is charged, [this] will blow over," said John Gruetzner, founder of China-focused corporate advisory firm Intercendent. "JD is well positioned to start revenue growth so the market will forgive [Liu]."

In China, many internet users have spoken up in support of Liu, who returned to public view at a press event in Beijing on Tuesday to mark a new partnership with textile company Shandong Ruyi.

"There is no way that Mr. Liu committed a crime," one commentator posted online. Another said: "I will support him by buying JD.com's products."

Liu has been a popular figure in China thanks in part to his rise from a humble start in a farming village in Jiangsu Province. He went on to found and develop JD.com into China's second-biggest online retailer after Alibaba.

Chinese internet support for Liu may reflect deteriorating sentiment toward the U.S. amid the trade war between the two countries and the fact that Chinese society is less sensitive to issues of sexual harassment.

An open question is how much the incident may affect JD.com's partnership with foreign companies.

Google in June agreed to invest $550 million for a stake in JD.com and jointly explore development of retail services outside China. Walmart two years ago gained a stake in JD.com as part of a deal in which JD.com took over the U.S. retailer's online operations in China. Walmart also invested alongside JD.com last month in a fundraising round for a JD.com logistics affiliate.

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