JD.com (NASDAQ:JD), China’s second largest e-commerce company after Alibaba, floated for the first time on the Nasdaq last Wednesday, raising $1.8bn. The company headquartered in Beijing, but registered in the Cayman Islands, placed 93.7m shares at $19 instead of the initial range $16-$18 per share, valuing the company at about $26bn and making founder Richard Qiangdong Liu worth $5.7bn. Despite the recent cooldown in the technology sector, the more than expected price-tag signals investors’ appetite for Chinese online retailers ahead of the much anticipated Alibaba IPO in the autumn of this year, which is expected to dwarf JD.com’s raising.
China’s retail industry has experienced substantial growth as a result of rising disposable income and increasing urbanization. Total retail sales grew from RMB6.2 trillion in 2008 to RMB9.8 trillion (US$1.6 trillion) in 2012, according to Euromonitor International, representing a compound annual growth rate, or CAGR, of 12.2%.
According to iResearch, the first Chinese internet market research company, China’s online retail market size measured by transaction volume was RMB1.3 trillion in 2012 and is expected to reach RMB3.6 trillion (US$588 billion) in 2016, representing a CAGR of 28.9%, a growth rate significantly faster than that of the offline retail market.
Although both competing in the online sales market, JD.com and Alibaba have more differences than one would imagine. Alibaba is a much bigger and diversified internet behemoth, offering a wide array of internet services ranging from e-commerce, online payment to mobile apps, putting it in direct competition with the other Chinese internet champion Tencent (creator of QQ IM platform and Wechat messaging App) and, in less extent, with search engine provider Baidu. Even when solely considering its e-commerce business, Alibaba is different from JD.com. The former, which operates under the online marketplace business model, provides an intermediary platform that facilitates transactions between parties: a B2B platform (Alibaba.com), a B2C platform (T-mall.com) and an Ebay-like C2C platform (Taobao.com). On the other hand, although expanding into the online marketplace business, JD.com, operates mainly under the online direct sales business model, where a company procures and manages its own inventories, sells products directly to consumers online, and provides delivery and after-sales services.
According to iResearch China, JD.com, with a 46.5% market share, is the largest online direct sales company in China and its GMV (gross merchandise volume) was valued around US$20.7bn in 2013.
JD.com’s US$1.8bn offering is the 3rd largest IPO of 2014 in US, after Santander’s US$1.8bn and Ally Financial US$2.4bn. Priced at $19 per American Depositary Shares (2 Class A shares each) the IPO was 15 times oversubscribed and more than predicted $16-18 per share. Financial media reports that some hedge funds did not attempt to put orders in for the IPO as even a $10m subscription would amount to zero after the book is consolidated. Out of the 93.7m ADS in the offering, roughly 26% were accounted from existing shareholders thus leaving JD with a hefty $1.3bn capital raise.
Online retail stocks recently have been under pressure recently: Amazon missed Wall Street’s profit estimates during the first quarter of 2014 and its stock price slipped 24% year-to-date. JD.com improved its performance compared to the last years: its total revenues increased from RMB21.1bn in 2011 to RMB69.3bn in 2013 ($11.5bn), however the company has never been profitable, having reported a net loss of $50m in 2012 and $8m in 2013, while Amazon reported a comprehensive net income of $274m in 2013. Triniton Research estimates JD’s enterprise value at 1.43x 2014 sales forecast while Amazon at 1.49x.
On March 10, 2014, the Chinese retailer entered into a Strategic Cooperation Agreement with Tencent Holdings Limited, which now owns a 15% stake on a diluted basis. The transaction merges Tencent’s e-commerce business into JD.com and allows the latter to tap the hundreds of million active users on Tencent’s Wechat and QQ platforms. Like Alibaba has been seeking to develop mobile apps to compete with Tencent’s widely successful Wechat, also Tencent has been unsuccessfully competing with Alibaba in the e-commerce sector. With the deal, Tencent has bought into a successful online retailer that is able to compete with Alibaba, and aims to increase its competitiveness through synergies with its mobile apps.
Apart from Mr.Liu, selling shareholders included Chase Coleman’s Tiger Global Management (selling 13.4 million shares), HHGL 360BuyHoldings (selling 9.6 million), Yuri Milner’s DST Global funds (selling 6.8 million) and Best Alliance International Holdings (selling 5.8 million). However, founder Mr Liu is the only shareholder granted B-class shares, which come with 20 votes each and give him control of the company as long as he holds at least 5 per cent of the equity. Mr Liu owns approximately a 19 per cent stake after IPO, but through other agreements with shareholders he controls 83.7 per cent of voting power of the company. There is also a rule blocking the board from voting unless Mr Liu is present, giving him the ability to veto decisions by simply not showing up.
BofA Merrill Lynch and UBS Investment Bank were lead underwriters with a green shoe of 14 million shares.
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