China’s JD.com Seeks Jeff Bezos Treatment With $1.7 Billion IPOLeslie Picker
JD.com Inc.’s founder Richard Qiangdong Liu is asking for the Jeff Bezos treatment.
The Chinese online retailer, which is seeking as much as $1.7 billion from a U.S. initial public offering tonight, has a similar business model to Bezos’s Amazon.com Inc.: managing inventory and selling directly to consumers. JD.com, which hasn’t turned an annual profit, is asking for a valuation of about 2 times annual sales, close to where Amazon trades.
Investors seeking access to China’s growing e-commerce market need to decide if they’d back 41-year-old Liu’s efforts to expand the company at all costs, the way they have with Bezos, said Jeff Papp, a senior analyst at Oberweis Asset Management Inc. Fund managers also have an alternative to consider -- with the profitable and larger Chinese e-commerce company, Alibaba Group Holding Ltd., planning its own IPO for later this year.
“With JD.com, you’re going to have to take a leap of faith that revenue will grow over time and they’ll grow like Amazon,” said Papp, whose fund oversees $1 billion in Lisle, Illinois. “How many companies have tried to develop an e-commerce site and get massive scale? There’s only one company that’s gotten a free ride on valuation for doing this and that’s Amazon.”
Papp said he hasn’t decided whether or not to buy shares of JD.com.
Representatives for JD.com and Alibaba declined to comment on JD.com’s IPO. A spokeswoman at Amazon didn’t return calls and e-mails seeking comment.
JD.com intends to sell 93.7 million American depositary shares for $16 to $18 apiece, according to the IPO prospectus. At the high end of the range, that would yield a market value of $24.6 billion, or 2.2 times sales of $11.5 billion. Amazon trades at about 1.9 times last year’s sales.
JD.com uses an online-direct sales model, meaning it handles much of its own e-commerce logistics. The company operated 86 warehouses, 1,620 delivery stations and 214 pickup stations across China as of March, according to the filing. Fulfillment expenses for compensation, warehouse rent and shipping increased 34 percent last year to $679 million, the prospectus shows. Ninety percent of JD.com’s expenses can be attributed to cost of revenue.
In contrast, Alibaba outsources its logistics to third-party vendors, with much of the company’s expenses derived from managing the websites. Accordingly, the company makes most of its revenue from commissions and advertising paid by companies that use its platforms to sell directly to consumers or other businesses.
Both stand to gain from growth in China, where revenue from e-commerce is projected to increase 64 percent this year, compared with 12 percent in the U.S., according to digital researcher EMarketer Inc.
Still, while Alibaba has proven it can generate healthy profits from those sales -- with a 44 percent net income margin in the nine months through December -- JD.com remains unprofitable on an annual basis, despite a 24-fold increase in sales since 2009.
“JD.com has a lot to prove,” said Eric Jackson, the president of Ironfire Capital LLC, a hedge fund with offces in the U.S., China and Canada.
One way JD.com may do so is through a partnership with Tencent Holdings Ltd., Asia’s largest Internet company, tapping the 400 million monthly active users on Tencent’s WeChat messaging service and boosting traffic to JD.com’s online store. Tencent acquired a 15 percent stake in JD.com in March and plans to purchase shares in a private placement concurrent with the IPO.
JD.com also could improve its profit margins by expanding its online marketplace business, which works like Alibaba’s model, according to Praveen Menon, an analyst at Bloomberg Industries.
“We’ve seen both models work well,” Menon said by phone. “It depends on what the consumer finds more useful -- better logistics infrastructure in JD.com or choice online with Alibaba.”
Still, even Bezos has pushed the limits of investors’ patience. After Amazon surged by a multiple of more than 20 from its 1997 IPO to a high in January, the shares have fallen 26 percent from that peak as the company’s spending spree -- from warehouses for faster shipments to a grocery delivery service -- spooked investors.
To supporters, Amazon’s growth potential is huge, and Bezos’s unapolagetic spending -- aimed at taking the Seattle-based company far beyond its roots as an online seller of everything from books to children’s toys, is worth backing.
JD.com has ensured that Liu gets his way in key decisions with a dual-class share structure and a rule that Liu must be present for key votes. By skipping such sessions, Liu, who will hold 84 percent of voting power after the offering and is poised to become a billionaire, could effectively veto any proposal.
“The key risk and reward for these companies is to understand and get comfortable with the founders’ vision,” Oberweis’s Papp said.