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Why JD.com’s IPO bodes well for Alibaba

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Now a multi-billionaire: Liu

“Am I worried about what Liu Qiangdong is doing today? I have never met this person, he can do whatever he wants for all I care.”

Jack Ma seemed a little dismissive of his rival Liu – the chairman and chief executive of JD.com – in an interview with China Entrepreneur last year. And although Ma didn’t seem to consider Liu as a worthy challenger back then, he may be watching developments at JD.com a little more closely now, after it sold shares in a private placement to Tencent, China’s dominant social networking company and Alibaba’s most formidable rival, in March.

Last week JD.com also raised $1.8 billion on Nasdaq in an IPO that beat Alibaba’s own offering to the punch. Its stock closed 10% up on the first day of trading (and is 33.7% above the IPO price).

Commentators say that the enthusiasm for JD.com’s listing bodes well for Ma, who is eyeing the biggest internet IPO ever. “It is the pre-game show for Alibaba,” Rett Wallace of Triton Research told the Financial Times. “But the differences between JD.com and Alibaba are more interesting than the similarities.”

JD.com does compete against Alibaba Group but the two employ very different business models. Alibaba acts mainly as a middleman, operating a third-party platform on which vendors sell goods to consumers. JD.com carries its own inventory and sells directly to consumers. It also operates its own warehousing facilities and logistics network. That business model requires much more capital, which is one reason why JD.com reported a net loss of $608.4 million in the first quarter, despite 65% growth in revenues. It continues to pour money into developing its logistics operations. Between December and March this year, it added 10,000 staff in distribution and customer service, bringing the total to 40,000.

CNBC tested it out, and was impressed when an order made from an apartment in Beijing was delivered in just two hours (and the item only cost Rmb29, or $4.64).

Enthusiam for the stock was strong, despite revelations that JD.com had awarded Liu 93.7 million more shares, worth $591 million, as a one-off bonus shortly before the IPO. This was granted “in consideration of his past and future services,” according to the company prospectus.

“Obviously if company funds are paid just as a matter of executive compensation and not for shareholder value, wouldn’t that automatically mean that shareholder rights aren’t being fairly treated?” asked Michael Cheng, research director for China and Hong Kong at the Asian Corporate Governance Association.

Its detractors in China seemed more concerned about JD.com’s long-term prospects.

“No matter how you look at it, JD.com is a company that’s chronically losing money. It is very strange that for the same piece of metal, many people in China consider it junk, but others in the US think it very valuable. Something that’s ‘worthless’ in China is worth $30 billion in the United States [JD.com’s valuation],” Beijing Times mused.

But foreign investors seem eager for a chance to profit from China’s burgeoning e-commerce market. Last week online cosmetics site Jumei.com climbed 11% on its own trading debut in New York (for more on its colourful chairman see the Who’s Hu). Earlier this month, the tour booking website Tuniu also went public on Nasdaq and has since doubled its IPO price.

“[Chinese] tech stocks, along with China concept shares, are on the mend,” celebrated the China Daily.

In a number of cases, old economy shares haven’t been doing as well as their internet peers. China National Rail, the state-owned maker of bullet trains, dropped below its IPO price on the first day of trading (it has since inched back up so slightly) in Hong Kong. Similarly, pork producer WH Group also pulled its planned IPO in Hong Kong last month (see WiC235).


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