JD delivers (again)

In 2008 private equity investors were looking for the next big thing in China’s e-commerce sector. At that point the 10 year-old JD.com looked like one of the best candidates to challenge Alibaba in online shopping. But the company’s founder Liu Qiangdong found it difficult to pull off a fresh fundraising round. Investors were rattled by the global financial crisis. They also had doubts about Liu’s plan to build a proprietary logistics business to support JD.com’s online sales.

Liu was adamant that this was necessary because more than half of his customer complaints were about delivery problems. But he calculated that building his own fulfilment network would require at least $1 billion in capital, which put off a number of investors.

After dozens of meetings, Liu was fortunate to link up with Hong Kong financier Francis Leung, who personally invested $1 million and introduced Liu to former BNP Peregrine colleagues at Bull Capital Partners, says 36Kr.com. Together with Capital Today, another early investor in JD.com, Liu secured $21 million in the financing round.

For much of the following decade Liu struggled to make the same case for his logistics empire to fund managers. Weighed down by the buildout costs, the group was largely lossmaking for years. A large chunk of the e-commerce firm’s subsequent fundraisings went into its distribution network. Alibaba – which operated on more of an asset-light model that outsourced more of the work to third-party delivery firms – was widely viewed as having the better approach.

That view is no longer as dominant and the market has welcomed a slew of successful IPOs from China’s delivery firms. Now it is harvest time for JD.com too, which raised $3.2 billion in an initial public offering for its delivery unit JD Logistics in Hong Kong today.

Nearly 1.36 million retail investors subscribed for its shares, which climbed 18% from its offer price at one point during its trading debut this morning. That gave the company a market value of nearly HK$300 billion ($38.5 billion), comparing with SF Express’ Rmb319 billion ($50 billion) and $84 billion for FedEx.

The spin-off followed last year’s secondary listing of JD.com on Hong Kong’s main bourse (Liu’s internet firm had listed on Nasdaq back in 2014) and the separate Hong Kong debut of its sister firm JD Health.

JD Logistics remains an integral part of JD.com, its most important client. Last year more than half of its revenue came from sister firms within the JD group of companies. But that compares with more than 70% two years ago, showing that the reliance is reducing.

“Our growth strategy is partially based on the assumption that the trend toward outsourcing of supply chain services will continue,” the firm claimed in its prospectus. “Third-party service providers like us are generally able to provide such services more efficiently than otherwise could be provided ‘in-house,’ primarily as a result of our expertise, technology and lower and more flexible employee cost structure.”

JD Logistics operates more than 900 warehouses all over China. With more than 260,000 employees, mostly delivery staff, it claims that its network has coverage of almost all of China’s cities and counties, with 90% of customer orders deliverable within 24 hours.

The company is planning to spend most of the IPO proceeds on further enhancing its network. In doing so, it will again ask for investor patience – it has been lossmaking for 14 consecutive years, according to 36Kr. Last year’s red ink was Rmb4.1 billion. Yet it is now the second largest player behind SF Express in market value. Alibaba has also been investing heavily in the sector, putting money into its own logistics unit Cainiao, as well as a range of strategic investments in couriers such as ZTO and Yuanda. Reportedly J&T Express, a newcomer from the Southeast Asian market, is set to join the competition with a $1 billion IPO in New York (for more on this firm, see our initial report in WiC494).

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