Hong Kong investors today have a dependable way of playing the Chinese e-commerce boom, with the initial public offering of JD Logistics (HK:2618), the distribution and delivery arm of e-commerce marketplace JD.com (JD) .
JD.com has charted a different path to its chief rival, Alibaba Group Holding (BABA) . JD started building out its logistics distribution in 2007, whereas Alibaba has generally relied on an "asset-light" approach and third-party couriers. Having its own delivery network stood JD.com very well during the pandemic, when e-commerce seized up under lockdown. JD.com mobilized its own network to keep deliveries flowing.
JD Logistics also delivers goods for other companies. It gets around half its revenue from JD.com, which runs neck and neck with Alibaba's Taobao and Tmall sites for consumer clicks in China. Revenues for JD Logistics rose 47.2% in 2020, to C¥73.4 billion (US$11.5 billion).
Building out its network has been expensive, however, and put off early investors in JD.com. Much of the early funding JD.com received went into its distribution channels. It is likely that JD Logistics will continue to spend heavily, meaning it doesn't look set to turn decent profits even in the mid-term. It should then at that point have outspent its rivals, and be in a position of dominance. How much it cuts prices if Chinese logistics gets in a race to the bottom will determine the extent of its temporary losses.
The company's net loss increased to C¥4.0 billion (US$630 million) in 2020, from C¥2.2 billion the year before, due in large part to adjustments necessary as the value of its preferred shares increased. Its profit margin rose to 8.6% last year from 6.9% thanks in part to government measures to support businesses during Covid-19.
On Friday, shares in JD Logistics leapt at the open in Hong Kong but surrendered most of those gains by the close of trade.
JD Logistics ended the day up 3.3%. Ten minutes into trading, it shot 17.3% higher than its HK$40.36 open price, as retail investors who missed out on the initial public offering got their chance to buy the shares. But the stock lost ground as the day wore on, particularly in afternoon trade, before finishing at HK$41.70 with a far-slimmer gain.
According to some sensible and measured analysis from Smartkarma analyst Arun George, JD Logistics has a target share price based off discounted cash flow of HK$48.91, in line with Friday's trading.
The JD.com spinoff expects to raise HK$27.7 billion (US$3.6 billion) with the offering, if the over-allotment is exercised. The company says it will use 55% of the proceeds to expand its network, and 20% to develop advanced delivery options. Another 15% will go toward customer attraction and retention, with 10% as working capital.
This is the second-largest initial public offering in Hong Kong so far this year, behind only the US$5.4 billion debut of the Chinese short-video app Kuaishou Technology (HK:1024), the main competitor to TikTok.
The JD Logistics underwriters received deposits for 716 times the actual shares on offer for the Hong Kong retail portion of the floatation. That encouraged the underwriters to shift 9% of the total number of shares from the overseas portion to domestic Hong Kong investors. There was demand for 10.8 times the number of shares in the international portion, with flexibility through the overallotment.
The IPO had backing from a number of "cornerstone" investors that took about half the offering. Cornerstones commit to taking a chunk of the offering before it becomes public. On this deal, they include Blackstone Group (BX) , Oaktree Capital, the Singapore government investment arm Temasek, the Japanese tech venture-capital investor Softbank Vision Fund and the tech "Tiger cub" Tiger Global.
JD Logistics parent, JD.com, went public on Nasdaq in 2014, the first major Chinese e-commerce company to list in the United States. It has subsequently prepared the way for a retreat home with a secondary listing in Hong Kong in June 2020, if U.S. pressure on Chinese stocks listed there gets too intense.
The parent also spun out its subsidiary JD Health International (HK:6618) in Hong Kong in December, in a similarly sized US$3.5 billion offering. An online health clinic and drug-delivery company, JD Health shares soared 65% on debut but have suffered during the tech selloff in China since mid-February. They are still 50.8% above their sale price, but are little changed from that impressive first day of trade following a 39.5% selloff between mid-February and mid-March.
That's not unusual, with regulatory pressure mounting on Chinese Big Tech. JD.com was one of 13 Chinese tech companies summoned before financial regulators at the end of April to warn them to cut out monopolistic behavior. All are likely to be levied fines for past transgressions. Kuaishou shares, the short-video app, are less than half their post-debut peak.
It has also been a trying year for courier companies. Shares in S.F. Holding (SZ:002352), the largest rival to JD Logistics, have fallen around 20% this year. The doubling of S.F. Holdings shares last year leaves it with a market capitalization of around US$50 billion, and has made its founder Wang Wei the fifth-richest person in China.
At C¥154.0 billion in 2020, S.F. had roughly double the revenue of JD Logistics, although its growth rate of 37.3% was a full 10 percentage points lower than JD. At its peak today, JD Logistics market cap was around US$38 billion.
JD.com founder Liu Qiangdong (also known as Richard Liu) is also already on that list, with a fortune pegged by Forbes at US$18.6 billion. He began the company as a 40 sq ft store selling magneto-optical recording tape and DVDs in Beijing. When SARS hit in 2003, he took the store online and started selling electronics, too, which proved a lot more popular than tape.
Tencent Holdings (TCEHY) and Walmart (WMT) have both formed alliances with JD.com, and taken stakes in the parent company.
It will be interesting to see where JD Logistics takes the "last mile." It has been experimenting with drone delivery, which it used to deliver goods in Hubei Province during the peak of Covid-19. It also used autonomous delivery robot vehicles, like a half-size delivery truck, to take goods to a hospital in Wuhan, as well as local neighborhoods.
The company first trialed drones in remote Chinese villages as far back as 2016, in a feasibility trial across Baiyang Lake in a village normally served by boat. The land trip around the lake would take a 70-mile detour. It has also tested drone delivery in the islands of Indonesia, which as the world's largest archipelago cries out for such an approach.