Offering details. JD.com (NASDAQ:JD) is expected to issue 93,685,620 ADSs (or 107,738,460 ADSs, if the underwriters' over-allotment option is exercised in full) at an offering price range of $16-18 USD. Each ADS will represent two Class A ordinary shares, at a par value of $0.00002 USD per share. The expected net proceeds from this offering (of approximately $1.1bn USD) will be used to expand the company's fulfillment infrastructure and to fund potential investments and acquisitions of complementary businesses, assets, and technologies. Around $1.0-1.2bn USD from the offering will be used to build new warehouses, to acquire land use rights, and to purchase vehicles for shipping and delivery. After the offering, JD.com's existing shareholders will own approximately 60% of the company, new shareholders will own approximately 20% of the company, and Tencent (HK: 2988) - through a concurrent private placement - will own the remaining 20% of the company. JD.com signed an 8-year, non-compete agreement with Tencent.
Industry Dynamics. The online retailing market in China remains attractive, with an expected market-size CAGR of 30.2% from 2012 to 2016. In 2013, the transactions volume in China's online retailing market is said to have surpassed that in the U.S.; however, China's online retail penetration of internet users in 2012 was only 42.9%, compared to 71.6% in the U.S. These figures suggest that there is still much potential for growth in the industry, and that JD.com has the potential to expand its customer-base at attractive rates. With mobile shopping becoming more dominant, customers becoming more focused on product quality and logistics networks becoming more developed in China, it appears that JD.com is well-positioned to benefit from these market trends.
What makes JD.com an attractive investment? JD.com is currently the largest online direct sales company in China, with a market share of 46.5% in 2013. The number of SKUs (products) offered through both the online direct sales and marketplace channels has grown from 1.5 million in 2011 to an estimated 40 million in 2014. The company has one of the largest online product review databases in China for online direct sales, with around 300 million product reviews given by customers to date. JD.com operates 86 warehouses in 36 cities, along with 1,620 delivery stations and 214 pickup stations in 495 cities across China. As of April 1, 2014, JD.com employs 24,412 delivery personnel, 11,145 warehouses staff, and 5,832 customer service personnel. Over 70% of orders are delivered directly to customers using the company's personnel.
Partnership with Tencent as a growth strategy. In the Chinese e-commerce space, Alibaba (soon to IPO in the U.S.) is known to be the first mover in both C2C and B2B. When Chinese consumers think of online shopping or e-commerce, the platform that comes to mind is Taobao (Alibaba's e-commerce platform). As a smaller B2B company competing with Alibaba, JD.com is expected to experience difficulties gaining market share and increasing its brand awareness. JD.com currently has 125 million registered users, compared to Alibaba's 231 million active buyers. To become a more effective competitor, JD.com must rely on its partnership with Tencent and make use of Tencent's QQ platform, which has more than 800 million users and 400 million active users, to increase the awareness of its brand and products.
How should JD.com be valued? JD.com has yet to turn profitable, although it has steadily improved its net loss over the years from around -$200 million USD in 2011 to -$8 million USD in 2013. This should not be surprising, as Amazon.com (US: AMZN), a U.S.-listed B2C company with a business model similar to that of JD.com's, has experienced losses since its IPO in 1997 until 2002. Even today, Amazon.com's net margins are low at around 0.4%. Using Price-to-Earnings, it is nearly impossible to compare JD.com with its industry competitors, as the earnings component is very low (as an example, Amazon.com is currently trading at 260x 2014E earnings). For this industry, it is better to use Price-to-Sales (P/S) as a relative valuation metric. JD.com's 2014E price-to-sales ratio is 1.3x (given that the company's net revenue grew 65% in 1Q14, and assuming an annual revenue growth of 60% for the next year), compared to Amazon.com's 1.5x 2014E price-to-sales ratio. It appears that JD.com's valuation is reasonable.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Business relationship disclosure: The article has been written by a senior analyst at Central Asset Investments. Central Asset Investments is not receiving compensation for it (other than from Seeking Alpha). Central Asset Investments has no business relationship with any company whose stock is mentioned in this article. This article provides general information only. It does not constitute an offer to sell or the solicitation of an offer to buy any interests in any securities, investment product or fund. Investor should consult their own financial advisors prior to making any investment decisions and should not rely solely on these statements or any information presented in order to make such investment decision. Investors should verify the accuracy of any information mentioned in this article. CAI may or may not have an interest in the companies mentioned in this article.