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Summary

  • China-based specialty online retailer, focusing on electronics and home appliances products, which account for 82% of top-line revenue.
  • For the 2013 year revenue grew 68% to $11.5 billion and JD nearly broke even.
  • JD's gross margins are not high enough to provide significant bottom-line profits.
  • For example, JD has a gross profit of 10%; Amazon has a gross profit of 26%; Alibaba has an after-tax margin of 44%.

Based in Beijing, China, JD.com (NASDAQ:JD) scheduled a $1.6 billion IPO on the Nasdaq with a market capitalization of $23.4 billion at a price range midpoint of $17 for Thursday, May 22, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents
Manager, Joint managers: BofA Merrill Lynch, UBS Investment Bank, Allen & Company, Barclays, China Renaissance, Jefferies

Co-Managers: Oppenheimer, Piper Jaffray, SunTrust Robinson Humphrey, Cowen & Company

End of lockup (180 days): Tuesday, November 18, 2014

End of 40-day quiet period: Tuesday, July 1, 2014

Summary
JD is a China-based specialty online retailer, focusing on electronics and home appliances products, which account for 82% of top-line revenue.

For the 2013 year revenue grew 68% to $11.5 billion and JD nearly broke even.

However, JD's gross margins are not high enough to provide significant bottom-line profits. For example,

  1. JD has a gross profit of 10%.
  2. Amazon (NASDAQ:AMZN) has a gross profit of 26%.
  3. Alibaba has an after-tax margin of 44%.

Valuation

Glossary

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

4 qtrs ended 3/31/14

Cap (MM)

Sls

Erngs

BkVlue

TanBV

in IPO

JD.com

$24,606

2.0

-39.7

279.3

3.3

6%

Adj for March '14 q share compensation

-1757.6

(essentially breakeven)

Conclusion
The rating on JD neutral plus. Top-line revenue increased 68% in 2013 (very good) but JD's gross margins of 10% are too low to make any money (not so good).

JD is caught in a 'profitless prosperity' situation and is very vulnerable to increased competition from Alibaba, with 44% after-tax margins, albeit with a different business model.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

JD is the largest online direct sales company in China in terms of transaction volume in 2013, with a market share in China of 46.5%, according to iResearch, a third-party market research firm.

JD's gross merchandise volume, or GMV, increased from RMB32.7 billion in 2011 to RMB73.3 billion in 2012 and RMB125.5 billion (US$20.7 billion) in 2013.

Through its content-rich and user-friendly website jd.com and mobile applications, JD offers a wide selection of authentic products at competitive prices which are delivered in a speedy and reliable manner.

JD also offers convenient online and in-person payment options and comprehensive customer services.

In order to have better control over fulfillment and to ensure customer satisfaction, JD has built its own nationwide fulfillment infrastructure and last-mile delivery network, staffed by its own employees, which supports both its online direct sales and its online marketplace businesses.

JD has established strong relationships with its suppliers as it develops its online direct sales business. Leveraging its strengths, JD launched its online marketplace business in 2010, which has allowed JD to significantly expand its selection of products and services.

As a result of its superior customer experience, JD's business has grown rapidly.

The number of products JD offers through its online direct sales and marketplace has grown from 1.5 million stock keeping units, or SKUs, as of December 31, 2011 7.2 million SKUs as of December 31, 2012 to approximately 25.7 million as of December 31, 2013 and further to 40.2 million as of March 31, 2014. Electronics products and home appliances accounted for 80.1%, 65.3% and 63.6% of JD's total GMV in 2011, 2012 and 2013, respectively, and general merchandise and others for 19.9%, 34.7% and 36.4%.

JD fosters an interactive user community that discusses, rates and reviews its products and services. JD believes it has the largest online product review database of any online direct sales company in China with 297 million product reviews generated by its customers to date. JD had 12.5 million, 29.3 million and 47.4 million active customer accounts and fulfilled 65.9 million, 193.8 million and 323.3 million orders in 2011, 2012 and 2013, respectively.

Dividend Policy

No dividends are planned.

Intellectual Property

JD had 1,399 trademark applications inside China and 317 outside China. As of March 31, 2014, JD had 14 patents granted in China, 235 patent applications pending in China and 10 patent applications pending outside China. As of March 31, 2014, JD had registered 1,621 domain names.

Competition

JD's current or potential competitors include (i) major online retailers in China that offer a wide range of general merchandise product categories, such as Alibaba Group, which operates taobao.com and tmall.com, and Amazon China, which operates amazon.cn, and (ii) major traditional retailers in China that are moving into online retailing, such as Suning Appliance Company Limited, which operates suning.com, Wal-Mart, which holds a majority interest in yihaodian.com, and Gome Electrical Appliances, which operates gome.com.cn. JD also faces competition from online retail companies in China focused on specific product categories and from physical retail stores, including big-box stores like RT-Mart that also aim to offer a one-stop shopping experience.

5% stockholders

Richard Qiangdong Liu 18.8%

Max Smart Limited 18.8%

Entities affiliated with Tiger Global Management 18.1%

Huang River Investment Limited 14.3%

HHGL 360Buy Holdings, Ltd. 13%

T Global funds 9.2%

Use of proceeds

JD expects to net $1.1 billion from its IPO. Proceeds are allocated as follows:

$1 billion to $1.2 billion over the next three years to expand its fulfillment infrastructure by acquiring land use rights, building new warehouses and purchasing vehicles for shipping and delivery; and

the balance for general corporate purposes, including funding potential investments and acquisitions of complementary businesses, assets and technologies.

Disclaimer: This JD IPO report is based on a reading and analysis of JD's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Source: IPO Preview: JD.com