JD Gets Strong Demand For IPO Shares

| About: JD.com (JD)

It seems that e-commerce giant JD.com's decision to move slowly with its massive IPO was a good one, with word that the company's shares have priced quite strongly in their long march to market . JD made its first public filing for a New York IPO back in early February, meaning the process of listing will have taken more than 3 months when its shares start trading on Thursday. That's a long time in any market, and especially long for the current one where investor sentiment towards Chinese Internet IPOs was rapidly fading.

According to the latest reports, JD has priced its American Depositary Shares (ADSs) at $19 each, or above its previously stated range of $16-$18. (English article) That pricing allowed the company to raise nearly $1.8 billion, and gives JD a valuation of about $25 billion. Some observers are saying the strong pricing and valuation bodes well for leading e-commerce firm Alibaba, whose IPO in the next month or two is expected to value the company at anywhere from $150-$200 billion.

There's not much more detail in the latest reports on JD, besides to state the obvious fact that demand was relatively strong for the company's shares. That's not too hard to understand, as shares of China's other publicly listed e-commerce superstar, Vipshop (NYSE: VIPS) have soared more than 20-fold since their debut 2 years ago on investor enthusiasm about the huge potential for China's e-commerce market.

That said, it's also worth noting that shares are performing far worse for China's other publicly listed e-commerce laggards, early leader Dangdang (NYSE: DANG) and overseas-focused LightInTheBox (NYSE: LITB). Dangdang's shares now trade at around $10, or well below their IPO price of $16 more than 3 years ago; and LightInTheBox is doing even worse, now trading at about $5, or about half of the $9.50 offering price from their IPO a year ago.

So, the big questions now are: Will JD become another Vipshop or a Dangdang; and what does this latest pricing mean for the broader market, including sentiment for Alibaba's upcoming offering? The answer to the first question will largely depend on whether JD can post explosive revenue growth, which could be difficult for a company of its size.

Dangdang and LightInTheBox saw their revenue grow by 30 percent and 10 percent, respectively, in the first quarter, which is clearly not enough to get investors excited. Dangdang managed to eke out a profit for the period, while LightInTheBox posted a net loss. By comparison, Vipshop posted 126 percent revenue growth in the first quarter, while its profit grew around 5-fold.

JD was somewhere in the middle of the field, with revenue growing 65 percent in the first quarter, though it also posted a net loss. All of that said, it seems likely that the company's shares should perform reasonably well in their trading debut, perhaps rising 10-20 percent. I seriously doubt the company will see the kind of meteoric rise in its stock that we've seen from Vipshop, but I would also expect it to be trading at least 20-30 percent above its IPO price at this time next year.

As to broader trends, JD's pricing does seem to indicate the market may be getting a second wind after demand started to waver last month with the so-so pricing and trading debut for leading microblogging site Weibo (Nasdaq: WB). I expect that investors are waiting around for Alibaba's IPO, which is likely to come before the end of June, and should get strong demand due to the company's market-leading status. But once Alibaba lists, I would expect the current IPO window to quickly narrow or close and for new listings to sharply slow in the second half of the year.

Bottom line: JD.com's strong pricing for its IPO indicates the market may be getting a second wind, and the stock is likely to post a respectable gain of 10-20 on its first trading day.

Disclosure: No positions