On Friday, shares of JD Logistics surged as much as 18.3% on their first day of trading on the Hong Kong Stock Exchange, valuing the distribution arm of Chinese online retailer JD.com at $34 billion.
The IPO that raised $3.2 billion was Hong Kong’s second-largest listing of the year and bright spot for the city’s bourse after several first-day flops.
And for the sprawling JD.com empire—referred to as ‘China’s Amazon’—the IPO was the third blockbuster public listing in less than 12 months.
Like its U.S. peer, JD.com has amassed e-commerce power by building its own in-house, country-wide delivery infrastructure; the logistics business was spun off into a separate entity in 2017.
The public debut, while falling short of analyst estimates, is a milestone for for JD Logistics as it shoots for a bigger slice of China’s $2.3 trillion logistics market and eyes overseas expansion.
The IPO “helps [JD.com] crystallize the value of its logistics arm, which it had invested in heavily for more than a decade,” says Vey-Sern Ling, an analyst at Bloomberg Intelligence.
Distribution empire
JD.com has differentiated itself in China’s fiercely competitive e-commerce space by creating an in-house distribution network that extends across the country. Owning more links in the delivery supply chain has given the online retailer an advantage over rivals—one that proved especially handy during the COVID-19 online shopping boom, when heightened demand overwhelmed other delivery networks.
“We have built a nationwide ‘fulfilment infrastructure’ that we believe is the largest among all e-commerce companies in China,” said JD.com its 2018 annual report. The e-commerce giant delivers to all counties and districts in China and claims that 90% of all retail orders that go through its own distribution network are delivered on the same day or next day.
The parent company spun off JD Logistics four years ago to extend its warehouse network and supply chain services beyond its own merchants to external clients. JD Logistics raised $2.5 billion in 2018 for expansion and upgrades. It now serves almost 200,000 external clients—versus merchants that sell goods on JD.com—about 46% of the total number of its customers. As of this year, JD Logistics owns 1,000 warehouses that span 21 million square meters, double its 2018 figures. It added 200 warehouses in the last six months alone.
JD Logistics says it is in a “hypergrowth” phase, and plans to invest in infrastructure and new technology. The company has spent close to $800 million on tech since 2018. For instance, a key pillar of its business is its ‘cloud warehouse’ that helps clients organize inventory to warehouse layouts.
JD Logistics will need to “retain and add to [its] leased spaces” as land for warehouse facilities have grown in demand particularly since the pandemic, says Richard Huang, JLL China’s head of supply chain and logistics services.
In an interview with Bloomberg TV on Friday, CEO Yu Rui said JD Logistics is planning to move into Europe and expects its logistics centers to open on the continent by May 2022.
The money raised from the IPO will fund this expansion without burdening the larger JD group. “Going forward, investors and management can focus on two distinct businesses, e-commerce and logistics, which have different growth and profitability profiles,” Ling said.
Still, with such plans in place, profitability remains a concern for investors. Yu said in the Bloomberg interview that expansion is the company’s key focus in the near term but indicated that “net margin will keep improving in the long-term.”
Investors will be watching how JD Logistics can balance the “growth of core profitability, alongside new… and quite big investments into logistics,” said Ronald Keung, managing director at Goldman Sachs. JD Logistics reported $11.4 billion in revenue for 2020, but its net loss doubled from the previous year to almost $630 million. The company expects a significant loss for 2021.
IPO bonanza
The JD Logistics’ IPO is the third mega listing for the JD empire in less than a year.
In December, JD Health completed Hong Kong’s largest IPO of 2020, raising $3.5 billion. The company provides online health care services including doctor consultations and a digital pharmacy.
In June 2020, parent JD.com debuted a secondary listing on the Hong Kong stock exchange, raising $3.8 billion and following the secondary listing of main rival Alibaba, which was Hong Kong’s top IPO of 2019 at $11.2 billion.
Meanwhile, JD’s fintech arm JD Technology has run into hurdles on its way to the public markets. JD.com restructured the business this March, shifting cloud and A.I. businesses from the parent group to JD Technology, in a bid to make the subsidiary more tech-heavy rather than finance-focused.
The reorganization reflected new regulation in China that banned fintech firms from listing on Shanghai’s Nasdaq-like STAR Market. The new rule was as part of a larger clampdown on Big Tech that kicked off last November with Beijing scuttling the $37 billion IPO of fintech giant Ant Financial.
Beijing subsequently forced Ant Group to morph into a financial holding company that’s subject to greater regulatory control. More recently, Beijing ordered Tencent to reorganize along the same lines to be “better supervised,” Caixin reported.
But it seems JD Technology’s restructuring wasn’t enough. The firm withdrew its $3.1 billion listing from the STAR market in April and hasn’t announced new plans to go public.
China’s regulatory campaign has depressed investor enthusiasm for the listings of tech-focused Chinese firms in Hong Kong. Chinese search engine company Baidu and YouTube-like Bilibili both sank in their first days of trading in March. JD Logistics’ first day gain was not as big as analysts expected—they’d predicted shares would trade at a 20% premium—but it still indicates that investor sentiment may be improving.
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