This Chinese online retailer’s IPO documents could be a bit too candid

This Chinese online retailer’s IPO documents could be a bit too candid

By Heather Timmons @HeathaT

5 hours ago

The prospectus for Chinese online retailer JD.com’s planned $1.5 billion US public offering, filed recently with the Securities and Exchange Commission, offers up a warts-and-all look at the risks of investing in a Chinese internet company. And there are a lot of warts—over 40 pages worth—listed in the “risk factors” section, including:

We don’t really know what we’re doing in some businesses. The company recently expanded into internet finance, providing supply-chain financing to supplier and loans to customers. “We have limited experience in operating an internet finance business,” the prospectus admits.

Losses are piling up, and we may never make money. “We have incurred significant net losses since our inception….We cannot assure you that we will be able to generate net profits or positive cash flow from operating activities in the future.” Specifically, the company’s losses increased from 1.3 billion yuan ($214 million) in 2011 to 1.7 billion yuan in 2012. At the end of 2012 it was 4.2 billion yuan in debt.

Our internal fraud controls are weak. After a 2012 audit, an independent accountant “identified two material weaknesses in our internal control over financial reporting” which indicate “there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.” The company warns: “We may be unable to accurately report our financial results or prevent fraud. “

The appeal of JD.com lies in the company’s phenomenal sales growth, and US investors are expected to see taking a stake in the company as a proxy for China’s growing consumer class. Revenues increased from 2.9 billion yuan in 2009 to 41.4 billion yuan in 2012. Investors already include Saudi prince Alwaleed bin Talal.

The company’s ability to actually list in the US quickly is in doubt, thanks to a recent “US court judgement” that banned the Chinese arms of the big fouraccounting firms from audits of SEC-registered companies for six months. The firms, including JD.com’s auditor PricewaterhouseCoopers Zhang Tian, are appealing the decision, but it is unclear when the situation is resolved.

Until then, risk-tolerant US investors will just have to wait.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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