E-commerce in China: No profits, we promise; JD, an e-commerce firm billed as China’s Amazon, prepares an IPO

E-commerce in China: No profits, we promise; JD, an e-commerce firm billed as China’s Amazon, prepares an IPO

Feb 15th 2014 | SHANGHAI | From the print edition

IT IS a rare corporate boss who vows to make no profit for years. But that is precisely the strategy embraced by Richard Liu, the chief executive of JD. A year and a half ago, he declared that his Chinese e-commerce firm would earn no gross profits on electronic goods, which make up most of its sales, for three years. He was even reported to have threatened to sack any salesman making a margin.

Yet Mr Liu secured more than $2 billion in early funding from such celebrated investors as Prince Waleed Bin Talal of Saudi Arabia and Sequoia Capital, an American venture-capital outfit. He now wants foreigners to plough another $1.5 billion or so into JD (previously known as 360buy) at its forthcoming initial public offering in New York. This seems cheeky, given that the firm has been bleeding red ink. In 2012 its net losses topped 1.7 billion yuan ($283m), up from a loss of nearly 1.3 billion yuan a year earlier. In the first three quarters of last year, it did make 60m yuan of profit—but much of it from interest income. It has cash and equivalents on hand of only $1.4 billion, whereas its accounts payable exceed $1.7 billion. Given Mr Liu’s plans for further expansion, its finances are unlikely to improve soon.

Would any investor want to buy into this promise of prosperity without palpable profits? Maybe. JD’s growth story is impressive. Like Amazon, the American online giant to which it is often compared (since it offers its own range of goods as well as offering a shopfront for third-party sellers), JD is pursuing an “asset-heavy” business model that puts scale and market-share above short-term profits. On some measures, it is working: JD is the second-biggest competitor in the world’s biggest e-commerce market, lagging only Alibaba.

The value of transactions handled by JD exceeded 86 billion yuan during the first three quarters of last year, up from 33 billion yuan in all of 2011. The first three quarters of last year also saw the number of active accounts rise to 35.8m, from 12.5m in 2011. JD now has 82 warehouses across China, and over 18,000 delivery staff.

Two big questions hang over the firm’s future. One is whether the asset-heavy approach will pay off. Logistics infrastructure in much of China remains quite primitive. That means JD has to invest far more, proportionately, to guarantee reliable and timely deliveries in China than did Amazon, which benefited from America’s relatively good infrastructure.

JD also faces two formidable local rivals with strong finances. One is Tencent, an innovative firm that makes most of its money selling virtual goods to videogamers. Its early efforts at e-commerce were a bust but now this is a firm to watch. The reason is WeChat, its wildly popular messaging app. Tencent is cleverly using this free service as a Trojan horse, exploiting its presence on people’s smartphones to nudge them to shop via its various online platforms.

The other rival is, of course, Alibaba. The firm, which controls perhaps 80% of all e-commerce in China, is expanding into ancillary areas to fortify its position. It has invested in social-messaging outfits, launched online wealth-management services and bought into a popular taxi-hailing app. This week it launched a bid to win control of AutoNavi, China’s biggest equivalent to Google Maps.

JD’s rush to float, despite its meagre profits, is no accident. Alibaba is planning its own IPO soon, and it could be huge: the private sale of a stake in it this week values the firm at around $130 billion. It is hard enough trying to be the Amazon of China without also having to live in the shadow of Goliath.

 

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.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: