Online retailer JD.com raised $1.8 billion after pricing its IPO following the US close on Wednesday, the largest ever US stock market listing by a Chinese company.
Its 93.7 million American Depository Receipt deal was priced at $19 per unit, exceeding expectations and surpassing the initial $16 to $18 range.
Pre-greenshoe, the group offered 6.9% of its enlarged share capital with a split of 74% primary shares and 26% secondary shares.
The institutional book is said to have closed 15 times oversubscribed, with strong demand from long-only institutional investors, technology-focused funds and sovereign wealth funds, a banker close to the deal told FinanceAsia. Over 500 investors participated in the deal, the majority of them based in the US, with the top 20 holders accounting for half of the dealsize.
JD.com attracted very strong demand from day one, with the order book already covered by the end of the first two days of roadshows in Hong Kong.
And while there was the usual order inflation from Asia, the underlying quality of the order book was extremely strong. This left the leads with a difficult decision about whether to increase the price range.
In more stable markets, raising the range would have been unquestioned and almost certainly ensured strong aftermarket performance.
However, tech stocks in particular have had a volatile ride over the past two months as investors shift out into value stocks. Institutions also remain wary after suffering a succession of losses from the heavy pipeline of global IPO’s during the first and second quarter.
Therefore, both buyside and sellside are keen to see a successful deal, which trades up in the secondary market and re-boots confidence. People also remain aware that behind JD.com looms the very large shadow of China’s biggest e-commerce company Alibaba, which will list over the coming months.
Valuation
But JD.com’s trading prospects have been boosted by the decision to offer a reasonable valuation. At $19 per share, JD.com has been priced at a premium to its nearest global comparable - Amazon - on a trailing twelve months basis, but crucially at a discount on a forward looking basis.
The disparity between these two ratios and the high projected revenue growth, which lies behind it, has been JD.com’s main selling point.
Amazon closed Wednesday at $305.01. This represents a price to sales ratio of 1.85 times in 2013 and 1.52 times estimated 2014 sales. The stock is down 23.4% year-to-date after investors baulked at the company’s ambitious expansion plans.
By contrast, JD.com has been priced on a trailing twelve month price to sales ratio of 2.23 times and on a forward price to sales ratio of roughly 1.35. The company has also been priced at a discount to US-listed Chinese online retailer Vipshop Holdings.
Vipshop closed on Wednesday at $172.90 - a price to sales ratio of 2.86 times estimated 2014 sales. Investors will be hoping that JD.com mirrors Vipshop’s share price performance, with the latter up 107% year-to-date.
No profits yet
JD.com has been valued on a price to sales ratio because the company is still unprofitable, although its net loss has decreased from $210 million in 2011 to $8 million in 2013. Over the same period revenues have increased from $3.7 billion in 2011 to $11.5 billion in 2013.
On Monday, the company released its first-quarter results for 2014. These showed that revenues are continuing to climb strongly, up 65.1% year-on-year to $2.15 billion, roughly the same growth rate the company achieved throughout 2013.
Net losses, on the other hand, spiked upwards to $608 million. This was attributed to a share incentive plan for founder and CEO Richard Liu Qiangdong.
Post IPO, Liu will hold 84% of the voting power in JD.com as the company has also deployed the same controversial variable interest entity structure as Alibaba to ensure he retains control. This means investors will need to have confidence in his singular vision for the company’s future growth prospects.
The heavy stamp of one man’s influence is one of the many similarities between JD.com and Amazon, which did not turn a profit for many years either. “The company has a very similar model to Amazon, and with Amazon, people are betting on the growth model,” Philip Lee, director of research firm S&P Capital IQ, told FinanceAsia. “JD.com hasn’t made any estimates about when it will make a profit. It’s all about the scale though. And as it grows and reaches a certain scale, presumably expenses won’t grow as fast as revenues.”
The key to unlocking JD.com’s first profit is likely to be its partnership with Tencent Holdings. The latter bought a 15% stake in JD.com in March and purchased a further $1.3 billion in a private placement at the IPO price, bringing its stake to 20%, according to media reports.
JD.com will soon tap into Tencent’s WeChat messaging service, which currently has more than 400 million active monthly users. This should boost traffic to JD.com’s online store and revenue growth. JD.com is also considering incorporating WeChat’s online payment system into its own business model, mirroring Alibaba’s Alipay.
Investors remain keen on the Chinese e-commerce story because online retail penetration still lags far behind the US. The mainland online retail market was worth Rmb1.3 trillion ($212 billion) in 2012 and is forecast to reach Rmb3.6 trillion in 2016, according to iResearch.
Of the 1.35 billion people living in China, 618 million currently use the internet, but only 302 million use it for online shopping, according to the China Internet Network Information Centre. Clearly, the potential for internet companies such as JD.com – which, like Amazon, operates a direct online sales model and handles its own e-commerce logistics – is enormous.
According to its prospectus, JD.com currently operates 86 warehouses in 36 cities, with 1,620 delivery stations. Proceeds from the IPO are being used to expand the group’s logistics infrastructure.
One of its most promising growth areas lies in China’s third and fourth tier cities. Last year, a McKinsey report noted that customers in these cities spend a higher percentage of their disposable income online. This is partly the result of pent-up demand from not being able to source goods at physical shops, which have yet to reach the area.
Barometer for Alibaba
JD.com’s listing was also given a boost on its final day before pricing after US markets closed up. Both the S&P 500 and Nasdaq reversed Tuesday’s losses to inch up 0.7% after the release of dovish minutes from the latest Federal Reserve meeting.
E-commerce stocks including Amazon and Vipshop fared particularly well, with the former closing up 1.27% and the latter up 2.22%. Weibo, the most recent jumbo Chinese US IPO, also had an extremely good day.
China’s version of Twitter closed up 6.19% at $19.55. Weibo’s trading pattern post IPO has been a telling indicator of how volatile and ultimately directionless tech stocks have been over the past couple of months.
After being priced at $17 in mid-April, the stock rose 33% during the first five days of trading, only to fall 22% over the next five. It is currently trading 15% above issue price.
“Everyone will be closely watching JD.com and how it performs,” S&P Capital IQ’s Lee told FinanceAsia.
JD.com, rightly or wrongly, will be viewed as a barometer for Alibaba, and depending on demand and performance, "Alibaba will determine how soon to proceed with its own IPO."
Although the business models for both companies are different – JD.com owns its own warehouses and distribution centres while Alibaba outsources its logistics to third-party vendors – both companies are clearly a play on China and its growth story, and stand to benefit tremendously provided the e-commerce industry hits bullish forecasts.
Joint leads on JD.com’s IPO were Bank of America Merrill Lynch, UBS, Allen & Co, Barclays, China Renaissance and Jefferies. Co-managers comprise Oppenheimer, Piper Jaffray, SunTrust Robinson Humphrey and Cowen & Co.
