JD.com has a reputation for the fastest package delivery service in China. You order something in the evening, and it’s often at your door in the morning. That’s because of JD Logistics—and soon, JD Logistics is going to be a public company.
JD Logistics is set for an IPO on May 28. It’s the third subsidiary of e-commerce marketplace JD.com to go public in two years.
The logistics spinoff occupies a higher-end niche in the delivery business, making use of vertically integrated infrastructure and an army of delivery men to hand off 90% of orders within the same day. But excellent service comes at a cost: JD Logistics is often singled out in Chinese media because it hasn’t turned a yearly profit since its inception. Will these losses continue after the IPO? What is the company’s strategy going forward? And how independent will the JD spin off be from the e-commerce mothership?
Bottom Line: JD Logistics is a loss-making company that offers great service, but at a premium price and lower profit margins. Chinese observers are debating whether this can translate into a leading stand-alone business in the logistics industry, and whether the company has room to grow beyond its home court.
Numbers and dates
Key IPO facts:
- JD seeks to raise $3.2 billion, selling 609.2 million shares at HK$40.36 ($5.20) per share.
- Cornerstone investors include Softbank’s Vision Fund ($600 million), Temasek Holdings ($220 million), Tiger Global ($200 million), China Chengtong Holdings Group Ltd. ($150 million), Blackstone Group Inc. ($150 million), Matthews Asia ($100 million), and Oaktree Capital ($100 million).
- BofA Securities Inc., Goldman Sachs Group Inc., and Haitong International Securities Group Ltd. are joint sponsors, while UBS is the IPO advisor.
- JD.com currently holds 79% of equity in JD Logistics, and it plans to keep a majority position post-IPO.
- Analyst Esme Pau from Tonghai Securities, which also invested in the share offering, told TechNode that the company is optimistic. “We expect the post-IPO share price performance of JD Logistics to be decent. We are looking for +5-20% upside in the first few trading days,” Pau wrote.
- According to Pau, one of the reasons for the “positive view” is the company’s relationship to parent company JD.com. “[JD Logistics] enjoys support from JD.com which accounts for over half of FY20 revenue and experienced limited impact from the government’s tightening anti-monopoly regulations,” Pau wrote.
- However, Pau said a caveat to the share price prediction is that the “equity market sentiment is rather weak” and that hedge funds may dump the shares following the IPO.
- JD Logistics is losing money. According to its prospectus, net losses were RMB 2.8 billion, RMB 2.2 billion, and RMB 4 billion in 2018, 2019, and 2020 respectively.
- The company expects its losses in 2021 to increase “significantly” from previous years, citing rising expenses and a decline in profit margins after the government reduced COVID-19-related support.
- Revenue increased by 31.6% from RMB 37.9 billion in 2018 to RMB 49.8 billion in 2019, and 43.2% from RMB 34.6 billion to RMB 49.5 billion by the fourth quarter of 2020.
- According to its IPO prospectus, JD Logistics operates over 800 warehouses, 28 of which are partially automated, and one fully unmanned warehouse in Shanghai.
A brief timeline:
- 2007: What we now know as JD Logistics is born as JD begins building out an in-house logistics network.
- April 2017: The JD Logistics brand is formed to oversee JD’s delivery infrastructure.
- February 2018: The logistics business raises $2.5 billion from a range of backers including Hillhouse Capital, China Development Bank Capital, and Tencent.
- December 2019: JD Logistics initially targets an IPO at a valuation of $8-10 billion.
- Nov. 24, 2020: The unit lowers its sights, aiming for a $40 billion dollar valuation and looking to raise $5 billion.
- Feb. 16: JD Logistics files prospectus for an initial share offering on the Hong Kong market.
- May 28 (anticipated): Shares of JD Logistics will be available for trading.
Antitrust and other regulations have been a key factor in China tech businesses during the last year. But so far, JD has not been hit hard.
- Market regulators have been more kind to JD than its competitors Alibaba and Meituan, but the company was reprimanded with an RMB 500,000 (about $76,095) fine for violating the Anti-Monopoly Law, along with 11 other Chinese tech giants.
- In response, JD pledged to comply with antitrust regulations.
Check out TechNode’s Techlash Tracker for an overview of the crackdown.
JD.com is China’s second-largest e-commerce conglomerate after Alibaba. Internet giant Tencent is a significant stakeholder in the company, and its apps are heavily integrated with WeChat.
JD has a history of taking affiliates public while keeping their operations integrated with the main company. It’s a familiar approach in China tech—fintech giant Ant Group began as a part of Alibaba, and remains closely integrated with its mother company seven years after spinning off.
- JD’s healthcare unit went public in December.
- Its core offerings are its retail pharmacy and healthcare consulting services.
- JD.com retained 81% ownership.
JD Technology (previously JD Digits):
- The company’s fintech unit oversees lending services, and AI and blockchain applications for government clients.
- Continuing the IPO trend, it was slated to go public on Shanghai’s STAR market last July but those plans fizzled out in April after the blocked public offering of Ant Group.
- JD’s entry in the grocery delivery market filed for a Nasdaq IPO last May.
- The company is a joint effort with delivery service Dada Nexus, with JD holding a 51% stake.
- Daojia’s market share increased by 4% to 25% in 2020, an example of a successful spinoff that improves the company’s position.
What’s next for JD Logistics?
What’s next for JD Logistics? Chinese analysts have mixed views on the company’s future, arguing about how close the company is to profitability and how much room it has to grow. The key question: how far can JD Logistics go beyond delivering orders for other JD companies?
The bull case: forget the losses, focus on the tech
“Little Zhou Botong,” writing for a WeChat public account owned by the logistics industry trade publication Log Club, is bullish on JD Logistics’ long term trajectory but expects net losses to continue as the company prioritizes growth. The author’s pen name refers to a character from Jin Yong’s “Condor Heroes” series.
JD Logistics’ long term plan
“Little Zhou Batong,” Logistics Salon, May 14
Zhou writes that the company’s gross profit margin has increased while those for competitors SF Express and Tongda have decreased in the same time frame. The author says that JD Logistics’ network is already comprehensive, with the company establishing a presence in mainstream society as well as the “sinking market,” China’s lower-tier cities and small towns.
Currently, the establishment of JD Logistics’ network on a large scale has basically been completed. With the entrance into town- and county-level markets to drive user growth and the popularization of logistics services in society which has caused order density to increase, JD Logistics will win over a greater share of the market.
This widespread nature of the logistics network—along with years of operating experience, a good brand image, and a high quality of service—positions JD Logistics to be a leader in the industry, Zhou writes.
The future of operations in the logistics industry will heavily rely on technological infrastructure and platforms. JD Logistics is a leader in the automation, digitization, and use of smart technology on its platform, which undoubtedly will be of even more help to its logistics network.
The bear case: it’s as big as it’s going to get
Xie Kangyu, writing at WeChat public account Future Consumption, predicts a quick turn to profitability but argues that the industry does not offer much room to grow.
According to Xie, JD Logistics has already reached a large enough scale to balance out costs. Profitability is not far off, Xie writes, the proof being JD Logistics’ ability to lower fulfillment expenses per order and the fact that as early as 2019, it was done pouring money into major cities to capture those markets.
JD Logistics’ ceiling
Xie Kangyu, Future Consumption, February 19
Net losses have decreased from RMB 2.8 billion in 2018 to RMB 2.2 billion in 2019, then to RMB 11.7 million in the third quarter of 2020. Following this trend, profitability is just around the corner.
The reason for the gradual narrowing of net loss is that the period of large scale investments has already occurred, and so the effects of scale have diluted the company’s costs. As early as the second quarter of 2019 when a financial report was released, Liu Qiangdong had already revealed that investment by JD Logistics in first-tier cities had ended and that fulfillment expenses per unit had gradually decreased.
But Xie cautions that there is a ceiling to JD Logistics’ growth, arguing that the company’s cost structure in 2020, with the necessary costs of transportation capacity taking up 68.9%, does not allow for much further reduction.
This is the point of “diseconomies of scale” that JD Logistics has been questioned on before. Even after reaching the break even point, the decline in costs may come to a standstill.
On top of this, Xie argues, profitability in the logistics industry is already low, with more established competitor SF Express not even achieving a net profit rate of 4% despite its larger scale. And given that in the first three quarters of 2020, competitors SF Express and ZTO Express had gross profit margins of 18.12% and 23.46%, respectively, Xie writes, JD Logistics’ 10.95% lags behind.
These headaches will extend to soon-to-be former parent company JD.com as well, argues Xie. The author argues that service revenue is gaining importance as a driver in JD.com’s overall revenue and that logistics contributed significantly to JD.com’s net service income in the first quarter of 2021, with a revenue of RMB 13.8 billion and a year-on-year increase of 109%. After JD Logistics’ IPO, other parts of the e-commerce platform such as property management subsidiary JD Chanfa and Pinduoduo rival JD Pingou will take on greater responsibility for JD.com’s performance.
As we all know, JD Logistics is about to go public, and its subsequent operating performance will be moved from the group’s financial report. It can be predicted that this will have a significant impact on the group’s performance, and the responsibility of driving JD’s subsequent performance will be turned over to JD’s new businesses, such as JD Pingou and JD Chanfa. Currently, these parts of the business contribute a relatively small proportion of revenue, RMB 5.2 billion, which only accounts for less than 3% of total income.
JD Logistics defines its relationship with JD.com
Li Tong, of tech publication Huxiu, is more optimistic about the company’s future prospects. Huxiu says that while JD Logistics will maintain a tight relationship with JD.com, there is also lots of room to expand into external clients that do not have investment relationships with JD.com. As a spin-off, Li writes, it will remain responsible for bringing customers into the JD ecosystem.
JD Logistics makes three dishes out of one fish
“Eastland” (Li Tong), Huxiu, May 14
In 2020, the external users of [JD Logistics’] “integrated service” totaled 53,000 with an average expenditure of RMB 313,000. JD.com did not disclose the number of third-party merchants, but 53,000, proportionally speaking, is certainly a very small number. The penetration of “integrated services” has a lot of opportunity for growth.
But overall, Li writes, JD Logistics will not be leaving the family. The tech publication argues that clients from the logistics business can easily become clients of JD.com’s other services.
[A function of JD Logistics] is to provide customers for JD.com’s other businesses. For example, JD Logistics’ service partners have a large probability of becoming clients of JD’s fintech services.
JD.com and JD Logistics will continue to impact one another in the long term, Li says. The growth of the logistics company will depend on the success of the e-commerce giant, and in turn, JD Logistics’ achievements will also support the development of JD.com.
JD.com is the pot, and JD Logistics is the plant. Only if the pot is big will the plant grow big. On the other hand, the plant also adds color to the pot.
Related reading: Meanwhile, at the low end of the logistics market, a price war in livestreaming e-commerce hub Yiwu has wreaked havoc, forcing regulators to step in. (South China Morning Post)
With contributions from Emma Lee