Date
18 October 2017

Is JD.com IPO a good bet?

Russia’s richest man Alisher Usmanov and Saudi Prince Alwaleed bin Talal are among the high-profile shareholders backing the expansion initiatives of Chinese e-commerce firm JD.com {京東商城}. The billionaire tycoons, both early investors, are optimistic about JD.com’s prospects with Usmanov saying he expects “at least double returns” from his investment.

Owning a stake in JD during early days at presumably far lower valuations is one thing, betting money on the company’s upcoming IPO is another, as the Chinese firm is yet to convince customers that it can be more than just a cut-throat e-vendor of consumer electronics, and assure investors that it stands a chance of finding its niche under the shadow of its much bigger rival Alibaba.

On the surface, JD.com’s numbers have improved. After four consecutive years of losses since 2009, the company finally turned marginally profitable in the first nine months of 2013. But it was not entirely due to operational improvements – interest income, government financial incentives and other items totaling about 386 million yuan (US$63.7 million) helped make that possible. Stripping those out, JD was still in the red, albeit bleeding less than before.

But overall, it was quite encouraging to see the group turn in a profit in the nine months. 

According to its filing, the company recorded a net profit of 60 million yuan during the period, compared to a loss of 1.42 billion yuan a year earlier. Excluding other income, the group had an operating loss of 316 million yuan.

With stronger bargaining power, JD.com has managed to extend its account payable days, which is the average number of days a company takes to pay its suppliers. The figure, which stood at 35.3 days in 2011, jumped to 43.1 days in the first three quarters last year. This gave JD.com a chance to earn more from interest and save working capital. But there may be not much room to squeeze the suppliers further.

Government financial incentives, meanwhile, are solely controlled by local governments and vary each year, which makes it impossible to classify the gains as quality income.

As for the core operation of retailing electronic gadgets, the business does not carry a big margin. JD’s key selling point is fact is offering them cheap.

Electronic products are usually very much standardized, meaning that the difference in buying them at store A and store B is small. JD does not have a strong moat.

The company has been trying to do more third-party business and diversify into other products, but with limited success. The majority of its sales still come from electronic devices.

Opening the e-commerce firm’s webpage, the most eye-catching areas are usually occupied by electronics. The group’s image as being mostly an electronics vendor may take a long time to change. Using the same platform to run both in-house stores and third-party outlets could also be confusing.

Lastly, unlike Alibaba’s Taobao or Suning Commerce’s shopping platform, JD.com does not have its own payment system, which is a huge disadvantage for the firm in terms of liquidity and also consumer experience.

Compared to Alibaba’s proven model, JD is still searching for its way.

– Contact the writer at [email protected]

RC

EJ Insight writer

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