The filing was noteworthy for a couple of reasons.
First, it was the first big Chinese company to file to hold an IPO in the US since the SEC’s recent ruling “banning” the Big Four accounting firms from doing work in China.
This ruling was used by many to justify the large and fast drop in the last couple of weeks of Chinese Internet stocks. In truth, these stocks has gone through such an enormous run that they were looking for a reason to sell off and they found it in the emerging markets turmoil. This was never about the SEC ruling.
JD’s filing shows that Chinese companies are proceeding with their IPOs and expecting that there will be many appeals before this ruling is enacted – if ever.
But, more importantly, the JD filing gave a peek into one of the more talked about private Chinese Internet companies over the last few
Some Americans have called JD.com (also formerly called Jingdong and 360Buy in the past) the next Amazon of China. Upon closer look in the IPO filing though, JD seems to be more like the BestBuy.com of China or the next Dangdang from China.
Here are some relevant points I pulled out of the filing:
1. 85% of JD.com’s revenues are from selling consumer electronics. This is partly why their gross margins are so low (less than 10% in 2013).
2. Although JD.com likes to paint a picture that it is building out a low profit platform today, which they will be able to flip the switch on in the future to sell many more goods like Amazon, they haven’t been able to do this so far. You would think they would try to sell more than just consumer electronics before their IPO. The fact that they haven’t been able to diversify yet, suggests they’re having a hard time doing that. If it only it was as easy to actually “flip the switch” as it is to casually drop the phrase when meeting with American investors.
3. There was another company who IPO’ed saying they would be the next Amazon of China: Dangdang. Dangdang IPO’ed in late 2010. And for some time, American investors bought this idea of the next Amazon from China, bidding their share above $30 or about a market cap of $3 billion. Dangdang only sold books at the time of the IPO, but they promised this was just their Trojan Horse to sell Chinese consumers all kinds of goods. It turned out to be much more difficult than they thought to make the leap from low margin books to other SKUs. And their stock has remain depressed ever since.
4. Amazon’s business is based of its first party business (where they sell stuff themselves to their customers) and thirty party business (where they sell others’ stuff to their customers). JD.com says it is going to do the same in the future, yet the vast majority of its revenues today (70%) come from their 1st party business. Why is that important? Because it carries a lot more risk to JD.com investors buying into that type of business vs. one that is balanced like Amazon or another that is almost all 3rd parties selling (like Alibaba’s Taobao). JD.com has huge inventory risk being in the first part business. Their inventories have tripled in the last 2 years. That means all the warehouses which they proudly discuss having invested in over the past few years are housing JD.com inventory. If consumer tastes shift — as they do when it comes to consumer electronics — it’s JD.com that’s stuck with the inventory.
5. When you start expanding your SKUs as an e-commerce business, execution is hard. Standardized SKUs are better like consumer electronics. When you start going into areas like apparel, 5 new colors in 3 different sizes represent 15 new SKUs. Now multiply that by many more SKUs. If you’ve been a business that’s dealt with such complexity, you can handle it. If you haven’t, you’re bound to have hiccups and face near-term hits to your profitability.
6 . JD.com is a business that’s survived this long thanks to the mercy of its suppliers. According to the IPO filing, they’ve got $2 billion in payables and advances from customers and about $1.4 billion in cash on hand as of the end of September. Additionally, they note that their days payable has been increasing over the last 2 years from the 30 day range to now over 40 days. This is not a business that would not be operating today without staying in the good graces of its suppliers. If JD.com was to continue to stretch out days payable to suppliers, it’s unlikely that they would stay so agreeable. JD.com is in a tough spot as a result. If they expand into other SKUs, their short term profitability takes a hit and they probably have to pass on this pain to their suppliers who might revolt. If they don’t expand into other SKUs, they stay a consumer electronics online store with lots of competitors in China like Suning and Taobao. Raising money from the IPO will help buffer their cash but presumably only temporarily before they’re back at the same crossroads.
7. They don’t have their own payment system, putting them at a big disadvantage against Taobao and Tencent. Taobao transactions are conducted via Alipay. When they ship goods via third party delivery systems, these typically young and lower paid workers are only dropping off goods. As Tencent continues to push into e-commerce, it will push transaction to be done via their Tenpay system. JD.com has to rely on others’ payment systems. Therefore, when JD.com gets third party delivery workers to drop off goods, they also have to rely on those people to do Cash On Delivery and then send this back the chain to JD.com. It’s not ideal.
8. JD.com seems to have a rather higher return rate. Often in the IPO filing, you will see JD refer to gross GMV and net GMV. They appeared to have $2.4 billion in returns or 22% of their net GMV in the most recent period. This seems to be quite high, especially for consumer electronics. Presumably all of these are from their first party business too since its difficult to track returns on the third party business. Therefore the 22% figure could be much higher as a percent of the first party business net GMV. What’s going on here?
The bottom line is that JD.com’s business is not as strong as some might think. Although it’s easy (or lazy) to want to quickly compare a Chinese business to a top-of-mind American business, investors should resist this urge. JD.com is no future Amazon. The company formerly known as Jingdong is another Dangdang.