JD.com (JD) is on a roll. Its reliable e-commerce operations and logistic capabilities have enabled it to ride on the tremendous online shopping phenomenon amid the coronavirus outbreak. Data from the 6.18 shopping extravaganza this year provided interesting insights into its business transformation. The several discreet and overt moves made by the management during its Hong Kong listing in June offered great insights into its leadership transformation.
After being eclipsed by e-commerce peer Pinduoduo (PDD) in terms of active platform users as well as market capitalization, JD.com has found firmer footing in recent weeks relatively. Market players have apparently come to appreciate JD.com’s superiority and perhaps they are eyeing the unlocking of value from its affiliates.
Data by YCharts
Key arms of JD.com have been speculated to pursue their IPOs while its grocery delivery affiliate, Dada Nexus (DADA), has already completed its IPO in June. The rumors surrounding the “pending listing” of JD Logistics have surfaced since early 2018. Around that time, JD.com announced a strategic partnership with NIO (NIO) to offer delivery-to-vehicle services, well before the Chinese EV-maker became a well-recognized name among Robinhood traders.
The upcoming IPO of JD.com’s healthcare arm
Last week, JD Health was reported to be looking to raise at least US$1 billion and up to US$3 billion via an initial public offering slated for later this year. The listing is understood to be heading for Hong Kong rather than the U.S., given the friction faced by U.S.-listed Chinese companies in the past year. Yet, it’s a positive given the resurgence in investing interest in China.
The impetus for listing is obvious, given the surging interest among the investing community for healthcare service providers amidst the pandemic. Despite being carved out of JD.com only last year, JD Health had already fetched a valuation of around US$12 billion in a financing round in August.
The upcoming IPO of JD.com’s fintech arm
Hot on the heels is also the upcoming IPO of JD Digits which the company expects to raise around RMB20.4 billion ($3 billion). I wrote in my last article about the regulatory risks facing Alibaba Group’s (BABA) fintech unit, Ant Group. Businesses thrive on challenges and they would not be deterred. Successfully tackling headwinds would differentiate them from the competition.
Source: JD Digits
Likewise, for JD Digits, risks abound as declared in its prospectus (content in Chinese) lodged with Shanghai’s Nasdaq-style STAR Market. However, unlike Ant Group which could debut with a market valuation well above US$200 billion, JD Digits is valued at a fraction of that – about RMB200 billion. Considering its 2019 revenue at RMB18.2 billion, its price-to-sales ratio is just 11 times, a low multiple for a business growing at a compound annual growth rate of more than 40 percent.
Just as Jack Ma has the majority control over Ant Group, JD.com founder Richard Liu possesses a strong veto power over JD Digits with his 74.77 percent of voting rights under a dual-class share structure. Nevertheless, Shengqiang Chen, the legal representative of JD Digits, is understood to be the key operator of the fintech unit and this is where it gets interesting.
Source: JD Digits
The reluctant CEO who nearly missed his chance to become a billionaire
Back in April 2007, a prominent investor named Xu Xin provided Richard Liu with US$10 million in capital for JD.com to build its own logistics capabilities. The investor arranged for Chen to join JD.com as an accountant to ensure that the funds were well deployed.
Chen made use of the opportunity to leave his footprints in every task he was engaged in. He went on to develop a business analysis and control system for JD Group which impressed Richard Liu so much that he eventually promoted Chen to the position of group-level chief financial officer.
In 2013, words of JD.com planning an IPO surfaced. Around the same time, Ant Group announced (content in Chinese) its intention to build a small and micro financial services business. The sagacious Richard Liu quickly grasped the potential of a financing future and shrewdly determined that investors would welcome JD.com branching into this area which would boost its valuation ahead of the IPO. Thus, he resolved to enter that market as well.
Richard Liu’s enthusiasm and confidence (boosted by the success of JD Logistics which was started from scratch) was not shared by his deputies. During a senior management meeting to discuss the project, no one volunteered to take up the job of spearheading the new financing arm.
When called upon by Richard Liu, Chen initially rejected the “offer” because he thought with the IPO on the horizon, he could soon enjoy the recognition of being the CFO of a publicly-listed company instead of the head of a new startup whose future is uncertain. Furthermore, while he has an accounting background, financing is a different ballgame.
For someone good at doing the sums, Chen knew very well the risks were not worth it. However, he eventually gave in to the exertive Richard Liu and promptly got down to work. His research led him to conclude with the same findings with Ant Group, which were to serve individuals as well as small and micro enterprises.
Monetization of the big data from the e-commerce business
Essentially, both Alibaba and JD.com have already been serving this target market for a long time through their e-commerce activities. Thus, like Ant Group, JD Finance (the predecessor of JD Digits) could rely on JD.com and leverage its big data to determine who it could lend money to at a manageable risk level.
Chen, tapping on his experience in the early days of his time at JD.com as an accountant, designed and implemented a set of risk control algorithmic models to facilitate the lending process which greatly reduced the cost of manual labor. This set the foundation for success at JD Finance.
However, Chen was unable to rest on his laurels as newcomers were streaming fast into the field while existing ones continued to innovate. In 2015, he embraced the term “financial technology” or fintech as we know it now, and also explored the B2B2C financing model. JD Finance would serve as the first B (business) providing technology services to the second B. The second B would be responsible for providing a better service to the C (‘consumer’).
As this financing model requires strong technological capabilities and data support, many small and micro internet financing companies found the barrier too overwhelming to penetrate. This enabled JD Finance to capture market share. Chen was subsequently nicknamed “Mr. Technology,” heralding the fintech era of JD Finance.
JD Finance heralding the fintech era
Zooming in to 2018 and the fifth anniversary of JD Finance, the unit finally achieved its first profit, a year after JD Logistics turned profitable. Besides effecting a cosmetic name change to JD Digits, the fintech unit began adopting digitalization and artificial intelligence to navigate the rising industry competition and complexity.
With Alipay/Ant Group, together with JD.com major shareholder Tencent Holdings (OTCPK:TCEHY) (OTCPK:TCTZF), dominating the mobile payment space, JD Digits emphasized its strategic focus on corporate services. In the prospectus, the company listed the digital transformation (towards a digital age, SaaS, mobility, and AI) of traditional industries as one of the key trends.
Investor Takeaway
JD.com is on the cusp of unlocking tremendous value from its fintech and healthcare arms. We delved into the history of JD Digits. I hope readers agree that it is important to understand the circumstances faced by the company and appreciate the solid footing it is on to have confidence over the future of JD Digits and by extension, JD.com.
The presence of a proven and tested leader helming the company is also an assurance. In addition, the resolute selection of Chen by Richard Liu to start JD Digits from scratch is also testament of the latter’s talent spotting capabilities and good judgment.
Analysts are gradually realizing the bright future of JD.com and its affiliates, raising their price targets along the way. In the past year, the share price of JD.com has breached the consensus price target numerous times.
Data by YCharts
Besides the positive qualitative factors discussed in this article, readers might also be comforted that the “troika” of ratings all reflect “Very Bullish” on JD.com. In particular, the e-commerce giant is leading its industry of 50 names, ranked tenth out of 441 sectorial names, and 33 out of 3,927 candidates. Seeking Alpha has done back-testing to demonstrate that the quant ratings “beat the market”.
Source: Seeking Alpha Premium
Disclosure: I am/we are long JD, BABA, TCEHY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
