Employees sort parcels at JD.com’s automated logistics center during a government organized tour on China’s Singles Day shopping festival in Beijing, China November 11, 2020. REUTERS/Thomas Peter
HONG KONG, May 18 (Reuters Breakingviews) – An old Hong Kong market maxim advises traders to invest alongside a company’s controlling shareholder and avoid their spinoffs. The $3.4 billion initial public offering of Chinese web retailer JD.com’s (9618.HK) delivery arm, one of the city’s biggest this year, is a case in point.
Even before pandemic lockdowns boosted online ordering, the logistics sector was a hot investment target. Many investors believe applying technology and scale will dramatically improve profitability. JD Logistics is a good example: it has trebled its gross margin to 8.6% in two years and doubled revenue, proving it can find and exploit efficiencies. Its unmanned Shanghai warehouse can process 1.3 million orders a day. In the prospectus, research projects demand for full-service offerings including storage, tracking and distribution – about three-quarters of JD Logistics’ sales – will grow 9.5% between now and 2025, almost twice as fast as the straightforward work of moving stuff.
Rapid growth is one thing, benefiting from it is another. With a 2.7% share of the local market, JD Logistics is China’s biggest single player in integrated supply chains helped by the JD group accounting for 53% of its sales. One giant, reliable customer is a good financial bedrock. But its other top five clients together account for a mere 1.6%, highlighting the fragmented state of Chinese logistics, where all players face a perennial risk of being undercut.
The company’s targeted IPO price equates to an eye-watering 128 times 2020 adjusted net profit. By the same measure rival SF Holding (002352.SZ), with a market value of $44 billion, trades at a more reasonable 44 times. And in non-adjusted terms, JD Logistics lost 4 billion yuan ($620 million) that year.
Proceeds from the float will go to expanding its network and improving technology. The company warns that its big growth plans might hurt near-term profitability. JD.com, which will hold a 64% stake post-deal and trades on a mere 14 times its 2020 earnings, will reap the benefits of its subsidiary’s investments almost immediately. At this price, collective wisdom of yore about trading alongside tycoons seems as relevant as ever.
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CONTEXT NEWS
– JD Logistics on May 17 launched an initial public offering in Hong Kong that will raise up to $3.4 billion and give the company, an offshoot of $108 billion web retailer JD.com, a market value of up to $34 billion.
– The company said that just over half the funds raised would go towards upgrading its logistics networks, while a further 20% would be spent on technology development.
– The deal is one of the biggest floats expected this year in the Asian financial hub. It will price on May 21, to begin trading on May 28.
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