china| chinaauthorDavid WertimeIndex NewsletterDavid Wertime and our data-obsessed China team analyze China tech for you. Every Wednesday, with alerts on key stories and research.9338dd5bb5
Get access to Protocol
February 19, 2021
If Chinese ecommerce is a gold rush, Jingdong Logistics wants to sell everyone a pick and shovel.
That's the basic pitch behind an anticipated $5 billion IPO in Hong Kong that could value ecommerce giant JD.com's logistics arm at $40 billion, according to Bloomberg, making it the second most valuable third-party shipping company in China behind SF Express.
Here's everything you need to know about JDL and its market debut.
WHAT DOES JDL DO?
As the name suggests, JDL is the shipping and delivery arm of JD.com, China's second-largest ecommerce company after Alibaba. JD, listed on Nasdaq, is currently valued at over $160 billion.
JDL is a spin-off that began as JD's in-house logistics department in 2007, with its operations consolidated into a wholly owned subsidiary in 2011. Since 2017, it's made its services available to other companies besides parent JD and is betting that "as supply chain demands become increasingly sophisticated, more companies are expected to outsource their supply chain operations to third parties that can provide comprehensive supply chain solutions and logistics services," according to its offering prospectus.
JDL will be JD's third spinoff. JD Health raised $3.5 billion in a Hong Kong IPO in December 2020 and JD Digits, its finance unit, is planning an IPO in Shanghai, although it has been reorganizing itself to avoid running afoul of regulators as Ant Financial did in the run-up to its planned public offering.
JDL says it has over 800 warehouses and employs over 240,000 workers in delivery, warehouse and customer service roles. Its stated goal: "To become the world's" — not just China's — "most trusted supply chain solutions and logistics services provider." It's already known for its logistics prowess; many items delivered via JD allow buyers to specify the precise hour of doorstep delivery, so investors are unlikely to need a hard sell.
WHAT'S NEXT FOR JDL
JDL plans to use the proceeds of the offering to broaden its warehouse network and trick them out with more "smart" tech, strengthen its line-haul network, upgrade its cold-chain network to keep up with online demand for fresh foods and pharmaceuticals and bolster its cross-border network, partly because "demands from Chinese consumers for foreign products continue to remain robust."
JDL expects Chinese logistics spending to reach nearly $3 trillion by 2025, the highest in the world, partly due to "redundant logistics processes" that the company hopes to streamline. The integrated supply chain logistics market involves everything from express and last-mile delivery, to trucking and warehousing, to add-on services such as home installation and after-sale services, according to JDL. But it thinks that market is "highly fragmented" and sees a chance to become the logistics firm to rule them all.
Its secret weapon: tech. Its IPO prospectus mentions automated guided vehicles, autonomous mobile robots, sorting robots and self-driving vehicles, among other things, which will deliver "critical improvements in speed, accuracy and productivity in all key logistical operations." This includes a fully unmanned warehouse in Shanghai, already in operation. And the company will be guided by data to "gain a more comprehensive understanding of the sources of inefficiencies."
JDL doesn't make a profit, but the trend lines are good. Revenue's rising quickly: It grew 31.6% between 2018 and 2019, from about $5.8 billion to about $7.7 billion. From 2019 to 2020, revenue for the first nine months of the year jumped 43.2%, from about $5.3 billion to about $7.6 billion. Net losses were about $340 million in 2019, and only $1.8 million over the first nine months of 2020.
The company has previously been criticized by both commentators and JD CEO Richard Liu for bleeding cash. Chinese financial outlet Caixin reported Wednesday that Liu had "[written] in an internal email to [JD's] delivery leg in mid 2019 that the financing could only support JD Logistics' operation for two years if the company kept losing money." JDL's previous CEO, Wang Zhenhui, was ousted in December and replaced by Yu Rui, who had been the head of JD's Human Resources department.
JDL isn't promising a quick path to profitability, instead focusing on improving its competitive position. "Our costs and expenses will likely increase in the future as we expect to expand our logistics infrastructure, enhance our supply chain capabilities, develop and launch new solutions and service offerings, expand customer base in existing market and penetrate into new markets, and continue to invest and innovate in our technological platform," the prospectus says. "Any of these efforts may incur significant capital investment and operating expenses, and take time to achieve profitability."
But JDL spent only 2.9% of its revenue on research and development in the first nine months of 2020, down from 4% in 2018, suggesting JDL is far from a pure tech play.
WHAT COULD GO WRONG?
A bet on JDL is a bet on China's continued economic growth, growing consumer demand, digitization of commerce and deepening penetration of broadband and mobile internet. If these trends reverse, JDL — and many other Chinese companies, not to mention the global economy — is in trouble.
JDL also flags its relationship with its parent as a possible concern. JD's the source of most of JDL's revenue – 56.6% in the first nine months of 2020, down from 61.6% in 2019 – and its ties with JD may prevent JDL from doing business with JD's direct competitors. What happens to JD and even CEO Richard Liu (刘强东) reputationally will also affect JDL. (One example: In August 2018, Liu was arrested on a rape allegation while on a business trip in Minnesota. Prosecutors declined to charge him, and he later faced a civil lawsuit in a Minnesota court.)
Then there's the perpetual risk of intense competition. In the integrated logistics arena, this could come from the industry trend toward consolidation, which could mint new or bigger competitors than currently exist on the landscape.
WHO GETS RICH?
Here's what we know from the prospectus:
- Post-IPO, JD will still own a controlling interest in JDL via two subsidiaries, so JD founder and CEO Liu, who ultimately owns more than 76% of JD, has the most to gain.
- Cayman Islands-based Eastar Capital Fund, L.P. invested $360 million in a Series A round and owns 2.9% of outstanding shares.
- Hillhouse Capital invested $360 million in a Series A round via a subsidiary and owns 2.9% of outstanding shares.
As the Series A reportedly valued JDL at $13.5 billion, Eastar and Hillhouse stand to roughly triple their money upon the IPO.
Other investors include entities controlled by Tencent, Sequoia China and China Merchants Bank.
WHAT PEOPLE ARE SAYING
- "JD [Logistics] is the only company building an integrated, on-demand, digitized and increasingly autonomous logistics infrastructure at this scale," Jeffrey Towson, professor of investment at Peking University's Guanghua School of Management in Beijing, told the South China Morning Post on Thursday.
- "The problem is that JD Logistics is the only one still losing money among the publicly listed express delivery companies," Wu Lingwei wrote on WeChat account E-Commerce Online on Thursday.