Online buyers the fuel for unprofitable JD Logistics

JD Logistics, the delivery arm of JD.com (9618), is on track for a Hong Kong initial public offering that could raise up to US$4 billion (HK$31.2 billion), but China's widening tech crackdown might cool down investor enthusiasm.

The Beijing-based company began pre-marketing last week, targeting a valuation of up to US$40 billion, according to earlier reports.

JD.com, the No 2 e-commerce company in China, has already raised nearly HK$65 billion from share sales within a year. It completed a HK$34.27 billion secondary listing in Hong Kong last June, before spinning off JD Health International (6618), which raised more than HK$30 billion in December. Its online grocery delivery affiliate Dada Nexus raised US$320 million on Nasdaq last June.

But the IPO plan of JD.com's fintech affiliate may come to a standstill due to Beijing's tech sector crackdown. The unit, JD Digits Technology, was among the 13 fintech companies summoned by top financial watchdogs at the end of April. The company withdrew the IPO application from the Shanghai Star Market in March, which could raise about 20 billion yuan (HK$24.01 billion). It is also planning to restructure as a financial holding company to comply with regulatory demands, Bloomberg reported.

JD Logistics said it is less affected by the antitrust campaign. Despite claiming itself as the largest integrated supply chain logistics firm, the company only had a 2.7 percent market share last year. And it doesn't constitute a "platform company" under China's latest anti-monopoly guidelines, it said.

However, the State Administration for Market Regulation started an investigation into one of its past acquisitions in March, JD Logistics said, which might end up with an up to 500,000 yuan penalty, even a forced sale of its equity or assets.

Established as JD Group's in-house logistics department in 2007, JD Logistics takes on a different business model with other couriers. Apart from express delivery, the company also provides other value-added services such as home installation and after-sales services. It also provides warehousing and inventory management for enterprises, mainly brands and merchants in its parent's platform. In 2020, it served more than 190,000 corporate customers from fresh food to computer, communication, and consumer electronics products.

JD Logistics' warehouse network covers almost all counties and districts across China, including over 900 self-operated warehouses with a gross floor area of about 21 million square meters plus more than 1,400 franchise warehouses, according to its prospectus. The number of warehouses is over five times higher than its rival SF Holdings, also known as SF Express.

With a strong network and advanced supply chain technology, JD Logistics helped its parent's inventory turnover days maintain below 40 days since 2012. Through JD Logistics' network, about 90 percent of online retail orders placed in JD.com's platform were delivered on the same day, or a day after in 2020, the company said.

JD Logistics has opened up services to external customers since 2017. The firm generated 53.9 percent of revenue from JD.com and other related parties, down from more than 70 percent in 2018.

Revenues grew by 47.2 percent to 73.37 billion yuan last year, as the epidemic accelerated the e-commerce boom in mainland China.

However, JD Logistics has yet to turn a profit due to hefty investment in infrastructure network and technology. Net loss widened by 85 percent to 4.13 billion yuan last year, which is also dragged down by the loss in the fair value of its convertible redeemable preferred shares. In addition, JD Logistics expects to record a significant adjusted loss in 2021.

Gross profit margin improved from 2.9 percent in 2018 to 8.6 percent in 2020, benefiting from economies of scale and virus-related government policy support. But it is still far lagging behind peers, only half of that of SF Holdings. JD Logistics said the first-quarter gross profit margin was much lower than a year ago and a further decline for full-year result is projected, because of expansion of logistics networks and a significant increase in headcount, as well as less policy support. Total staff number grew 52.9 percent to 260,000, as of March 31 from a year ago.

JD Logistics plans to use the net proceeds to upgrade and expand logistics networks, develop technologies, increase solutions offerings, and enlarge the customer base, it said.