01/08/2021

JD.com To Carve-Out Its Logistics Business Via IPO

Deal Overview

On February 16, 2021, the second-largest Chinese e-commerce company, JD.com Inc. (NASDAQ
NDAQ
: JD, $84.31, Market Capitalization: $131.94 billion), announced its intent to separate its logistics unit; JD Logistics, by listing the shares on the Main Board of the Hong Kong Stock Exchange. The Company has submitted a spin-off proposal to the Hong Kong Stock Exchange under PN15, and the Hong Kong Stock Exchange has confirmed that the Company may proceed with the Proposed spin-off.
The proposed carve-out will be effected by way of the Global Offering of the JD Logistics Shares, comprising the Hong Kong Public Offering and the International Offering. On the same day, that company had submitted a listing application form (Form A1) through its Joint Sponsors, to the Hong Kong Stock Exchange to apply for the listing of, and permission to deal in, the JD Logistics Shares (representing ordinary shares with a par value of US $0.000025 each in the share capital of JD Logistics) on the Main Board of the Hong Kong Stock Exchange. Upon completing the Proposed Spin-off, the Company will continue to hold more than 50% of JD Logistics indirectly; and remain a subsidiary of the Company. It should also be noted that the IPO may also be affected due to the current global environment due to the pandemic, which recently has resulted in the Chinese stocks losing steam. Thus, brokers have pointed out that JD Group may have to move fast to deliver the JD Logistics IPO due to the current market condition.

We had published a Potential Spin report on December 30, 2019, where we discussed that the company had entered early talks with banks about a potential overseas IPO that could raise $8 billion to $10 billion. The proposed carve-out is subject to, among other things, the obtaining of approval from the Listing Committee of the Hong Kong Stock Exchange for listing of, and permission to deal in, the JD Logistics Shares, and the final decisions of the Board and of the board of directors of JD Logistics. Details in respect of the Proposed Spin-off, including the size and structure of the Global Offering, the extent of the decrease in shareholding percentage of the Company in JD Logistics, have not yet been finalized. The company has said that it will announce further details as and when appropriate.

Deal Rationale

JD Logistics began as JD Group’s in-house logistics department in 2007. Since 2017, the company opened its solutions and services to external customers with the goal of empowering their supply chain. Over the years, the company has grown exponentially and now operates more than 900 warehouses and has over 190,000 delivery staff. As part of its global strategy, the company is continually building its international supply chain network, covering more than 220 countries/regions as of December 31, 2020. The company has already set itself apart from its biggest rival, Alibaba, by spending heavily on its own logistics network, unlike Alibaba, which acts as a marketplace for merchants and outsources its delivery to third-party courier companies. JD’s more reliable and timely delivery shone during the Covid-19 pandemic. JD Logistics said about 90% of the orders it processed for its parent last year were delivered on the same day or the day after. The listing will further enable JD Logistics to compete with its peers as an independent company.

We believe that the proposed listing on the Hong Kong Stock Exchange will help unlock the value for both JD Group and JD Logistics, which will benefit the business stakeholders and help the newly formed company accelerate its business growth, especially with its external customers. The IPO will also lead to a re-rating for the logistics business and appeal to an investor base that pursues high growth opportunities in the supply chain solutions and logistics services business, which is different from the relatively more diverse business model of JD Group’s operations. The proposed carve-out would create long-term shareholder value by allowing JD Logistics Group and JD Group to focus on their respective core businesses and capture different growth fundamentals. With JD Logistics as a separated listed entity, the Company can entirely focus on and deploy its financial resources towards the development of JD Group’s business without needing to consider JD Logistics Group’s funding requirements. The carve-out would also enable both JD.com Inc. and JD Logistics to directly and independently access both equity and debt capital markets in the future on a stand-alone basis. The separation will also provide clarity of the credit profile of JD Logistics Group for rating agencies and financial institutions that wish to analyze and lend against the credit of the supply chain solutions and logistics services business. Post-carve-out, JD Group will continue to operate, among others, online retail and marketplace e-commerce businesses offering a diverse range of products.

China’s rapid digitalization of the economy has created increasingly multi-faceted customer demands. Such demands are currently serviced by a fragmented group of incumbent logistics players. They are severely underserved, presenting significant opportunities for supply chain solutions and logistics services providers, such as JD Logistics. According to the CIC Report, the market size of the integrated supply chain logistics services industry is expected to grow from RMB2,023 billion in 2020 to RMB3,185 billion by 2025, representing a CAGR of 9.5%, which is approximately 1.8 times the growth of China’s logistics spending over the same period. The integrated supply chain logistics services market in China is highly fragmented due to its vast size and specific requirements across industry verticals. According to the CIC Report, the top ten players only accounted for 7.9% market share in terms of revenue in 2019.

It should be noted that the listing of Logistics business would be JD’s second multibillion carve-out in recent months. In December 2020, the IPO of JD Health raised $4 billion, the largest in Hong Kong last year. Also, on March 31, the company, through a subsidiary, entered into definitive agreements with Jingdong Digits Technology Holding Co., Ltd. (JD Digits), pursuant to which the Company will transfer JD Cloud & AI business and certain assets, together valued at approximately RMB15.7 billion, to JD Digits, as consideration and in exchange for the issuance of ordinary shares by JD Digits. Upon completion of this transaction on March 31, 2021, the Company’s equity interest in JD Digits increased to approximately 42%.

Company Description

JD.com Inc (Parent)

JD.com is a leading technology-driven e-commerce company transforming to become the leading supply chain-based technology and service provider. The company has opened its technology and infrastructure to partners, brands and other sectors as part of its Retail as a Service offering to help drive productivity and innovation across a range of industries. JD.com is a member of the NASDAQ100 and a Fortune Global500 company. Founded in 1998, JD.com’s retail platform went online in 2004. The Company engages in the sale of electronics and home appliance products and general merchandise products (including audio, video products, and books) sourced from manufacturers, distributors, and publishers in China on the Internet through its website, www.jd.com. It also offers an online marketplace that enables third-party sellers to sell their products to customers on the Company’s Website. The Company operates through the provision of a single class of services for accelerating and improving the delivery of its products over the Internet. JD.com operates approximately 210 warehouses with an aggregate gross floor area of approximately four million square meters in over 50 cities. It operates over 5,370 delivery stations and pickup stations in approximately 2,350 counties and districts across China. The Company also offers online and in-person payment options and customer services. As of December 31, 2020, JD.com had approximately 310,000 employees, excluding part time employees and interns. The Company recorded consolidated net revenue of $114.3 billion in FY20.

JD Logistics (Carve-Out)

JD Logistics was incorporated in the Cayman Islands on January 19, 2012. As of February 16, 2021, JD Group, through its wholly owned subsidiary, held approximately 79.12% of JD Logistics’ total issued share capital. JD Logistics is the largest player in China’s integrated supply chain service market in terms of total revenue in 2019, according to the CIC Report. JD Logistics offers a full spectrum of supply chain solutions and high-quality logistics services enabled by technology, ranging from warehousing to distribution, spanning across manufacturing to end customers, covering regular and specialized items. In January 2021, JD Logistics signed an agreement with Chinese confectionary manufacturer Xu Fu Chi. Leveraging JD Logistics’s technology capabilities, the collaboration will support Xu Fu Chi’s supply chain management system digitalization efforts and enhance the confectionary manufacturer’s omnichannel service capabilities across various distribution channels. As of December 31, JD Logistics operates more than 900 warehouses, covering an aggregate gross floor area of approximately 21 million square meters. The company is among the top players in China in terms of warehousing space. As part of its global strategy, the Company is also continually building an international supply chain network, which covered more than 220 countries/regions as of December 31, 2020. JD Logistics reported revenues (under the segment name ‘New Businesses’) of $6.6 billion in FY2020.