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JD.com IPO: Approach With Caution (Update 1)


Not only does JD.com face a potential cash crunch as it seeks to diversify its business away from consumer electronics, its management team faces scrutiny as well.

A look at the company's F-1 shows that many of its management team have only recently joined the company, with some joining late in 2013. Haoyu Shen has served as chief operating officer since August 2011, Ye Lan has served as chief marketing officer since February 2012, Guoqing Zhao has served as chief strategy officer since June 2012, Yu Long (also known as Rain Long) has served as chief human resources officer and general counsel since August 2012, Sidney Xuande Huang has served as chief financial officer since September 2013, and Shengqiang Chen has served as the chief executive officer of the company's Internet finance group since September 2013.

Perhaps even more troubling than the revolving door is the fact that Xufu Li, who has served as a JD.com's director since January 2009, will resign before the completion of the initial public offering.

If that weren't enough, the company's founder, Richard Qiangdong Liu, has enormous control and influence over the firm. Liu, who founded the company in 2004, owns 18.4% of the aggregate voting power through Max Smart Limited, a company wholly owned by Mr. Liu, and owns an additional 22.5% of the aggregate voting power of the company, "as certain holders of our ordinary shares have granted the voting rights associated with their ordinary shares to Mr. Liu as their exclusive proxy and attorney-in-fact," according to the risk section of the F-1. Liu also owns 5.3% of the company's stock through another company where he is the sole shareholder and the sole director, Fortune Rising Holdings Limited.

There is a dual class structure, with Class B shares having 20 times the voting power of Class A shares, effectively meaning that Liu has 80% of the voting power. "Based on our proposed dual-class voting structure, holders of Class A ordinary shares will be entitled to one vote per share in respect of matters requiring the votes of shareholders, while holders of Class B ordinary shares will be entitled to twenty votes per share, subject to certain exceptions," the company stated in its filing.

In addition to the vast voting power that Mr. Liu has, he also has the ability to cancel a board meeting, if he decides not to show up. That is cause for concern right there, never mind the enormous voting power Liu has.

In the filing, JD.com said it intends to use the proceeds from the filing to buy more land rights, build new warehouses, expand distribution and acquire other companies. However, the company also wants its own delivery people, effectively owning the last mile of shipping. Amazon, which partners with UPS (UPS), FedEx (FDX) and the United States Postal Service, has been looking into building its own drones for the last mile of delivery, but that's years away and would not be able to handle the scale of Amazon's roughly $100 billion in yearly sales any time soon. To suggest JD.com could do otherwise is a pretty lofty goal, especially when Alibaba, which is much larger than JD.com, is working with third-party companies.

While the offering is still months away, it will be interesting to see who is actually selling their stake. With firms such as Tiger Global, DST, and Sequoia Capital all involved, it will be important to see if these firms have faith in the company, or if the risks in JD.com's F-1 filing and liquidity concerns have them running for the hills.

--Written by Chris Ciaccia in New York

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