JD.com Surges in Largest-Ever Chinese IPO
Updated from 10:13 a.m. EDT to include opening trading prices.
NEW YORK (TheStreet) - JD.com, China's largest online direct sales company, broke new records for a Chinese company listing its shares in the U.S. On Wednesday evening, the company sold 93.7 million American depositary receipts for $19 each, raising $1.78 billion. The initial public offering values JD.com at about $26 billion.
JD.com opened trading on Nasdaq on Thursday morning at $21.75, nearly 10% above it IPO price. JD.com shares were rising over 15% in early trading, indicating strong institutional and retain demand for the offering.The IPO follows a string of large Chinese public offerings in 2014, including Weibo (WB) and Cheetah Mobile (CMCM) and comes ahead of e-commerce giant Alibaba's expected offering. That offering could not only break records for a Chinese company, it may also turn to be the largest-ever IPO, eclipsing the size of Visa (V), Facebook (FB), and Google's (GOOG) listing. While many believe JD.com's IPO could be a telling sign of investor interest in Alibaba, the businesses aren't directly comparable. Nevertheless, JD.com's multi-billion dollar listing on the Nasdaq and its IPO pricing above a $16-to-$18 a share range augur well for Chinese e-commerce titans looking to list their shares in the United States. Investors appear interested in e-commerce IPO's as the Chinese economy becomes more oriented around consumer spending, a rising middle class and increased connectivity to web-enabled devices. There is also the prospect that companies like JD.com use their U.S.-based offerings as a starting point for international expansion. In coming years, both JD.com and Alibaba could begin to compete directly against some of the largest e-commerce giants like Amazon, eBay (EBAY - Get Report), and companies that are tied to commerce by way of large marketing and advertising businesses such as Google, Facebook and Twitter (TWTR). JD.com most-closely resembles Amazon because it holds a large inventory of merchandise and has made a heavy investment in distribution networks throughout China. There is no United Postal Service in China, meaning JD.com has spent heavily on a fleet of transportation vehicles and even has large staff of carriers. Alibaba, by contrast, is more of a marketplace to match buyers and sellers with additional payment, search and advertising networks that play a prominent role throughout the company's ecosystem. Those businesses can be loosely compared to eBay, which pioneered the online marketplace in the 1990s and has the most successful mobile payments business in PayPal. Financially, the characterization of JD.com as comparable to Amazon and Alibaba to eBay holds true. JD.com has yet to report an annual profit as costs to run the company's various businesses has outrun sales in recent years. Amazon reported just $274 million in net income in 2013 on over $74 billion in revenue, while eBay reported a full-year profit of $2.9 billion on over $16 billion in revenue. In 2013, JD.com generated 11.4 billion in revenue but had total operating expense of $11.5 billion. For 2013, JD.com reported a gross profit of $1.13 billion and gross margin of 9.9%. Alibaba, by contrast, reported $6.5 billion in 2013 revenue and net income of over $2.8 billion. There are other differences between JD.com and Alibaba. While JD.com is listing its shares with a dual class stock structure that will effectively give founder Richard Qiangdong Liu full control of the company, Alibaba is seeking to list its shares with a single class of stock and a structure that will allow the partners of the firm to elect a majority of nominees to the company's board of directors. In fact, JD.com's board cannot form a quorum without the presence of its founder. JD.com and Alibaba face a legion of political risks as a result of their operations in China, and the accounting and financial complexities of listing shares of a Chinese business internationally. However, one troubling issue raised by TheStreet in JD.com's IPO was a $591 million stock grant to founder Richard Qiangdong Liu. That stock grant was decided just weeks ahead of the company's filing of a prospectus for an IPO in the U.S. Amended IPO prospectuses eventually detailed the value of those stock grants and actually caused the company to report a first quarter loss in 2014. U.S. investors would likely not take similar stock grants well as JD.com becomes a public company.