Gritty Tweaks Prepare a China E-tailer for U.S. IPO

BEIJING (TheStreet) -- The first Chinese online shopping company to apply for a U.S. stock market listing has been tweaking its business model for a decade while getting around regulatory and legal barriers that might have stopped a less ambitious firm long ago.

More tweaking may be needed to keep Internet retailer JD.com, which Thursday unveiled plans to raise US$1.5 billion this year in an initial public offering, competitive against formidable rivals Alibaba, Amazon (AMZN), Suning and Wal-Mart (WMT) in China's growing Internet marketplace.

JD is China's biggest business-to-consumer shopping platform, offering everything from fresh apples to designer handbags, washing machines and zinc supplements.

Last September, the privately held company -- whose investors include the Russian investment firm Digital Sky Technologies and Saudi Arabian Prince Alwaleed bin Talal, according to a prospectus filed with the Securities and Exchange Commission -- reported its first profit since launching in 2004.

JD reported earnings of $9.8 million on $7.7 billion in online sales revenue for the first three quarters of 2013. The company also said its 35 million consumer accounts during that period generated about $14.3 billion in transactions.

Its chief competitor is Alibaba, China's largest e-commerce company and operator of several Web sites including the retailer Tmall. Tmall and its big sister Taobao, a consumer-to-consumer portal, reported $161 billion in gross merchandise sales for the year ending March 2013. Alibaba says it may seek an IPO in New York or Hong Kong later this year.

JD's other major rivals include the China unit of Amazon, Walmart's China online division Yihaodian, and Chinese appliance retailer Suning. These and many smaller players have benefited from an ongoing shift to online buying in China. The business consultancy McKinsey & Co. last year said online retailers in China sold goods worth $190 billion in 2012, and could be selling $650 billion worth by 2020.

JD said it planned to offer American depository receipts on the Nasdaq or New York Stock Exchange sometime in 2014. The prospectus did not estimate a price range.

Behind JD's popularity and flashy Web site is a huge, gritty logistics operation. Goods are shipped to 460 cities around the country from warehouses in 34 hub cities. Next-day deliveries are made possible by an army of 18,000 couriers, mainly young men riding electric bikes or three-wheelers.

The delivery scheme gets around city rules against the commercial use of sidewalks. Sidewalk spots serve as customer pick-up sites in areas where couriers are restricted, such as college campuses. Sometimes couriers for JD, Tmall and other shopping Web sites pile boxes together on a sidewalk and let customers search out orders.

JD recently started a non-bank credit service for product suppliers that avoids the Chinese government's strict financial controls. A company that has sold goods on the JD portal for several months can get a no-collateral, 90-day loan for a 10% annual interest rate plus fees, Chinese media reported last fall.

The government is also letting JD provide special tax receipts, called "fapiao," for certain goods sold in the city of Beijing. Customers including companies and government entities can use these receipts to apply for tax deductions.

In another tweak, in December JD was one of 11 non-telecom companies, including Alibaba, that won government permission to sell telecom services such as mobile phone calling minutes. Services will be purchased wholesale from firms such as China Mobile and resold to consumers through Web sites.

JD has tweaked its identity more than once. The original Web site domain 360buy.com was the retailer's first name. That later became Jingdong Mall, then simply Jingdong in Chinese and JD in English.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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