Trying to figure out how big the Tencent 15% purchase of JD.com is isn’t the easiest of tasks. While everyone knows the number, US$215-million, with the possibility of another five percent when JD.com lists on the NASDAQ, but that just scratches the surface.
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The listing date according to its filing is unknown, but expected later this year. Stop for a second here, what is JD.com? Well, the former name is 360buy.com, the business itself is just over a decade old, but more importantly it is the second largest ecommerce business in mainland China. After Alibaba, which retails their online goods under brand names such as Tmall.com and Taobao.com.
But what better than the company and its prospectus to tell us exactly what it is:
“We are the largest online direct sales company in China in terms of transaction volume in 2012 and the first nine months of 2013, with a market share in China of 45% in the third quarter of 2013, according to iResearch, a third-party market research firm. Our gross merchandise volume, or GMV, increased from RMB32.7 billion in 2011 to RMB73.3 billion in 2012 and RMB86.4 billion (US$14.1 billion) in the first nine months of 2013.”
So if I annualise its 2013 sales, you get to somewhere around US$18.8-billion. Perhaps a stronger last quarter in sales would push such a business over US$19-billion and beyond. But of course with a business of this sort in the ramp up phase the company has been making losses, having recently turned profitable. The first nine months of the 2013 financial year the company had profits of a mere US$10-million, but that is a huge turnaround from a net loss of RMB1.4-billion (US$230-million) for the comparable nine months the year prior.
So that is a big swing, in a market that is growing really, really quickly. The company explains that the Chinese retail and indeed online retail market is very different from that which the US consumer would be used to:
“China’s large size and population and differences in consumer behavior and purchasing power across the country have presented significant challenges for retailers to scale up and expand nationwide. As a result, China’s retail industry is highly fragmented, with the top 20 retailers in aggregate only accounting for approximately 10% of the total market share in 2012, as compared with approximately 40% in the United States, according to Euromonitor International. The fragmented offline retail market in China presents an opportunity for online retailers.”
And lastly, whilst it is difficult to make predictions, the company has used independent research to show that the market is expected to maintain the speeds seen in the early stages of ecommerce in China:
“According to iResearch, China’s online retail market size measured by transaction volume was RMB1.3 trillion in 2012 and is expected to reach RMB3.6 trillion (US$588 billion) in 2016, representing a CAGR of 28.9%, a growth rate significantly faster than that of the offline retail market.”
So the company is looking at the US investor and asking them for a substantial sum, US$1.5-billion in order to continue to scale up its business. And obviously the valuation has been pegged somewhat to this Tencent purchase, US$215-million for a 15% stake gives JD.com a market enterprise value of US$1.433-billion.
In turn, that means the amount it is are raising is basically exactly the same as what it is worth now, quite clearly taking advantage of investor appetite for ecommerce assets in China. Jim O’Neill (the guy who coined the phrase BRIC) said in an interview a while back, that he thought in years to come that Chinese internet businesses would eclipse even the likes of WalMart. Here I guess is proof that indeed this is moving in the right direction.
The last observation is that this has all the classic tell-tale signs of a Koos Bekker type acquisition, find a trustworthy owner managed startup (The founder is Richard Qiangdong Liu) that is looking for sizable capital injection in order to scale up. While this is a sizable acquisition, I am guessing that this is early days, very early days for online retail in China.
This could turn out to be an amazing, well-timed acquisition by Tencent, ramping up its stake in due course to 20%. Nice. And good for any Naspers shareholders, which own 34.9 percent of Tencent.
Naspers shareholders now indirectly own 5.235% of JD.com. And that in itself is fun, to be the owner of one of the biggest online retailers in the world, in the coming years. This is a positive for all of the businesses Naspers, Tencent and of course JD.com.
To end off with, here is a WSJ tweet from yesterday, which explains (a picture tells 1000 words) about the competitive landscape in China. Nice.
China's Tencent buys into http://t.co/5Pb1VKG5BR, heating up competition w/ Alibaba. http://t.co/htwxlyKbzK pic.twitter.com/i3Oc5z5bKv
— Wall Street Journal (@WSJ) March 11, 2014
This article by Sasha Naryshkyine is adapted from the Vestact newsletter and republished with permission.
Image: JMR_Photography (via Flickr).
