Breakingviews-Jingdong IPO tests U.S. appetite for China stocks

Thu Sep 8, 2011 5:01pm IST

Stocks

   

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

By Wei Gu

HONG KONG, Sept 8 (Reuters Breakingviews) - Jingdong, the Chinese online retailer, hopes to raise up to $5 billion in New York. If it does it will set new records for U.S. Internet initial public offerings.

It’s growth speed and scale are exciting. But it is not the only Amazon (AMZN.O) lookalike in China -– indeed, Amazon itself has a presence. Competition hurts profit margins. Moreover, rising doubts about Chinese Internet darlings will test investors’ appetite. Accounting standards and ownership rights are not the only things that give pause for thought.

Inefficiency in traditional forms of retail distribution has helped boost the attractiveness of Internet routes to market. Low-cost online offerings also appeal to price-sensitive Chinese consumers, who like to shop around. With online retailing making up just 3 percent of total retail sales in China, there is a lot of room for growth. China’s total online retail sales are expected to reach $295 billion in 2014, surpassing the United States’ $249 billion, according to Forrest Research. Jingdong’s sales are expected to double from 2011 to reach $10 billion in 2012, according to SFG Research.

But Jingdong is not the only outfit to notice the opportunity. Competition is tough, and Jingdong isn’t an industry leader. E-commerce pioneer Taobao, owned by Alibaba Group 1688.HK, soaks up 69 percent of online retail sales, according to iResearch. Jingdong, which sells everything from books to electronics, is a distant second, accounting for 4 percent of the market. Clothing retailer Vancl has 0.8 percent of total. Amazon’s own Chinese site Joyo has a small sliver too.

Second-tier players have to compete hard on price to attract new customers. Lack of product differentiation reduces Jingdong’s appeal. Vancl, which is seeking to raise $1 billion from New York in 2011, has better margins as it has its own branded apparels.

Still, Jingdong’s focus on fulfilment logistics gives it a big advantage. It offers free delivery on all orders, since the Beijing-based company has its own shipping companies. That enables Jingdong to collect cash or credit card payment from customers when goods arrive. That is a big deal in a country where reliable delivery and online payment remain challenging. Jingdong’s infrastructure investment is also more aggressive than its rivals. It has plans to build more than 300 warehouses throughout the country.

Intense competition and heavy investment plans gives Jingdong an urgent need to raise capital. But it is a big ask. Foreign investors will need plenty of reassurance before entering this Amazonian jungle.

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CONTEXT NEWS

-- Chinese online retailer Jingdong Mall, which runs 360buy.com, plans to raise $4 billion to $5 billion in an initial public offering. The IPO is tentatively scheduled for the first half of 2012, IFR, a Thomson Reuters publication, said on Sept. 7.

-- It is scheduled to pick underwriters for the IPO in the week of Sept. 12 in Beijing. An IPO of that size would surpass Google's $1.9 billion IPO in 2004 as the largest-ever Internet float in the United States, according to Thomson Reuters data.

-- Jingdong’s main rival is Amazon’s China site Joyo www.amazon.cn. It also competes with Taobao Mall, an Internet book seller, China Dangdang Inc (DANG.N), and online clothing retailer Vancl. Vancl has mandated four banks to arrange a U.S. initial public offering that could be worth up to $1 billion, potentially the largest Chinese Internet listing in the United States in 2011.

-- Reuters story: China's Jingdong Mall plans $4-$5 bln US IPO - IFR [ID:nL3E7K72QP]

-- Reuters Insider TV clip: reut.rs/nNn3ze

-- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [GU/]

(Editing by Robert Cole and David Evans)

((wei.gu@thomsonreuters.com)) Keywords: BREAKINGVIEWS JINGDONG/

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