JD.com’s $3.9 billion Hong Kong IPO sees another Chinese giant diversify away from U.S. markets

Chinese e-commerce giant JD.com will go public on Thursday in Hong Kong and is expected to raise at least $3.9 billion, boosting Asia into its biggest week for initial public offerings so far in 2020.

JD’s Hong Kong debut, likely one of the largest IPOs this year, is a secondary listing for the company. JD went public on the New York-based Nasdaq stock exchange in 2014, a few months before its online retailing rival Alibaba Group debuted on the same exchange.

Nationwide coronavirus lockdowns in China in the first months of the year caused online retail sales to surge. In the first quarter of 2020, JD’s revenue grew 20.7% year-on-year, and online sales during the May Day holiday in the first week of May increased 45% compared to the holiday period in 2019.

The June 18 debut coincides with JD’s massive “618” shopping festival, an annual promotion that last year brought in a record $29.2 billion in sales. The event coincides with the company’s founding on June 18, 1998.

In the 22 years since, JD has transformed from a small seller of electronics to the second-largest e-commerce company in China by market share.

History of JD.com

JD’s billionaire founder and chairman Liu Qiangdong, also known as Richard Liu, started the business in 1998, selling computer parts at a market stall in Beijing. Liu had built up a chain of 12 electronics stores across the city by 2003, when the SARS outbreak struck China. He closed all his stores and shifted to selling his wares online instead.

JD.com on the Fast Track to Drone Deliveries
An employee prepares a JD.com drone for a package delivery demonstration at the company’s drone testing site in Xi’an, China, on Tuesday, June 19, 2018. JD’s army of drones is key to its delivery network.
Qilai Shen/Bloomberg via Getty Images

When the outbreak subsided, he stayed online, launching a consumer retail website in 2004. Today JD.com has 387 million active customers. Chinese tech conglomerate Tencent Holdings owns an 18% stake of JD, and Walmart Inc. has a roughly 10% stake.

JD sells everything from baby formula to Prada handbags. It offers a luxury delivery service, JD Luxury Express, in which white-gloved men in suits deliver high-end products to customers’ doors. It’s also a grocer. The pandemic boosted its online supermarket sales; between January and March, vegetable sales increased 207%, and sales of chicken and eggs increased 301%.

JD controls most of its supply chain and delivers goods to customers from its 730 warehouses, promising same- and next-day delivery with the help of tens of thousands of drivers and an extensive network of delivery drones. By comparison, Alibaba functions largely as a platform and payment service for third-party sellers and earns much of its revenue from advertising.

JD, like Alibaba, is trying to expand beyond online retailing into business-to-business services like logistics and cloud computing. In the e-commerce sector, it’s the main rival of Alibaba, which still dominated with an estimated 56% market share in 2019, compared to JD’s 17%, according to data from eMarketer. Both companies are wary of competition from relative newcomer Pinduoduo.

CEO case

JD’s Hong Kong IPO splash will come as its founder and CEO shirks public view. Liu has stepped back from company recently. He is still listed as JD’s CEO and chairman, and he still controls almost 80% of shareholder votes, but his name has been scrubbed from the records of several JD-linked companies in the last few months.

In 2018, Liu was arrested in Minnesota on suspicion of rape. Prosecutors later dropped the charges, citing insufficient evidence.

World Internet Conference - Wuzhen Summit
Richard Liu, CEO and founder of China’s e-commerce company JD.com, attends a development forum in 2015. He has stepped back from public view since being accused of rape in 2018; he denies the claims.
Visual China Group via Getty Images/Visual China Group via Getty Images

Liu’s accuser, a University of Minnesota student named Liu Jingyao who hails from China, filed a civil lawsuit against the executive in April 2019 after prosecutors dropped the criminal charges against him. The suit is ongoing, and in April a Minnesota district court dismissed a motion filed by JD to dissociate the company’s name from the case against its founder.

A lawyer for Liu Qiangdong said in an April 2019 statement to the New York Times that based on the dismissal of criminal charges “and our belief in [Liu’s] innocence, we strongly feel that [the civil] suit is without merit and will vigorously defend against it.”

JD’s U.S.-listed shares dropped as much as 60% in the months after the allegation against Liu, who had been a prominent public face of the company he founded, and who has never identified a successor. Share prices have since rebounded.

Secondary listings

The JD listing comes one week after the $2.7 billion Hong Kong IPO of Chinese gaming company NetEase, which, like JD, is already Nasdaq-listed. NetEase CEO William Ding said NetEase’s secondary listing in Hong Kong shows the company is “returning to a market in which we share a closer mutual understanding.”

Rising tensions between the U.S. and China and an increasingly hostile atmosphere towards Chinese companies in the U.S. are driving more Chinese companies closer to home, to markets in Hong Kong and on the mainland.

China’s largest computer chipmaker, Semiconductor Manufacturing International Corporation, is planning to go public in Shanghai after delisting from the New York Stock Exchange in June, and Robin Li, CEO of Baidu Inc., said in May that the Nasdaq-listed Chinese search engine firm is considering a secondary listing in Hong Kong because of concerns that the U.S. is “constantly tightening the control of Chinese stock companies.”

More than 200 Chinese companies trade on U.S. exchanges; 32 of them are eligible for secondary listings in Hong Kong. Alibaba initiated a secondary listing in Hong Kong last year.

Nasdaq on May 18 said it would enforce stricter rules on companies that want to list on the New York-based exchange. The new requirements call for levels of auditing and fundraising transparency that would make it more difficult for companies from China to list. The changes were announced as Nasdaq prepared to delist China’s Luckin Coffee Inc. in light of Luckin’s financial fraud scandal. Luckin is appealing the decision.

The U.S. Senate on May 20 unanimously passed a bill that will increase oversight and require audits of foreign companies that list on U.S. exchanges. Companies that the U.S. is not able to audit will be banned from U.S. exchanges, and the measure mandates that foreign companies certify they are not owned or controlled by a foreign government.

The bill is not specific to China, but its sponsor Sen. John Kennedy (R–La.) said last month, “The Chinese Communist Party cheats, and the Holding Foreign Companies Accountable Act would stop them from cheating on U.S. stock exchanges.”

Before the bill becomes law, it must pass through the U.S. House of Representatives and then be signed into law by President Donald Trump.

China’s securities regulator rebuked the U.S. legislation and said it would “weaken the confidence of global investors in U.S. capital markets.” JD referenced the U.S. bill in the risk factors section of its Hong Kong prospectus, saying the bill, if enacted, could adversely effect U.S. share prices, lead to a loss of investor confidence, and potentially lead to JD’s delisting from Nasdaq.

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