I was trying to figure out how big the TenCent 15 percent purchase of JD.com is. And whilst everyone knows the number, 215 million US Dollars, with the possibility of another 5 percent when JD.com lists on the NASDAQ, the listing date according to their filing -> JD.com, Inc is unknown, but expected later this year. Stop for a second here, who 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 who better than the company and their prospectus to tell us exactly who they are:
"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 their 2013 sales, you get to somewhere around
18.8 billion Dollars. Perhaps a stronger last quarter in sales would push such a business over 19 billion Dollars 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 10 million Dollars, but that is a huge turnaround from a net loss of 1.4 billion RMB (230 million Dollars) for the comparable 9 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, 1.5 billion US dollars in order to continue to scale up their business. And obviously the valuation has been pegged somewhat to this TenCent purchase, 215 million Dollars for a 15 percent stake gives JD.com a market enterprise value of 1.433 billion Dollars. Which means that the amount that they are raising is basically exactly the same as what they are 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, last year in fact after he had retired from Goldman Sachs, 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 sizeable capital injection in order to scale up. Whilst this is a sizeable acquisition, 215 million Dollars, 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 their stake in due course to 20 percent. Nice. And good for you, the South African shareholders of Naspers, who own 34.9 percent of TenCent. Indirectly now the Naspers shareholders own 5.235 percent 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.