JD.com (JD 2.61%), the largest retailer in China, is reportedly in talks to spin off its logistics unit in an overseas IPO, according to Reuters. Let's discuss four key things investors should know about this potential spin-off.
1. It's operated as a stand-alone business for two years
Unlike its rival Alibaba (BABA 1.53%), which relies on third-party logistics services which it owns stakes in, JD owns and operates its own logistics network and fulfillment centers. JD also stocks its own inventories, while Alibaba's online marketplaces don't.
As a result, JD generates much higher revenue than Alibaba, but operates at much lower margins. The bears often claimed that JD Logistics was too capital-intensive, and Alibaba founder Jack Ma once proclaimed that JD's business model would end in a "tragedy".
Back in 2017, JD split JD Logistics into a stand-alone business unit and offered its services to third-party companies. The following year, the unit raised $2.5 billion from big investors -- including Hillhouse Capital Group, Sequoia Capital China, Tencent, and China Life Insurance -- which valued it at $13.5 billion.
2. An increasingly automated network for 24-hour deliveries
JD Logistics' network -- which includes over 650 warehouses in 89 cities, seven fulfillment centers, and front distribution centers in 29 cities -- can fulfill roughly 90% of JD's direct sales orders in China within 24 hours. It's also been testing out "flash deliveries" in several regions that can fulfill certain orders within an hour.
JD accomplishes this with a growing fleet of warehouse robots, autonomous vehicles, and delivery drones. Its autonomous delivery vans cruise the streets of about a dozen Chinese cities, and it offers drone deliveries in several Chinese cities and other Asian markets.
JD Logistics was also "top-ranked" in customer satisfaction in a recent survey by the State Post Bureau. The network's positive reputation and massive scale are attracting plenty of attention -- 40% of JD Logistics' revenue now comes from external customers, up from just 20% two years ago.
3. Its revenue is surging, but it's still unprofitable
JD operates JD Logistics as a stand-alone unit, but still doesn't report its revenue and profits separately. Its third-party logistics revenue remains bundled with its other smaller businesses -- including its cloud, digital health, and overseas divisions -- in its "new businesses" unit.
Revenue from that unit rose 62% annually to 5.88 billion yuan ($823 million) last quarter, or 4% of its top line. Its operating loss narrowed from 1.54 billion yuan to 1.27 billion yuan ($178 million), compared to an operating profit of 4.97 billion yuan ($696 million) for the whole company.
JD Logistics' losses will likely continue to narrow as it attracts more external customers, automates its network, and downsizes its massive human workforce, which included 116,427 delivery workers, 37,217 warehouse workers, and 15,574 customer service personnel last quarter.
The unit's expanding gross margins, along with rising revenue and tighter cost controls at JD Retail, enabled JD to post positive GAAP operating margins over the past three quarters. Therefore, a full spin-off of JD Logistics would stabilize JD's margins and defy the "tragic" outcome Jack Ma once predicted.
4. A $30 billion valuation
JD Logistics reportedly wants to raise $8 billion to $10 billion in its IPO, which could equal a valuation of up to $30 billion. That valuation might seem lofty, since JD only has an enterprise value of $53 billion -- but investors should note that JD still trades at just 0.6 times next year's sales.
JD still trades at a discount due to previous concerns about its slowing growth, rising expenses, and a scandal involving its founder and CEO. However, most of those headwinds have dissipated -- JD's revenue growth has accelerated for two straight quarters, its profitability has improved, and the charges against its CEO were dropped.
JD Logistics could file its IPO in the second half of 2020. If JD's core business continues to improve, it could convince plenty of investors to support JD Logistics' public debut.