JD.com (JD 2.08%), the largest direct retailer in China, is currently in the process of spinning off three of its non-core businesses via IPOs: JD Health, JD Digits, and JD Logistics.
JD Health, which the company has already closed the books on, will start trading in Hong Kong on Dec. 8. JD Digits filed its IPO in Shanghai in September, but tighter fintech regulations have postponed its debut. JD Logistics is reportedly in preliminary talks with banks to file its IPO in Hong Kong.
Those moves all complement JD's own secondary listing in Hong Kong in June, which was filed in response to rising trade tensions and the ongoing threats to delist U.S.-listed Chinese stocks. Let's take a closer look at these three spin-offs and see how they'll affect JD's U.S. investors.
Image source: Getty Images.
1. JD Health
JD Health sells pharmaceutical products, medical supplies, vitamins, and other healthcare products online. It also provides telehealth services from hundreds of doctors.
Its pharmaceutical retail business has 72.5 million annual active users, and its entire platform has served over 150 million cumulative users. It controls nearly 30% of China's online pharmacy market, according to Frost & Sullivan.
JD Health's top competitors include Alibaba's (BABA 2.59%) Ali Health, Tencent's (TCEHY 3.56%) affiliate WeDoctor, and Ping An's (PANH.F 50.48%) Good Doctor. The pandemic generated strong tailwinds for all four online healthcare services, as more people stayed home, stocked up on medical supplies, and avoided in-person doctor visits.
As a result, JD Health's revenue surged 76% year over year to 8.8 billion yuan ($1.3 billion) in the first half of 2020, and it generated a net profit of 370 million yuan ($58 million). That's equivalent to about 3% of JD's revenue and 2% of its net income during the first half of the year.
JD will still own an 81% stake in JD Health after its public debut. It's expected to raise $3.5 billion, with a valuation of $28.5 billion -- making it Hong Kong's biggest IPO of 2020.
2. JD Digits
JD Digits offers consumer loans and supply chain financing for companies. JD owns 37% of the fintech affiliate, which planned to raise $2.9 billion in Shanghai with an initial valuation of about $29 billion.
Its revenue rose 33% to 18.2 billion yuan ($2.8 billion) in 2019 and hit 10.3 billion yuan ($1.6 billion) in the first half of 2020. It serves about 600 financial institutions, 700 large business centers, 200,000 small and medium-sized businesses, and 1 million "small and micro" enterprises. It also provides a smart city operating system with marketing technologies for over 300 cities across China.
JD Digits generated an adjusted net profit of 790 million yuan ($120 million) last year and 387 million yuan ($59 million) in the first half of 2020. But the company is still unprofitable on a GAAP basis.
Earlier this year, JD Digits seemed poised to benefit from Alibaba-backed Ant Group's IPO. Unfortunately, Ant's IPO collapsed last month after Jack Ma, Alibaba's co-founder and leading Ant investor, criticized China's state-backed banks.
JD Digits' microlending business already faced regulatory scrutiny prior to Ant's IPO, and its failure sparked the creation of even tougher rules for fintech platforms. As a result, it's now unclear if JD Digits will still go public.
Image source: JD.com.
3. JD Logistics
JD Logistics, which operates JD's logistics network and fulfillment services, has operated as a stand-alone business since 2017. It currently operates over 800 warehouses, fulfillment centers in eight cities, and front distribution centers in 31 cities. It also fulfills deliveries for third-party customers.
Its network covers "almost all" counties and districts across China, and has been increasingly automated with warehouse robots, driverless vehicles, and delivery drones.
JD doesn't disclose JD Logistics' financials separately. The segment is included in the "new business" unit, which generated $1.6 billion in revenue, or about 6% of the company's top line, last quarter. That business is still unprofitable, and it incurred an operating loss of $101 million last quarter.
JD hasn't officially announced the unit's potential IPO yet, but it could raise "at least" $5 billion, with a valuation of $40 billion, according to Bloomberg. JD's latest report also suggests JD Logistics' margins are expanding as it accepts more orders from third-party customers, but we won't know more until it pulls back the curtain.
The key takeaways
For now, JD's U.S. investors should mainly pay attention to JD Health's IPO. They won't receive any of the Hong Kong-listed shares after the IPO, but the profits should boost JD's free cash flow.
JD will still control JD Health, and its revenue and profits will still flow back to its parent company. Not much will change right away for JD's investors, but JD Health could fund its future investments and acquisitions with its own stock -- which could boost JD's own margins.
JD Digits seems dead in the water for now, while it's futile to speculate on the future of JD Logistics. But the goals of all three spin-offs are the same: to streamline JD's core business, raise fresh cash, and reduce its overall dependence on U.S. exchanges during the ongoing trade war.
