JD.com Is Spinning Off Shares of Its Logistics Business

JD.com (JD 2.08%) is the largest online retailer in China. But investors may not know it also runs the largest logistics company in the region. It was formerly a division of its parent company, but now, JD Logistics (2618 0.25%), has been spun off as its own company and trades on the Hong Kong exchange. Since the logistics business has been a strong differentiating factor for the online retailer, is the spin-off a stock that investors should take a look at? On a Fool Live episode recorded on May 26, Fool contributors Brian Stoffel and Brian Withers discuss JD.com's latest quarter and whether this logistics specialist is worth owning.

Brian Withers: Coming on the home stretch, JD.com. JD is continuing to grow in the largest e-commerce market in the world. It added, [laughs] this number is just amazing, 112 million new active users in the last 12 months. That's a 29% gain year over year. What's interesting is most of these new active users, 80% of them came from lower-tier markets. JD is deepening its reach into China's massive market.

Revenue grew 39% year over year, meaning customers are buying more from the platform as they realize the ease of use and the value of the offering. Revenue over the last 12 months was $124 billion. Profits are still small but growth of the profits outpaced the top line at 45%. Their services revenue, which is made up of logistics and advertising, grew faster than product revenue at 73%. It's the highest growth rate of that business in the last five years. It contributed almost 14% to the overall total.

Interestingly enough, this time, it split out the logistics business. This was something that I was interested in seeing because they're planning to split it off. You can see JD retail here on the left is a majority of the overall revenue was up 35%. Logistics here, up to 22, this is RMB, billion for the quarter. It's about a 7 to 1 ratio. It's somewhere in the 3 billion U.S. dollar range. Then this new business over here, the tiny sliver, this is around JD property and some of its other technology and services business. This logistics business is going to be split off as a separate entity for the Hong Kong Exchange. But the overall, JD retail will still own 50% of JD logistics indirectly as it will remain a subsidiary as well.

Brian Stoffel: See, man, I thought we were going to have a fight on air here. Come on.

Withers: We can. Go for it. Tell me. You were interested in this logistics business, right?

Stoffel: Let's clear the five people watching in on what's going on here.

Withers: [laughs]

Stoffel: Brian, beforehand, said he is not that interested in the logistics side of the business, which are just fighting words for me because I'm focused so much on moat. At least, the last time I checked. I sold JD a while ago for a bunch of reasons that have nothing to do with what we're talking about here.

But when I last checked, JD, they controlled everything in the fulfillment. They own the last mile. For those of you who don't know, that means it's a JD employee who brings the package from the mail center to the house, to the apartment, to the condo, wherever, to the farm in rural China. They own that last mile. All those teeny tiny cities or much smaller cities, they're all probably about the same size as our big cities, they own all of that.

If I'm an evil supervillain, [laughs] the whole reason that I'm just like, I'm not even going to try and take on JD, is because they've invested so much money in this, I would have to sink bazillions of dollars to even try and remotely match the skill that they have. I know it cost them a lot of money to build that and they're not done building it. But man, once they're done, that seems like an impenetrable business. But that's my point of view. I'm curious as to Brian, your take on that.

Withers: Yeah. Just to put an emphasis or a stamp on what you said, they own over 800 warehouses across China. I want to say 120,000 delivery people. I mean, just a massive workforce. They own all the pieces of moving those packages around China. What this spin-off does, and they've been partnering with other companies, it allows JD logistics to court customers on their own.

One of the success stories that they talked about was Skechers. Skechers is growing its footprint in China and it wants to be in more places in China. Partnering with a logistics partner who already has a massive set of warehouses and last-mile delivery is a great opportunity for Skechers.

What I look at though is I've been in distribution and logistics a good part of my career. Think about companies like Apple who are really focused on bringing you, the consumer, the best experience in their iPhone or their device. They really are excited about paying for R&D people or great people in their stores to have a good experience at their Genius center or whatnot. But you know what they really don't want to pay for? They don't want to pay for moving their stuff around. They want a logistics partner that's going to deliver it for them [laughs] but like the old Midas commercials, they don't want to pay a lot for it. [laughs]

These logistics partners, unfortunately, end up getting squeezed from the customer-facing brands that use them because as much as we love convenience and whatnot as customers, the product that we're getting is much more important than what it takes to actually physically get it from point A to point B.