JD.com Bodes Well For Alibaba Group, But Also A Threat

Investor's Business Daily

JD.com shares rose 10% in their debut on Thursday after pricing the year's third-largest U.S. initial public offering, setting the table for Alibaba Group's blockbuster new issue.

The strong support for one of China's top e-commerce firms indicates renewed interest in Internet stocks, which have slumped with other growth stocks during the current market correction.

"It shows investors' willingness to own high-risk growth stocks," said Bill Whyman, analyst at International Strategy & Investment. "Internet stocks have been under pressure and to see this IPO in an area where the market has been most concerned is a positive sign.

JD.com (JD) has a business model similar to Amazon.com (AMZN). It sells a broad range of goods online that it delivers to customers.

JD.com late Wednesday priced its IPO at 19, above its expected range of 16-18. It sold 93.7 million shares, raising $1.78 billion. The stock hit 22.80 early, closing at 20.90, up 10%.

That follows the IPO of Chinese online beauty products retailer Jumei (JMEI) last week. As China's largest online retailer of beauty products, Jumei also priced above the high end of its range and finished its first day day up 10%. Priced at 22, shares fell 7% Thursday at 22.54.

Chinese real estate site Leju (LEJU), an April IPO, hit a new high intraday Thursday. Several other China Internet stocks also did well Thursday amid JD.com's debut and upbeat economic data.

Several U.S. Internet stocks also shined Thursday, including Google (GOOGL) and Zillow (Z).

JD.com is China's largest direct sales website in terms of transaction volume, processing $20.7 billion in gross merchandise volume in 2013. Electronics and home appliances accounted for 64%.

Sales rose 67% last year to $11.4 billion. The company had an operating loss of $96 million and a net loss of $8 million — though red ink has been shrinking.

The company says it has 47.4 million active customers, up 62% in the past year. It has 86 warehouses in 36 cities and 1,620 delivery stations in 495 cities.

Alibaba looms large on the horizon. China's e-commerce emperor has filed for an IPO that could raise $20 billion or more, analysts say, topping Visa (V) and Facebook (FB) as the largest U.S. new issue ever.

But JD.com poses a growing threat for Alibaba.

Tencent invested $1.3 billion as a private placement alongside the JD.com IPO, raising its stake to 20%. The companies forged a strategic partnership in March to help counter Alibaba. Tencent, which trades on the Hong Kong stock exchange and reported sales of $10 billion last year, is Alibaba's main rival.

Tencent offers a wide variety of Internet services in China, in cluding instant messaging, social networking, games and media. It owns WeChat, a full-featured mobile app platform with 396 million monthly active users.

"The combination of JD.com and Tencent provides some interesting cross-selling opportunities," said Brendan Ahern, managing director of KraneShares, a China-focused provider of exchange traded funds.

"What we are seeing is a land grab by firms trying to build their brand and audience to gain market share in a very competitive market in China," he said.

China has about 618 million Internet users, more than double that of the U.S. Some 53 million logged onto the Web for the first time last year.

JD.com's IPO valued the company at $26.4 billion. Tencent has a $134 billion market cap, nearly equal to Amazon's $140.3 billion.

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