Closer Look: JD.com, Tencent Both Have to Like their Big Deal
(Beijing) – After much speculation, the deal is done. Tencent Holdings will buy 15 percent of China's second largest e-retailer, JD.com Inc., for US$ 215 million and give some of its e-commerce businesses to the latter.
Tencent's statement on March 10 confirmed rumors that have swirled for three weeks. Speculation of a partnership with Tencent has changed the discussion about JD.com's planned listing in the United States.
The deal would see JD.com take on several e-commerce businesses under Tencent, including full stakes and the logistics teams of business-to-consumer shopping site QQ Wanggou and consumer-to-consumer shopping site Paipai.com. It will also get a minority stake in Yixun.com, which specializes in home electronics.
Tencent will give JD.com prominent placing on WeChat, the country's most popular messaging app, and share the Tenpay payment service that is built into WeChat to improve the online shopping experience.
The partnership boosts the expected value of JD.com's IPO to at least US$ 8 billion, analysts say.
JD.com filed an IPO application with the U.S. Securities and Exchange Commission on January 30. It will likely start its road show in April after releasing an audited annual financial report for 2013. Many analysts say JD.com wants to avoid listing at the same time as Alibaba out of fear the industry leader will steal its thunder.
Before the news of the partnership, many investors preferred Alibaba to JD.com because the former is more profitable. Part of this is because JD.com has to invest in logistics and inventory management. Unlike Alibaba's Tmall, which serves as a platform for businesses to sell their wares, JD.com has to buy products and store them in its warehouses. This comprises the majority of its inventory.
Despite the difference in operating models, the two companies rely on economies of scale to keep costs down, but JD.com lacks an edge in this area. "JD.com counts on the scale of its traffic flow and user numbers, and it is competing with Alibaba on those," a veteran analyst at an Internet company said. Relying on a search engine to drive traffic is not enough to beat Alibaba, the source said.
JD.com has raised a stunning US$ 1.88 billion with five rounds of fundraising. But foreign investors worry about a lack of room for further appreciation if JD.com cannot innovate and transform into an Internet company.
"JD.com, of course, wants to be seen as the future Chinese Amazon.com, but the idea needs to be sold hard to investors," said a source at an investment company who is familiar with JD.com.
Amazon's data processing and systems are evidence of its status as a Net company, but JD.com is just a retail company that is active on the Internet, the source said.
Even if investors buy JD.com's Amazon story, it is at best a beta version of Amazon, which means its valuation could suffer a cut of 50 percent, analysts say.
But with Tencent on its side, this could change. For starters, JD.com's services will gain prominent positions on WeChat and integrate several e-commerce services under Tencent. All of this will bring new traffic to JD.com.
Tencent is known for its large, unified user base and high degree of user loyalty. The successful transition of WeChat into a platform offering various services – such taxi hailing, e-shopping and e-investments – proves this.
"If JD.com can get support from Tencent, which has a huge advantage in platform services, it could gain users and traffic from the shareholder, making its economies of scale much more powerful," the analyst at an Internet company said. "The deal would also boost JD.com's IPO valuation."
Although Tencent cannot change JD.com's business model, which includes the large demands for capital that logistics and inventory management require, it can inject so-called "Internet DNA" into the e-grocer. This could inspire investors. JD.com might also develop an app or services with Tencent, which would no doubt be better than its current app.
Analysts do worry about potential differences in the companies' approaches. "JD.com perhaps wants to rely on its own payment service and continue to expand it, but Tencent probably hopes to use JD.com to promote its Li Cai Tong," the source from an Internet company said, referring to an e-investment service offered by Tencent.
Overall, though, Tencent should be pretty happy. It exchanged e-commerce units short on popularity for shares in JD.com, a deal that its investors will easily see as worthwhile.
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