JD.US 9618.HK

China’s No. 2 e-commerce company has announced plans to spin off its industrial and property units, but will retain majority control of both for strategic reasons

Key Takeaways:

  • JD.com has proposed a plan to spin off its JD Industrials and JD Property units, with each filing for separate Hong Kong IPOs
  • More tech giants are expected to follow the lead of JD.com and Alibaba in spinning off businesses, but it is unclear whether that will satisfy China’s anti-trust regulator

  

By Trevor Mo

JD.com Inc. (JD.US; 9618.HK) has touted a plan announced last week to spin off two of its units, saying the move will create opportunities for people who might want to invest in its property and industrial divisions as they prepare for separate IPOs. It added the plan will be good for JD.com as well because splitting off the two businesses will let it focus on its core e-commerce operations.

But a major unspoken subtext underlying the announcement, and a similar one just days earlier that saw rival Alibaba (BABA.US; 9988.HK) say it would split itself into six distinct business units, was whether such steps might appease Chinese regulators that have grown increasingly distrustful of the power wielded by the nation’s big tech companies.

JD.com didn’t offer up a detailed reorganization plan like Alibaba. But the move still marks another step to win good will from regulators following a recent prolonged crackdown on companies from many of China’s tech sectors. The latest breakup announcements by both companies add to a list of various other businesses they have spun off as separately operating entities. JD.com certainly hopes that spinning off more businesses will make itself look smaller to Beijing, which worries about monopolistic practices by China’s Big Tech firms.

But the companies may find that regulators are unconvinced, at least if their purpose is to prove they are really “breaking up.” That’s because both JD.com and Alibaba are likely to retain controlling stakes of their various businesses being spun off to stand on their own. We’ll examine whether such plans will be sufficient to appease regulators shortly.

But first we’ll look more closely at the two operations JD.com is spinning off. Both of those, JD Industrials and JD Property, were nurtured internally to provide services for JD.com’s own needs before starting to serve third-party clients. JD Industrials operates a B2B platform connecting industrial suppliers and buyers, while JD Property specializes in infrastructure management and operations in areas such as logistics parks and business parks.

According to its IPO prospectus filed in Hong Kong, JD Industrials’ revenue rose 36.9% to 14.1 billion yuan ($2 billion) in 2022 with net losses of 1.3 billion yuan. JD Property’s prospectus shows its revenue doubled to 2.3 billion yuan, with a profit of 2.2 billion yuan over the same period.

Will spinoffs suffice? 

The new spinoffs would continue a trend for JD.com, which already has several other separately listed units for its wide-ranging businesses. Apart from its main U.S.- and Hong Kong-listed JD.com, the company currently has two other listed units: JD Health (6618.HK) and JD Logistics (2618.HK). It is also in the process of a similar spinoff for its fintech business, JD Technology, which is reportedly eying its own public listing.

Despite efforts to introduce outside capital, JD.com remains in clear control of most of its spinoffs. It currently holds 67.62% and 63.55% of JD Health and JD Logistics, respectively, according to enterprise information site Qichacha. Its new IPO filings for JD Property and JD Industrials show it will hold more than 50% of both firms after completion of the proposed spinoffs as well.

It’s not hard to understand why JD.com insists on maintaining control of its spinoffs, since they still play an important supporting role in its core e-commerce business. For example, the strong reputation for reliability enjoyed by JD’s core e-commerce service owes in no small part to support from its in-house logistics unit. As its spin-offs add third-party customers, JD.com can also enjoy the added revenues without giving up control of its offspring companies.

Then there’s the previously mentioned issue of trying to look smaller, and whether the new breakups will please regulators, or simply irk them instead. Alibaba will face the same issue as it also plans to retain a controlling stake of all six businesses under its reorganization plan.

According to that plan, each of Alibaba’s units will have its own management team and autonomy to set business strategy. Five of the units will also have the option to raise outside capital and become separately listed one day. One of those, Alibaba’s Cainiao Network Technology logistics arm, has already started preparations for an IPO in Hong Kong, Bloomberg reported last week.

While reducing themselves may make them look smaller, the companies will have to also convince regulators that they aren’t monopolistic in terms of market share and how they wield their power. For example, companies that operate in smaller markets but have an overly large share can also raise regulatory waves if they decide to raise prices and find other ways to take advantage of their clout at the expense of smaller rivals.

While regulatory response remains to be seen, other Chinese tech giants, from Tencent (0700.HK) to Meituan (3690.HK) and ByteDance, are likely to follow Alibaba’s and JD.com’s lead. Perhaps in anticipation of that, shares of other tech giants, including Tencent, surged last week on anticipation that some of them might explore similar actions.

Regardless of JD.com’s actual motivations with its two new spinoffs, investors liked what they saw, at least initially. JD.com’s shares gained 7.8% last Thursday after the announcements, marking their best day in nine months. But the enthusiasm was fleeting, and the company’s shares later gave back all the gains over the following days. The reality is that Beijing regulators are notoriously fickle and not transparent. Accordingly, any early enthusiasm that the breakups might mitigate the chances of future regulatory clashes were probably quickly offset by realism that Beijing’s stance will be difficult to gage.  

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