Categories Analysis, IPO, Retail

Can JD.com (JD) gain from separation of logistics unit?

The market is abuzz with reports of China-based e-commerce firm JD.com (NASDAQ: JD) holding talks with banks to spin off its logistics arm, most probably through an initial public offering. The stock has been garnering the market’s attention as it recovers from the recent lows. Having entered 2020 on a positive note, the company will constantly be on the radar of investors.

Related: JD.com Q3 2019 Earnings Conference Call Transcript

Of late, there has been apprehension about the retailer’s financial health as growth stagnated and expenses increased. In the current scenario, separating the capital-intensive JD Logistics might strengthen JD’s overall cash position, which in turn would enhance shareholder value. According to sources, the IPO is likely to happen in the second half of the year and it would value the company at around $30 billion.

Turnaround Hopes

It is estimated that as a stand-alone entity, JD Logistics would perform better, leveraging the ongoing technological innovation and reorganization of operations. That would expedite the unit’s turnaround process and help it emerge from the losing streak.

Also see: Alibaba posts solid Q2 results on strength of retail, cloud

JD has been generating relatively higher revenues by operating its own delivery network and fulfillment centers, unlike rivals who rely on third-party services. The fact that not all the revenue generated under the current arrangement translates into margins justifies the spin-off plan. When it comes to hitting the high-growth path, the recent de-escalation of the China-US trade dispute, which has been a major drag on JD’s growth prospects, bodes well for the company and its stakeholders.

Positive Outlook

After recording double-digit revenue growth across all the key business segments in the third quarter, JD predicted a marked increase in its fourth-quarter revenues. In the most recent quarter, adjusted earnings moved up and topped the Street view. The company also registered a 10% growth in the number of annual active customers as it continued to expand into smaller cities.

Stock Gains

JD.com lost significant market value in the recent past and is currently trading sharply below the record highs seen about two years ago. However, the shares made notable gains this week as the ongoing recovery gathered momentum. The stock, which has been on an uptrend since the beginning of last year, gained 66% since then.

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