INTERNET: JD Marches Towards Profits, Ties With Tuniu

Bottom line: JD.com’s latest results show it could reach profitability on an operating basis later this year, while its new tie-up with Tuniu looks like a well-conceived plan that reflects a growing wave of equity tie-ups among Chinese Internet firms.

JD’s loss narrows, ties with Tuniu

China’s second largest e-commerce firm JD.com (Nasdaq: JD) has been busy wowing investors these last few days, starting with its latest quarterly ressults that shows it is making strong progress in moving towards sustainable profits. Meantime, the company has also become the largest individual stakeholder in online travel site Tuniu (Nasdaq: TOUR) through its participation in a deal that saw Tuniu raise $500 million by selling shares to a larger group of investors.

Wall Street greeted the pair of news stories with mildly positive reaction, bidding up JD.com shares by 2 percent after the reports came out. The stock has rallied nearly 50 percent this year and is 77 percent above its IPO price from a year ago, as investors grow more bullish on this company that is China’s biggest challenger to the much larger Alibaba (NYSE: BABA). Tuniu shares also got a nice lift from the news, rising 4.5 percent.

The Tuniu tie-up is the latest in a series of deals that have seen China’s online companies increasingly link up through large but not majority stakeholdings in each other. JD is a good case in point, as the company itself sold such a large stake of itself last year to leading social networking service (SNS) provider Tencent (HKEx: 700). Alibaba has also been active in this investment pattern, buying large strategic stakes in names like SNS giant Sina Weibo (Nasdaq: WB) and online video leader Youku Tudou (NYSE: YOKU).

I’ll return to more discussion of this kind of strategic tie-up shortly, but let’s start first with a look at JD’s latest results that are the main driver behind the stock’s modest rally in the latest trading session. In this case it was JD’s top and bottom lines that got investors most excited, with the company’s revenue and operating loss rising and shrinking by considerable amounts, respectively.

On the top line, JD’s revenue jumped more than 60 percent to 36.6 billion yuan ($5.9 billion) in the first quarter of this year. (company announcement) Its operating expenses grew at a slower 41 percent rate as it got costs under control, with the result that its operating loss shrank to 822 million yuan, from 3.85 billion yuan a year earlier. The strong figures were slightly tempered by JD’s guidance that revenue growth in the current quarter would slow slightly to 52-56 percent.

Next let’s look at the big deal that saw Tuniu announce it would issue $500 million in new shares to a group led by JD.com, which will buy $350 million of those through a combination of $250 million in cash and $100 million in other resources. (company announcement) Others in the investor group included leading Chinese travel services site Ctrip (Nasdaq: CTRP), and a number of private equity investors such as Singaporean sovereign wealth fund Temasek.

JD will become Tuniu’s largest single shareholder after the deal, with 27.5 percent of the company. As part of the tie-up, Tuniu will become the exclusive operator of JD.com’s travel channel on its website and mobile app for 5 years, and will become JD’s preferred partner for hotel and air ticket booking services. That arrangement shows that the pair will work closely together, though the time limit also indicates they could end their alliance after 5 years depending on how well they work together.

That kind of arrangement is emerging as the norm for many of these new equity tie-ups between Chinese Internet companies, which prefer to maintain their independence while also forging strong exclusive partnerships. Such a strategy looks relatively sound, as it will allow many of these companies’ entrepreneurial founders to keep running their shops while also pooling resources with others. I do expect some of these alliances will ultimately turn into outright acquisitions while others will end in divorce, with perhaps a 50-50 ratio for success in this growing round of strategic tie-ups.

Related posts:

(Visited 119 times, 1 visits today)