After a lapse of one and a half years, on September 30th, JD Industrial updated its prospectus with the Hong Kong Stock Exchange, planning to go public on the main board.

In March 2023, JD Industrial first submitted its prospectus, at which time the company was still in a state of continuous losses, with net losses of 1.26 billion yuan and 1.27 billion yuan for the years 2021 and 2022, respectively. Reporters from China Business News noticed that the latest submitted prospectus资料显示s that JD Industrial has entered a profitable state since the second half of 2023, achieving a net profit of 4.8 million yuan for the year 2023 (with a net loss of 190 million yuan in the first half of 2023), and a net profit of 290 million yuan for the first half of 2024.

Cao Lei, director of the E-commerce Research Center at the iResearch Institute, stated that as a "latecomer" in China's MRO (Maintenance, Repair, and Operations) procurement service market, JD Industrial's resumption of its IPO has attracted market attention. After submitting its prospectus for the first time, JD Industrial has once again submitted a prospectus to the Hong Kong Stock Exchange after a year and a half of preparation and adjustment, demonstrating its confidence and determination towards the capital market.

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Why were there losses before?

In fact, JD Industrial has not always been in a state of loss. According to the prospectus submitted in March 2023, the total revenue of JD Industrial from 2020 to 2022 was 6.8 billion yuan, 10.35 billion yuan, and 14.13 billion yuan, respectively; with a net profit of 340 million yuan in 2020, and net losses of 1.26 billion yuan and 1.27 billion yuan in 2021 and 2022, respectively. The latest prospectus资料显示s that JD Industrial has been in a profitable state in 2023 and the first half of 2024.

By synthesizing the prospectus materials submitted by JD Industrial twice, it can be seen that from 2020 to 2023, the gross margin of JD Industrial has been relatively stable. Both the beginning year of 2020 and the end year of 2023 were profitable, so why did such a large net loss occur in 2021 and 2022?

The prospectus资料显示s that the operating costs of JD Industrial from 2020 to 2023 were 5.42 billion yuan, 8.42 billion yuan, 11.59 billion yuan, and 14.54 billion yuan, respectively, with gross margins of 20.3%, 18.6%, 18.0%, and 16.1%. In the first half of 2023 and 2024, the operating costs of JD Industrial were 5.89 billion yuan and 7.16 billion yuan, with gross margins of 17.8% and 16.9%, respectively.

In addition to operating costs, there are fulfillment expenses, sales and marketing expenses, R&D expenses, general and administrative expenses, etc.

A close examination reveals that in 2021, the general and administrative expenses of JD Industrial suddenly increased significantly, and the fair value changes of convertible preferred shares were quite large in 2021, 2022, and the first half of 2023.

The prospectus shows that the general and administrative expenses of JD Industrial from 2020 to 2023 were 46.315 million yuan, 780 million yuan, 140 million yuan, and 310 million yuan, respectively, accounting for 0.7%, 7.5%, 1.0%, and 1.8% of total revenue. It can be seen that the general and administrative expenses of JD Industrial in 2021 were much higher than other years in both absolute terms and proportion, where exactly did this huge expense go?JD Industrial, in its prospectus, stated that the significant decrease in general and administrative expenses in 2022 was mainly due to a substantial reduction in share-based compensation expenses. Upon reviewing the prospectus materials, it was found that this large amount of general and administrative expenses in 2021 pointed to a share-based compensation expense for Liu Qiangdong. In 2021, JD Industrial granted a share-based compensation expense of up to 680 million yuan to non-executive director Liu Qiangdong.

Relevant data indicates that JD Industrial has been an independent business unit of JD Group since July 2017, operating in the industrial supply chain technology and services business. Prior to its first submission of the prospectus, JD Industrial completed a Series B financing round in March 2023. The latest prospectus materials show that JD Group (controlled by Liu Qiangdong) indirectly holds the rights to approximately 1.944 billion shares of JD Industrial through its subsidiaries, accounting for about 78.84% of the total issued share capital of JD Industrial.

Additionally, Max I&P Limited, a company controlled by Liu Qiangdong, also holds approximately 90.63 million shares of the share awards that have vested to Liu Qiangdong (with a weighted average fair value of $1.18 per share on the grant date), accounting for about 3.68% of the total issued share capital of JD Industrial.

The prospectus materials show that JD Industrial began adopting an equity incentive plan starting in 2021, and the restricted share units granted in 2021 vested immediately on the grant date. However, from 2022 onwards, the share options granted are typically planned to vest over a period of 1 to 6 years.

It can also be observed that the fluctuations in the fair value of convertible preferred shares have an impact on JD Industrial's net profit. In 2021, 2022, and 2023, the changes in the fair value of convertible preferred shares were 920 million yuan, 1.92 billion yuan, and 530 million yuan, respectively, accounting for 8.9%, 13.6%, and 3.1% of total revenue. In the first half of 2023 and the first half of 2024, the changes in the fair value of convertible preferred shares were 470 million yuan and 9.08 million yuan, respectively, accounting for 6.6% and 0.1% of total revenue.

JD Industrial stated in its prospectus that adjusted profit, which excludes the potential impact of items that management believes do not reflect the operating performance of the company, facilitates the comparison of different periods and the operating conditions of different companies. JD Industrial defines adjusted profit as the profit from continuing operations for the year, excluding share-based compensation expenses and changes in the fair value of convertible preferred shares.

From 2020 to 2023, JD Industrial's adjusted net profits were 440 million yuan, 500 million yuan, 710 million yuan, and 900 million yuan, respectively. The adjusted net profits for the first half of 2023 and the first half of 2024 were 410 million yuan and 515 million yuan, respectively.

Challenges Faced by JD Industrial

According to the disclosures in the prospectus, the net proceeds from this IPO by JD Industrial will mainly be used to further enhance industrial supply chain capabilities; expand the business across regions; potential strategic investments or acquisitions; and for general corporate purposes and working capital needs.

Since 2017, JD Industrial has been focusing on the supply chain technology and services business for MRO procurement services.According to a report by China Insights Consultancy, China leads the global supply chain market, with the largest global market size of 10.9 trillion yuan in 2023. However, the digital penetration rate of China's supply chain market was only 5.9% in 2023, and it is expected to reach 8.5% by 2028.

In recent years, the transaction scale of China's industrial B2B e-commerce has maintained rapid growth, and industrial e-commerce has also attracted significant attention from the capital market. Data from the "Dianshobao" e-commerce database shows that from 2022 to the present, 18 platforms in China's industrial e-commerce sector have obtained financing, with a total amount of approximately 6.97 billion yuan. The invested parties include Ant Factory, Ouyi Industrial Products, Yuetaotao Mall, Zhenkunxing, and Yimai Industrial Products, among others.

Cao Lei pointed out that as a "latecomer" in industrial e-commerce, JD Industrial has a huge market size and growth potential but still faces competition from traditional industrial product distributors, other industrial e-commerce platforms, large-scale comprehensive e-commerce platforms, and international industrial e-commerce giants.

The prospectus shows that from 2020 to 2023, JD Industrial's total revenue was 6.8 billion yuan, 10.35 billion yuan, 14.13 billion yuan, and 17.34 billion yuan, respectively. The compound annual growth rate of JD Industrial's operating income from 2021 to 2023 was 29.4%. However, as the scale expands, the year-on-year growth rate of JD Industrial's operating income from 2021 to 2023 is declining.

In terms of revenue composition, JD Industrial's revenue is divided into two main parts: product sales revenue and service revenue. From 2020 to 2023, JD Industrial's product sales revenue was 6.23 billion yuan, 9.47 billion yuan, 12.94 billion yuan, and 16.12 billion yuan, respectively; service revenue was 570 million yuan, 870 million yuan, 1.2 billion yuan, and 1.22 billion yuan, respectively. In terms of revenue proportion, from 2020 to 2023, the proportion of product revenue in total revenue was 91.7%, 91.6%, 91.5%, and 93.0%, respectively; the proportion of service revenue in total revenue was 8.3%, 8.4%, 8.5%, and 7.0%, respectively.

It can be seen that in the past few years, the proportion of JD Industrial's product sales revenue has always been above 90%, and the proportion is still expanding, while the proportion of service revenue is declining. A careful review of the prospectus data shows that JD's service revenue is divided into two parts: transaction platform service revenue and advertising and other service revenue. Among them, the proportion of advertising and other service revenue in total revenue has always been relatively stable, while the transaction platform service revenue has been declining year by year. From 2021 to 2023, the proportion of transaction platform service revenue in total revenue was 4.9%, 4.6%, and 3.2%, respectively; the data for the first half of 2023 and the first half of 2024 were 4.2% and 2.3%, respectively.

In addition, JD Industrial's gross margin also shows a declining trend. From 2020 to 2023, JD Industrial's gross margin was 20.3%, 18.6%, 18.0%, and 16.1%, respectively. The gross margin for the first half of 2023 and the first half of 2024 was 17.8% and 16.9%, respectively.

Issues such as operating income growth rate, transaction platform service revenue, and gross margin may all be challenges faced by JD Industrial's future development. However, according to the report by China Insights Consultancy, JD Industrial has become the largest participant in China's MRO procurement service market. According to the transaction volume in 2023, JD Industrial ranks first in the market, with a scale twice that of the second place.

"To maintain its competitive advantage, JD Industrial needs to strengthen supply chain integration and optimization, improve user experience and service levels, expand product lines and value-added services, strengthen brand building and market promotion, and continue to invest in technological innovation and R&D." Cao Lei also pointed out that the future of industrial e-commerce will show trends such as continuous expansion of market scale, obvious intelligence trend, accelerated global layout, strengthened supply chain integration and optimization, improved user experience and service levels, and strengthened brand building and market promotion. These trends will promote the rapid development and transformation of the industrial e-commerce industry, bringing unprecedented opportunities and challenges to enterprises in the industry.