In early January, InvestorPlace’s William White highlighted the 13 things to know about JD.com’s (NASDAQ:JD) planned spinoff of its logistics business. After the logistic division’s IPO, the company is considering a secondary offering of JD stock in Hong Kong, following Alibaba’s (NYSE:BABA) November 2019 listing that raised more than $11 billion.
Is there a downside to this move? Let’s have a look at both sides of the argument.
A Hong Kong Secondary Listing Would Be Good for JD Stock
One of the benefits of a Hong Kong listing for Alibaba was that it was added to the Hang Seng Composite Index, which would increase institutional purchases of its stock.
Due to unequal voting rights and its secondary offering, BABA stock is not eligible for the Hang Seng Index, a group of 50 of China’s largest companies. That compares to 481 for the Hang Seng Composite.
However, as InvestorPlace’s Wayne Duggan stated in December, the Chinese are far more familiar with Alibaba, which should push the stock higher in Hong Kong, which will in turn,push it higher in New York.
It’s hard to imagine that the same situation wouldn’t be the case for JD.com.
It’s expected that JD will raise $8 billion to $10 billion for its logistics business. A Hang Seng Composite Index listing would gain billions more, something other U.S.-listed Chinese tech firms are contemplating.
As a result, a secondary listing seems like a no-brainer for CEO and founder Richard Liu.
JD.com’s 28.7% growth in third-quarter revenue, the best showing of the past five quarters, suggests 2020 is going to be an excellent year for the company. A logistics IPO and a Hong Kong listing would be icing on the cake.
The Logistics IPO is Plenty
On January 8, JD priced two SEC-registered bond offerings that raised $1 billion for general corporate purposes. Demand for the two bond tranches was tremendous. The first bond raised $700 million, had a 10-year maturity and paid 3.375%. The second bond was a 30-year maturity, raised $300 million and paid 4.125%.
The 3.375%, 10-year bond attracted $4 billion in orders, while the 30-year bond had $1.3 billion in orders, which means 80% of demand went unfilled. That leaves JD in the enviable position of being able to go back to the debt markets in the future should it need additional capital without further diluting existing shareholders.
At the end of September, JD had just $445 million in long-term debt or 1.3% of its $34.4 billion in total assets or less than 1% of its current market capitalization.
While it might eventually seek a Hong Kong listing, for now, it probably makes more sense to get the logistics business spun-off and attracting a new set of investors before it tries to gain entry to the Hang Seng Composite Index.
That’s especially true given the Hang Seng Indexes Co. has undertaken a review of the rules governing eligibility for the Hang Seng Index. With no financial issues and trailing 12-month free cash flow of $2.84 billion, I believe it makes sense to wait for the review’s findings to be released before taking on a second equity offering.
If JD is an excellent company, as I believe it is, there will be plenty of demand by Hong Kong investors when and if it lists there. In the meantime, it can take advantage of the healthy bond markets.
Whatever it decides to do, JD stock remains a buy.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
