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JD Logistics shares see gains fizzle after surging as much as 18% in Hong Kong debut

BEIJING — Shares of JD Logistics, the logistics arm of Chinese e-commerce giant JD.com, rose on Friday as the company debuted on the Hong Kong Stock Exchange.

Shares surged more than 18% at one point, after opening at 46.05 Hong Kong dollars. Much of those gains were later pared, with the stock ending its first trading day in Hong Kong 3.32% higher than its issue price.

JD Logistics priced its IPO at 40.36 Hong Kong dollars per share, the lower end of the expected range. The company raised $3.2 billion in its initial public offering.

The company plans to use the funds raised to invest in its logistics network and infrastructure, CEO Yu Yui told reporters Friday.

He said that in addition to expanding further into less developed parts of China, the company also intends to build up an international logistics business, with air freight development set to reach a “breakthrough” soon.

The logistics unit’s vast network of warehouses and delivery workers in China has given JD a competitive edge against its rival Alibaba, as the Beijing-based company can deliver products to millions of customers within the same day, or the next.

A worker inspects an order at a JD.com delivery station in Yizhuang, Beijing, amid the coronavirus outbreak.

Hilary Pan | CNBC

Logistics is “very important,” as JD competes with rivals on service quality, EY Asia-Pacific IPO leader Ringo Choi told CNBC’s “Squawk Box Asia” on Friday. That, along with incorporating artificial intelligence and robots, will affect the firm’s “future competitiveness” against other e-commerce players.

“Logistic(s) is becoming more important and becoming one of (JD’s) killing weapons in the high competition environment,” Choi said.

JD Logistics’ public listing marks the latest in a series for the parent company, after JD.com itself went public in New York and, subsequently completed a secondary listing in Hong Kong. The company’s health unit, JD Health, was also listed in Hong Kong in December.

JD Logistics earned 73.4 billion yuan ($11.4 billion) in revenue in 2020. But it expects to “record a significant adjusted loss” in 2021. The company disclosed net losses of 4 billion yuan in 2020, greater than the 2.2 billion yuan in 2019.

While JD Logistics has boosted warehouse efficiency with robots and automation, the final delivery leg depends heavily on more than 200,000 human couriers. As a result, the company said labor costs have accounted for more than 40% of total operating expenses and revenue costs for the last three years.

“Any failure to retain stable and dedicated labor by us may lead to disruptions to or delays in our services,” the company warned, noting overall tightening in the labor market and rising wages.

Another risk is heavy reliance on the state of the parent company JD.

JD Logistics has been trying to sell its delivery services to third parties, and counts U.S. shoe company Skechers as a client. But so far its revenue and business have been tied JD, which accounted for more than 50% of the logistics unit’s revenue last year.

When asked about these risks, Yu said he expects the share of revenue from non-JD clients to increase. The CEO said the company incurred losses due to needed investments, and expects the business to move in a “healthy” direction.

Future third-party customers will likely come from businesses selling consumer electronics, home appliances, furniture, autos and other consumer goods, Yu said in an interview with CNBC.

While express delivery will remain a significant part of JD Logistics’ business, Yu said the company aims to sell its warehouse sorting and delivery management technology to customers to cover their entire supply chain.

The end-to-end coverage is JD Logistics’ strategy for standing out against competitors such as SF Express, a giant in China’s express delivery industry. Local start-ups are already selling warehouse management software and equipment.

— CNBC’s Arjun Kharpal contributed to this report.

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