warts and all

This Chinese online retailer’s IPO documents could be a bit too candid

February 4, 2014
February 4, 2014

The prospectus for Chinese online retailer JD.com’s planned $1.5 billion US public offering, filed recently with the Securities and Exchange Commission, offers up a warts-and-all look at the risks of investing in a Chinese internet company. And there are a lot of warts—over 40 pages worth—listed in the “risk factors” section, including:

We don’t really know what we’re doing in some businesses. The company recently expanded into internet finance, providing supply-chain financing to supplier and loans to customers. “We have limited experience in operating an internet finance business,” the prospectus admits.

Losses are piling up, and we may never make money. “We have incurred significant net losses since our inception….We cannot assure you that we will be able to generate net profits or positive cash flow from operating activities in the future.” Specifically, the company’s losses increased from 1.3 billion yuan ($214 million) in 2011 to 1.7 billion yuan in 2012. At the end of 2012 it was 4.2 billion yuan in debt.

Our internal fraud controls are weak. After a 2012 audit, an independent accountant “identified two material weaknesses in our internal control over financial reporting” which indicate “there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.” The company warns: “We may be unable to accurately report our financial results or prevent fraud. “

The appeal of JD.com lies in the company’s phenomenal sales growth, and US investors are expected to see taking a stake in the company as a proxy for China’s growing consumer class. Revenues increased from 2.9 billion yuan in 2009 to 41.4 billion yuan in 2012. Investors already include Saudi prince Alwaleed bin Talal.

The company’s ability to actually list in the US quickly is in doubt, thanks to a recent “US court judgement” that banned the Chinese arms of the big four accounting firms from audits of SEC-registered companies for six months. The firms, including JD.com’s auditor PricewaterhouseCoopers Zhang Tian, are appealing the decision, but it is unclear when the situation is resolved.

Until then, risk-tolerant US investors will just have to wait.

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