Why we probably won’t see a 2013 IPO from Chinese e-commerce giant 360buy

March 19, 2013
March 19, 2013

There is a lot of hype around China’s 360buy Group, sometimes called the “Amazon of China,” including speculation that the online shopping site is gearing up for an IPO. However, a source in the industry told Quartz, an IPO is not in the cards for 2013. And there are several reasons why 360buy should in fact wait even longer.

While IPO rumors have come and gone, the latest reason for the speculation is the similar chatter about Alibaba Group, China’s largest e-commerce company and 360buy’s biggest rival. (Alibaba’s TMall is thought to have some 45% of the business-to-consumer (B2C) market share, compared with 360buy’s 17%.) Some say an imminent Alibaba listing puts pressure on 360buy to move first in order to beat Alibaba to the punch.

But investors in an IPO will ask whether 360buy can make a real profit, and some analysts doubt it. 360buy follows an Amazon model when it comes to logistics and, as a result, it is burning through cash to expand its capacity in deliveries, warehousing and inventory. Furthermore, many of its products are low-margin electronic goods. That pits it against Suning Appliance, a brick-and-mortar retailer listed in Shanghai which is breaking into e-commerce, and is planning to spend $3.5 billion on ramping up.

Alibaba follows a different model—one that’s high-margin and low-cost. That means apple-to-apple comparisons with 360buy aren’t entirely appropriate. Alibaba’s TMall is a collection of thousands of virtual stores for brands like Prada, Gucci, Gap and, as of yesterday, Microsoft. Those stores handle the deliveries, which means Alibaba doesn’t rack up high capital costs; the company doubled its net income to $273 million in the second quarter of last year. As a result, for Alibaba an IPO is logical for funding its growth. The company may go public in the fourth quarter this year, though no decisions have been made, according to sources.

Where 360buy sees TMall’s Achilles heel, the source told Quartz, is in logistics. TMall doesn’t handle deliveries, so it’s unusually vulnerable to bottlenecks in China’s backward parcel delivery system. It recently formed a coalition with delivery and real estate companies to help get around this. 360buy wants to invest in warehousing and logistics to give itself a competitive edge, the source said.

Last month 360buy raked in $700 million in its latest fundraising round—enough cash to make the final push toward profitability and making a public listing a medium-term goal, the industry source said. CEO Richard Liu said he expects to be profitable only in 2014 (link in Chinese), though the source said that could happen as soon as the end of 2013. But most of that $700 million will go into building up its logistics, putting further pressure on its already low-margin business and making an IPO premature. Another sign that it’s too early for 360buy to consider listing is that valuation estimates have been in flux, when they normally go steadily up for a company in pre-public mode.

All this suggests 360buy isn’t ready to start unveiling its financials, much less go on a road show to pitch the company. If it sells itself too early to investors, it risks having its IPO become a flop. Even if Alibaba beats it to going public, 360buy is better off waiting to solidify its business first.

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