The biggest IPO you've never heard of

By The Wall Street Journal

A Chinese company few Americans have heard of is gearing up for what could be the largest Internet IPO in U.S. history.

The company, Beijing Jingdong Century Trading, runs 360buy.com, a fast-growing online-shopping site that sells a broad range of goods, mostly directly to consumers, much like Amazon.com (AMZN). This business-to-consumer​ part of China's online shopping market is expected to expand more than fivefold to 650 billion yuan ($100 billion) over the next three years, according to Beijing research firm Analysys International.

Jingdong hopes to raise as much as $4 billion to $5 billion from an initial public offering in the first half of 2012, people familiar with the situation said last week. If it succeeds, it would overtake Google (GOOG), whose $1.9 billion IPO in 2004 makes it the current record holder for Internet companies.

Jingdong declined to comment on any possible IPO.

The deal offers a shot at rich fees for IPO bankers who have been largely sidelined by the choppy market this summer. Bankers from several major securities firms recently flew to Beijing to vie for the assignment in a so-called "bakeoff" competition, expected late this week.

Market weakness in the months ahead or investor wariness toward China stocks could trip up Jingdong's plans. Many Chinese stocks that listed in the U.S. earlier this year are trading at less than their IPO prices, thanks in part to a spate of accounting scandals.

A battle for China shoppers

In addition to setting a new benchmark for IPOs, a successful Jingdong deal could heat up an intensifying rivalry between the company and Alibaba Group Holding Ltd.'s Taobao, long China's undisputed champion of online shopping.

The unlisted Alibaba Group, in which Yahoo (YHOO) owns a roughly 40% stake, was largely responsible for building the Chinese Internet shopping market, famously besting online auctioneer eBay (EBAY) in China by launching a similar website, called Taobao, that doesn't charge fees to its sellers. Taobao, which has said it is profitable, makes its money by selling ads and logistics and other support services to its merchants.

Today most of the money Chinese consumers spend on online purchases of everything from clothing to furniture and cellphones flows through Alibaba Group's sites. Total transactions on those sites last year neared 400 billion yuan, or around $62.5 billion. Taobao doesn't disclose its financial results.

Jingdong, which has more than 12,000 employees, isn't yet profitable. But much as happened in the U.S., Chinese consumers have started gravitating toward sites like Jingdong's 360buy.com that warehouse and ship goods themselves, rather than simply match buyers and sellers.

Revenue at Jingdong rose to nearly $1.6 billion last year, up from nearly $626 million in 2009, a company spokesman said.

From storefront to the Web

The company began as a brick-and-mortar electronics retailer. Founder Liu Qiangdong, who the company says is 37 years old, started 360buy.com in 2004 after he was forced to close his Beijing stores the previous year because of an outbreak of severe acute respiratory syndrome, or SARS, which hammered retailers as shoppers avoided crowded areas like malls.

Unlike Taobao, which generally doesn't handle deliveries of items purchased on its sites, Jingdong ships directly from shipping facilities reaching 130 cities, and handles about 70% of its own delivery. It outfits employees with satellite-based tracking devices so customers can track everything from what time their purchases were packed to which subway station their delivery person departed from -- and how to reach that person by cellphone.

Taobao, however, remains a powerhouse, and it hasn't been standing still. Three years ago, it opened an online shopping mall and courted well-known brands to sell their goods on the site.

Those sellers now include Fast Retailing, apparel chain Uniqlo and computer maker Dell (DELL). In June, Taobao split that business, Taobao Mall, which competes with Jingdong, from its original consumer-to-consumer​ site, Taobao Marketplace.

Alibaba Group Chairman Jack Ma said this month that Taobao hopes to handle 1 trillion yuan, or about $156 billion, in transactions on its websites in 2012.

A growing roster of rivals, including Jingdong, have eroded Taobao's market share. Its share of online purchases in China slipped to 71%, by value, in the second quarter from 75% a year earlier, according to Analysys International. Jingdong's second-quarter market share was 3.5%

In online business-to-consumer​ sales, Taobao Mall was No. 1 in market share, at 33% in the second quarter, up from 28% a year earlier, and No. 2 Jingdong's share was 12%, up from 11%, Analysys said.

Duncan Clark, chairman of Beijing-based research firm BDA China Ltd., said Taobao is unlikely to retain more than 70% of the market forever. Taobao "clearly created the market…but the fact that they cracked it means others can benefit," he said.

International competition

Not only does Taobao face pressure from Jingdong, but also from major brands like Apple (AAPL)  and Gap (GPS), which have launched their own online stores in China in the past year.

Some brands also hesitate to sell their goods through Taobao Mall because of concerns about sales of counterfeit products on its sister site Taobao Marketplace.

"I can still find a lot of small, unusual things to buy on Taobao . . . but I use Jingdong because I can be sure the products are authentic," said 30-year-old Beijing shopper Sue Su.

She also said Jingdong consistently delivers packages to her home within 24 hours, while shipping services used by Taobao sellers can take from two to five days.

Alibaba Group spokesman John Spelich said Taobao Mall tries "to provide global brands with the best opportunity to reach" beyond first-tier Chinese cities, such as Beijing and Shanghai, and has shown it "is an incredibly effective way" for brands to reach consumers.

A company spokeswoman said the company worked with 6,000 brand owners last year to take down 5.7 million trademark-infringing​ listings from Taobao Marketplace and has taken 47 million listings down in the first half of 2011.

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