What JD.com Investing in Li & Fung Really Means

It was previously reported that the e-commerce giant, JD.com Inc (NASDAQ: JD) (SEHK: 9618), invested US$100 million in Li & Fung, one of the oldest companies in Hong Kong.

The seemingly unconventional marriage between the new and the old has puzzled many in the market.

In this article, I’ll take a look at the strategic implications of this deal to JD.com as well as to Li & Fung.

Transaction overview

Li & Fung is one of the oldest companies in Hong Kong since its founding more than 100 years ago.

Initially, Li & Fung focused primarily on sourcing and trading by taking advantage of the strategic location of Hong Kong. It now also has a logistics business, which provides distribution centre and transport management services.

JD.com was reported to have subscribed for new shares issued by Li & Fung for an amount of US$100 million, after its shares were de-listed from the Hong Kong stock exchange two months ago.

After the transaction, the family behind Li & Fung will retain control of the company (with 60% voting rights) while JD.com will be a strategic, minority shareholder.

Strategic value-add

The investment from the online e-commerce giant into the trading and sourcing giant may seem out of the blue.

With the rise of technology and the Internet, being a sourcing or trading middleman is a sunset business. But what JD.com is going after is the logistics business and expertise Li & Fung can offer.

That’s because a successful online e-commerce platform, sales and in-time delivery all go hand-in-hand.

For example, Alibaba Group Holdings Ltd (NYSE: BABA) (SEHK: 9988) has Cainiao, which currently runs one of the most efficient and extensive logistics networks in China.

JD.com currently runs its own in-house logistics business. It needs to further develop and upgrade its logistics business in order to further challenge the dominance of Taobao, especially in overseas markets.

Although JD.com is closing in on Alibaba in China, Taobao still remains the dominant Chinese e-commerce platform in overseas markets.

With the expertise of Li & Fung in global logistics management, it can help JD.com challenge the stronghold of Taobao in overseas markets.

On the other hand, for Li & Fung, having a heavyweight strategic partner, such as JD.com, also helps digitise its business and logistics network in mainland China.

The e-commerce platform also allows Li & Fung to market its products more effectively to Chinese consumers.

Due to its poor financial results and further weakening fundamentals, Li & Fung was privatised and de-listed a few months ago.

But now, with a significant minority shareholder like JD.com, it can add the element of tech to revitalise its “old school” traditional business.

Foolish conclusion

In my opinion, it wouldn’t be a surprise if Li & Fung re-lists itself again in the future, but with a very different (tech-oriented) “story” at a much higher valuation.

For JD.com, having a strategic partner like Li & Fung can definitely strengthen its global logistics networks to support its international expansion.