Ant trail

JD emulates Alibaba with black-box finance unit

JD.com is copying larger rival Alibaba with its own black-box finance unit. China's second-largest e-commerce group has just completed a fundraising which values its financial division at $7 billion. But investors can only guess at the subsidiary's financials.

JD.com is a relative latecomer to the business of lending to web suppliers and consumers. At the end of 2013, it had outstanding loans worth just 100 million yuan ($15.2 million).

By the end of September last year that figure had ballooned to 4.1 billion yuan. The loss-making online retailer currently finances these loans from its own balance sheet - in the three months to September, supply chain financing and consumer lending sucked 3.6 billion yuan from operating cash.

The upstart also runs a Kickstarter-like crowdfunding platform, and offers wealth management products, payments and insurance. The logic is that JD.com's trove of consumer shopping data gives it a large base of potential customers, and an edge over traditional banks when assessing credit risks. Selling a 14 per cent stake for $1 billion gives investors a sense of its worth.

In some ways, JD.com is following its larger rival. Ant Financial, controlled by Alibaba boss Jack Ma, runs Alipay - the country's largest online payments platform - as well as an internet bank and a consumer credit scoring service. Alibaba does not own a direct stake in Ant, but if it goes public, the e-commerce group will receive either a 33 per cent stake or a one-time payment equal to a percentage of Ant's equity value. Though the business has yet to disclose any financial data, a funding round last June valued it at $45 billion.

For investors in the $37 billion JD.com, the sudden emergence of a valuable new unit is significant. The question now is to what extent it can capitalise on the exploding valuations in China's online finance industry. Ant recently began its second financing round ahead of a much anticipated initial public offering. On January 18, Chinese online lending platform Lufax, which is backed by insurance group Ping An Insurance, raised $1.2 billion at a valuation of $18.5 billion.

Yet disrupting the country's financial sector is not for the faint-hearted: regulatory risks and crackdowns loom. Shareholders may demand to look inside the black box before recognising JD Finance's full value.