Tencent Holdings Ltd. and JD.com, Inc. said the two plan to invest an aggregate of approximately US$863 million in cash in Vipshop Holdings Ltd. (NYSE:VIPS), a Chinese online discount retailer, as Tencent intensifies its entry into the retail space in direct competition to chief rival Alibaba Group.
Tencent and JD.com will subscribe for newly issued class A ordinary shares of Vipshop at a price equivalent to US$13.08 per American Depositary Share (ADS) of the New York-listed company with current market capitalization of US$4.97 billion. The purchase price represents a 55% premium over the closing price of US$8.44 apiece as of the last trading day of Vipshop on December 15, 2017.
The move is the second major initiative for Tencent in the e-commerce and retail space, after it revealed plans to buy a 5% stake in Chinese fresh produce retailer Yonghui Superstores and 15% of a new concept supermarket store operated by Yonghui last week.
The investment announced today will see that Tencent and JD.com each owning 7% and 5.5%, respectively, of Vipshop’s total issued shares after the transaction’s closing. Most importantly, Tencent will grant Vipshop an entry on the interface of its dominant Wechat Wallet, enabling Vipshop to utilize traffic from Tencent’s Wechat platform with nearly one billion monthly active users.
"We look forward to providing Vipshop with our audiences, marketing solutions, and payment support to help the company provide branded apparel and other product categories to China’s rising middle class," said Martin Lau, president of Tencent Holdings. "We already see substantial demand from our users to discover, discuss and purchase branded apparel in our applications, and we believe that connecting our users more deeply to products on Vipshop’s platform will enrich their online experiences."
At the same time, JD.com will grant Vipshop entries on both the main page of JD.com’s mobile application and the main page of its Wechat Discovery shopping entry, and will assist Vipshop in achieving certain GMV targets through JD.com’s platform.
Combining the resources of Tencent’s powerful Wechat app, where users are increasingly turning to for shopping needs, JD.com and Vipshop, will create enormous threat to Alibaba, currently China’s largest e-commerce company. Alibaba has seen its position in the third-party payment market erode by Tencent’s Wechat, with Alipay’s market share dropping from over 80% in 2014 to 54% as of the second quarter 2017. It appears now that Tencent wants to achieve the same objective in Alibaba’s core business of retail.
Tencent is JD.com’s largest shareholder with a 18.1% stake in China’s second largest e-commerce player, just above JD.com founder Liu Qiangdong’s 15.8% interest as of May 2017. Tencent and JD.com have also invested in companies together, previously planning to inject US$1.55 billion in 2015 in Chinese auto information and marketing web portal Bitauto Holdings Ltd. to build a comprehensive online automotive transaction services platform for Chinese car buyers.
For the Vipshop investment, Tencent and JD.com will each subscribe for newly issued Class A ordinary shares of Vipshop in the amount of approximately US$604 million and approximately US$259 million, respectively. The purchase price will be US$65.40 per Class A ordinary share, which is equivalent to US$13.08 per American Depositary Share (ADS) of Vipshop, five of which represent one Class A ordinary share.
The shares subscribed by Tencent and JD.com will be subject to a two-year lock up restriction. As part of the deal, Tencent and JD.com will have the right to appoint a director and an observer, respectively, to Vipshop’s board of directors during the two-year lockup period.
"We, together with Tencent and JD.com, will leverage our respective strengths to form a strategic cooperative alliance aiming to achieve a deep, win-win cooperation and to benefit internet users and consumers," said Eric Ya Shen, Vipshop’s Co-founder, chairman and CEO. "We will develop a holistic cooperation with Tencent on the Weixin (Wechat) platform and expand our strategic alliance with Tencent into more and broader areas."