Dec. 19 (NBD) -- Chinese tech behemoth Tencent Holdings Ltd and the ecommerce giant JD.com Inc said on Monday that they will jointly invest 863 million U.S. dollars in Chinese online discount retailer Vipshop Holdings Ltd.

Vipshop shares rose by 49 percent in pre-market trading Monday on the New York Stock Exchange and closed at 11.75 U.S. dollars, the highest close since August 9, this year. 

Li Chengdong, an independent e-commerce analyst, said to NBD that JD's expanding apparel sector poses increasing pressure on Vipshop. This cooperation between the two sides is of strategic significance, for they highly complement each other in terms of customer base and business aspects.

Photo/VCG

Vipshop sustains independent operation

According to Vipshop's statement on Monday, Tencent and JD will purchase the newly issued Class A common shares of Vipshop for 604 million U.S. dollars and 259 million U.S. dollars, respectively. The purchase price will be 65.40 U.S. dollars per Class A share, which is equivalent to 13.08 U.S. dollars per American depositary share of Vipshop.

Upon completion of the transaction, Tencent and JD will hold 7 percent and 5.5 percent of Vipshop shares, respectively, the two companies said in a statement.

Industry insiders commented that the purchase price was inexpensive, considering the revenue and income of Vipshop.

Vipshop reported a revenue of 15.3 billion yuan (2.31 billion U.S. dollars) for the third quarter of fiscal year 2017 ending in September 30, up 27.6 percent year on year, according to the company's quarterly unaudited financial results. 

It is noteworthy that the newly issued are subject to a two-year lockup period, and Tencent will have the right to appoint a director and JD an observer to Vipshop's board of directors during the lockup period.

Tencent is JD's largest shareholder, with a stake of about 18 percent. After the deal is closed, Tencent and JD together will own a 12.5 percent stake in Vipshop, which goes very close to Vipshop's largest shareholder, Shen Ya, chairman and CEO of Vipshop.

This makes people wonder whether Shen will lose his control over the company.

With this regard, Vipshop pointed out to NBD that Shen remains the company's largest shareholder and maintains control of the company. In addtion, the company will sustain its independent operation.

Vipshop further explained that the company adopts a dual class common stock structure, generally the "Class A" and the "Class B". Under the structure, typically the Class A Common Stock will have 1 vote per share and the Class B Common will have 10 vote per share.

Since shares held by Shen belong to the "Class B", Shen will still hold roughly 60 percent of the voting power at the company after the transaction is completed. 

JD wants a bigger share in the apparel market

Li told NBD that Alibaba wants to maintain its dominant position in the apparel market and JD aims to take a bigger slice of the cake, which brings unprecedented challenges to Vipshop.

Under such circumstance, JD and Vipshop joined hands to challenge Alibaba's dominance.

NBD noticed that with its expansion in the sectors of fast moving consumer goods and fresh food, JD has drawn a large number of female customers.

This March, JD divided the department of apparel and household into two separate departments. Following that, JD invested, in June, 397 million U.S. dollars in a London-based online fashion retail platform, Farfetch, becoming one of the largest shareholders of the latter. These moves show the importance that JD attaches to the apparel business.

JD needs to break the existing pattern of the apparel and household market, if the company wants to take the leading status.

Cao Lei, a researcher of the China e-Business Research Center, said to NBD that apparel constitutes the core business of Tmall and Taobao of Alibaba.

Some industry analysts believed that reshuffles and restructuring in the online apparel market can be expected against the background of consumption upgrade.

It's a smart move for JD to forge a strategic cooperation with complementary partners like Vipshop in order to compete with Alibaba's Tmall.

The cooperation will marry JD's clientele and logistics system to Vipshop's expertise in clothes and its supply chain, which can enhance JD's growth in the apparel sector.

Vipshop regarded the cooperation as resource swap and strategic collaboration to build a win-win ecological chain.

Strategic agreements were also inked alongside the deal. Tencent will allow Vipshop an entry point on the interface of its mobile social networking application WeChat's wallet segment, and JD.com provides Vipshop entry into the main page of JD.com's mobile application.

Vipship said that the company's strengths in flash sales and apparel will increase JD's attraction to female consumers and extend JD's apparel business. Besides, the investment will help Tencent to build a healthy and diversified online and offline retail ecosystem, Vipshop added.

Email: gaohan@nbd.com.cn