Source: Finance World Weekly (ID: cjtxzk)

Barring any surprises, this could be the most expensive acquisition in Chinese logistics history in recent years. According to sources close to the deal, Deppon Logistics has confirmed its integration into JD.com, with the transaction value expected to exceed 10 billion yuan. The industry generally believes that acquiring Deppon can fill JD Logistics' gaps in traditional heavy cargo delivery. However, how much return can this driving force and imagination space create for the enterprise? The moment to test JD Logistics' integration capabilities has arrived.

An announcement has made Deppon's prospects increasingly clear.

Unless something unexpected happens, the entire team of this established express delivery company, along with its 14.7 billion yuan in total assets, will ultimately belong to JD Logistics. A source close to the deal confirmed to Finance World Weekly that at the morning meeting on February 28, Deppon Express founder Cui Weixing announced internally that the company would be acquired by JD.com. "JD has already sent senior executives in, and Cui will completely leave the company around June."

Three days earlier, Deppon announced that its controlling shareholder had decided to suspend trading due to major matters related to equity structure changes.

On March 2, Deppon issued another announcement stating that during the suspension, the parties involved had further communicated and negotiated on matters related to the controlling shareholder's equity structure changes, but no transaction agreement had been signed yet, and the suspension would continue.

Given the significance, both Deppon and JD have been exceptionally cautious, and the outside world knows little about the actual negotiation process.

However, rumors about Deppon "selling out" have been circulating in the market for over six months. Potential acquirers rumored include not only JD.com but also SF Express, Yunda, and Douyin. Recently, as Douyin denied involvement, JD.com and SF Express became the most likely "saviors." According to sources, Deppon's revenue scale of nearly 30 billion yuan means "not everyone can easily swallow it."

According to insiders at Deppon, the company began optimizing its workforce from early 2021, from administrative and clerical positions to closing multiple frontline business departments and establishing single operating divisions, involving store managers and senior management teams. "Such cost control is also to get a better price in the end."

Finance World Weekly learned that after Deppon's listing in 2018, Cainiao, under Alibaba Group, extended an olive branch. It is said that Cui Weixing quoted 32 billion yuan at the time, but the deal ultimately fell through.

Now, Deppon's acquisition by JD.com seems to be an open secret. With several consecutive days of suspension, speculation suggests the deal might still be stuck on price.

On March 4, Deppon will hold a shareholders' meeting at its headquarters in Shanghai. Shareholders planning to attend have heard that JD.com initially offered 13 billion yuan, then raised it to 15 billion yuan, and the final transaction price is likely to be around 17 billion yuan, about 30% above the company's current market value.

Based on this, Cui Weixing, who holds about 35% of Deppon, would directly gain nearly 6 billion yuan from selling the company.

(Image source: Visual China)

****Behind the Acquisition

"For Cui, selling Deppon now is undoubtedly the best outcome," said the aforementioned source close to the deal. The preliminary transformation plan after JD's acquisition of Deppon has already been drafted, including adjustments to the overall personnel structure, business structure, and finances.

A Deppon insider told Finance World Weekly that JD is likely to first select one of Deppon Express's current vice presidents to manage the transition. The former leader Cui Weixing and his second-in-command, Cui Weigang, will completely leave the company.

Before the suspension, Deppon pre-disclosed its worst performance since its listing in 2018. In 2021, the company expected a profit of 70 million to 190 million yuan, a year-on-year decrease of 67% to 87%; if non-recurring gains and losses are excluded, the company would record its first loss since listing, with an expected loss range of 160 million to 270 million yuan.

This performance was achieved after large-scale layoffs in the second half of last year to protect profits.

Amid the crisis, Deppon's stock price fell from a peak of 30 yuan per share to around 10 yuan, and its market value shrank by nearly 70% compared to the 300 billion yuan at the time of listing.

China's logistics market is primarily road transport, roughly divided into express delivery, less-than-truckload (LTL) freight, and full truckload transport based on cargo weight and transport organization.

In 1996, Cui Weixing started by contracting the cargo department of China Southern Airlines, founding the predecessor of Deppon, Cui's Freight Company.

He first ventured into air freight and LTL transport. Despite the low gross margins of LTL and full truckload, Deppon targeted high-end customers with differentiated advantages, launching distinctive products like Precision Trucking/City Transport, establishing its leading position in LTL transport.

At that time, a popular saying in the logistics industry was: "For express delivery, there's SF Express; for LTL, look to Deppon."

Later, with the boom of e-commerce, Deppon announced its entry into the express delivery market in November 2013. However, overly conservative business thinking caused Deppon to miss the timing.

"They were too conservative at the start, thinking e-commerce parcels were too low-end and not profitable. By 2016, when they really tried to push, it was too late," admitted an industry insider familiar with Deppon.

In 2016, SF Express, YTO, Yunda, and Shentong all went public via backdoor listings on the A-share market, and ZTO successfully IPO'd in the US. Competition in the express delivery market became intense, and Deppon's express business has been declining since then, with market share falling from 0.88% in 2018 to 0.68% in 2020. In May 2020, Cainiao-affiliated Yunda became the second-largest shareholder of Deppon.

With strategic shifts, Deppon's once-proud LTL freight business also faced attacks from all sides. On one front, established rival Aneng Logistics went public and attacked; on the other, competitors formed alliances to grab market share. For example, SF Express acquired Xinbang Logistics to establish the "Shunxin Jieda" freight brand, and Best acquired "Quanjitong" to establish Best Freight. From 2017 to 2020, Deppon's freight business also shrank year after year.

As the first listed freight company in the logistics industry, Deppon's situation of being acquired has drawn much sentiment from the outside world. If there were other options, Cui Weixing probably wouldn't want to give up the company he had painstakingly built for 25 years.

In the past few years, the brutal nature of the industry's bloody battles made Cui realize that once the best development opportunity was missed, Deppon was destined to lose the ability to fight alone.

In early 2021, the market gradually heard news that Deppon's management had been in contact with potential investors, discussing acquisition plans and comparing offers. According to insiders at SF Express, Deppon and SF had contact, "but SF already has Shunxin Jieda, and the company's current focus is on intra-city freight. In comparison, Deppon Express and JD's current layout are more complementary."

The aforementioned source close to the deal also believes, "JD's main advantage is in warehousing and distribution, which can drive traffic to Deppon Express, while Deppon Express can fill its gaps in traditional heavy cargo delivery." Industry insiders believe that JD Logistics' victory among many bidders may be due to its high desire for Deppon and its relatively highest offer.

However, Finance World Weekly noted that behind both JD and Deppon stands the common investor Sequoia Capital, which may have directly facilitated effective communication between the two companies' senior management.

In the past few days, the capital market has also been optimistic about this deal. Before Deppon's suspension, its stock price started rising from a low on February 23, and after three consecutive days of gains, it hit its first limit-up of the year. The final suspension price was 12.66 yuan per share, with a cumulative increase of nearly 20%.

(Zhengzhou JD Asia One Warehouse Logistics Park, Image source: Visual China)

****JD's Pace

In late January 2018, in Davos, Switzerland, Cui Weixing and Liu Qiangdong rarely met. That World Economic Forum annual meeting was one of the few occasions they appeared publicly together.

At a luncheon, Deppon, which had just been listed for seven days, was full of ambition. Cui Weixing said Deppon was steadily advancing into the international market. Facing the intensifying industry consolidation, he even said, "We have not considered that path."

That afternoon, Liu Qiangdong sat on stage with simultaneous interpretation headphones, responding positively to questions from David Rubenstein, co-founder of Carlyle Group, about JD Logistics' listing, and revealing that the company was increasing investment in the logistics sector.

At that time, Cui Weixing did not expect that Deppon's glorious moment would forever stop in 2018.

Although Liu Qiangdong has now stepped down as CEO of JD Group and officially retired to the second line, since he advocated building its own logistics in 2007, to formally establishing JD Logistics Group in 2017, and to the logistics division listing on the Hong Kong Stock Exchange in May 2021, Liu has designed a clear development path for JD Logistics.

With this acquisition of Deppon, JD Logistics' territory expands again, and JD's entire logistics ecosystem is becoming more complete.

Before this, in February this year, JD Group's sub-group JD Property Development increased its stake in China Logistics Assets four times in a row, reaching 87.19%. This means that after more than four years of layout, JD can make a mandatory unconditional cash offer. This supplier, which owns 38 logistics parks and 179 logistics facilities nationwide, has finally become JD's possession.

Earlier, JD Group had long coveted Dada Group, a local instant retail and delivery platform. In 2016, JD first acquired 47% of Dada's equity and continued to increase its stake. Recently, JD spent $550 million on a strategic subscription to Dada Group, raising its stake to 52%, firmly holding the say.

However, in these two acquisitions, the main player was not JD Logistics. According to industry analysts, before its independent listing, JD Logistics had no financing channels, and the company was not profitable, so acquisitions had to be done through others.

JD Logistics' only direct acquisition was in August 2020, when it spent 3 billion yuan to acquire Kuayue Express, known for air freight, instantly gaining over 620 air cargo routes. By the first half of 2021, this number had grown to over 1,000.

Looking at JD's several expansions in logistics: the acquisition of China Logistics Assets met its need for self-built warehouses; the acquisitions of Kuayue Express, Dada Group, and Deppon were all to supplement its own business lines.

In 2019, JD underwent its largest organizational restructuring in history, and JD Logistics' weight within the group was raised again. Together with JD Mall and JD Digits, it was seen as one of the "three horses" driving JD Group's revenue growth.

Before JD Logistics' listing, Wang Qi's company had provided communication strategy services for JD. Recalling the collective meetings with JD executives, she said Liu Qiangdong was very clear about his demands, ranking genuine products, logistics, and low prices as the top three needs, followed by after-sales and SKU (product category count).

"I remember he said at the time that JD's e-commerce brand accumulation needs to synergize with warehousing and logistics," Wang Qi believes that every step JD has taken is very much in line with Liu Qiangdong's personality.

After listing, JD Logistics seemed to press the accelerator. In the past year, JD Logistics added 450 new warehouses, equivalent to the number built in the 10 years from 2007 to 2017. As of the third quarter of 2021, JD Logistics operated about 1,300 warehouses, 41 Asia One smart logistics parks, and a total warehousing area of about 23 million square meters.

With the rapid business growth, frontline employees are the first to feel the pressure.

An employee responsible for JD Logistics' transit operations told Finance World Weekly that since the listing, the overall atmosphere has become tense. "Listed companies have to look at financial reports; previously, too much was invested in operations, so the company needs to balance traffic generation and investment." In his department, for example, since last year, they have been tasked with some traffic generation responsibilities and required to increase individual order business.

Indeed, investors look at efficiency, so listed companies must strictly control profits and losses. JD Logistics cut loss-making businesses like furniture heavy cargo and contract logistics, while setting a 100% annual growth target for departments responsible for KA (key accounts) and sales development. Some employees who couldn't bear the performance pressure chose to resign.

However, in the view of JD Logistics CEO Yu Rui, compared to most companies in the internet industry, JD Logistics hasn't moved as fast, and it's even a bit "boring," requiring time for improvement.

(Image source: Visual China)

****JD's Strategy

People familiar with Yu Rui feel his work style and personality are somewhat similar to Liu Qiangdong's. He is not satisfied with JD Logistics being just a transportation company, fearing it will become a company that only runs errands and moves boxes.

He agrees with Liu Qiangdong's strategic design of "integrated supply chain" for JD Logistics, believing that JD Logistics can intervene from the early sales forecast stage of corporate clients, and based on sales forecasts, arrange category distribution and inventory; after sales begin, promptly meet return and exchange needs.

In practice, this has indeed helped clients' businesses. For example, Amway, after cooperating with JD Logistics, reduced inventory turnover days by about 30%, and inventory reserve funds significantly decreased; for Skechers, the weighted average delivery time for all e-commerce orders decreased by about 5 hours, improving efficiency and consumer experience.

Currently, over 75% of JD Logistics' revenue comes from integrated supply chain clients. Yang Daqing, an industry expert who has studied logistics and supply chains for over a decade, told Finance World Weekly that after JD Logistics' independent development in 2017, it is no longer just the "logistics support" for JD Mall, but an independent value-creating logistics service company. "It's not just a cost center; it's also a new profit source."

From 2018 to the first half of 2021, JD Logistics' revenue from external clients increased year by year, reaching 11 billion yuan, 18.8 billion yuan, and 33.9 billion yuan respectively. In 2018, external client revenue accounted for only 29.1% of JD Logistics' total revenue, but by the first half of 2021, this proportion had risen to 54.7%.

In fact, since the company's inception, JD Logistics has been loss-making. Liu Qiangdong poured tens of billions into it without improvement. To continuously "transfuse" logistics, he met up to 42 investors in a week at his peak.

Although the industry does not endorse this crazy spending, Liu has his own stubbornness. He believes that the money JD has invested heavily in logistics over the years has not been lost or evaporated, but simply changed its form of existence.

It wasn't until 2020 that JD Logistics first saw the light of day, achieving full-year profitability. Some investors revealed that the 2021 financial report also looks good.

As competition in China's logistics industry intensifies, corporate mergers and acquisitions are accelerating. Comparing horizontally with peers, JD Logistics' expansion speed is actually not fast.

Over the years, SF Express has gathered companies like Xinbang Logistics, Shunlitong, and Kerry Logistics through acquisitions and equity investments, early on spreading its business across express delivery, freight, cold chain, instant delivery, and international services.

In 2017, Liu Qiangdong said in an interview with CCTV Finance that in the future, only SF Express and JD would be able to establish themselves in the domestic logistics industry.

The outside world often compares JD Logistics with SF Express. In the first half of 2021, SF's revenue was 88.3 billion yuan, while JD Logistics' revenue was only 48.5 billion yuan, half of SF's. Additionally, JD Logistics' gross margin and net margin were 3.65% and -31.39%, respectively, while SF's were 10.1% and 0.47% in the same period.

An industry insider close to JD pointed out that related-party transactions between JD Logistics and JD Group have always had potential risks, although these are not heavily disclosed in financial reports.

Moreover, in the corporate client track, JD Logistics faces more and more competitors. After SF and Cainiao entered, Best Group also shed its express delivery burden and shifted focus to the supply chain track.

JD Logistics still faces many challenges. Looking at the entire logistics industry, if Deppon smoothly integrates into JD this time, it will be the largest acquisition in domestic logistics history in recent years.

As the "LTL King" Deppon comes to an end, this company with a market value of 13 billion yuan will henceforth be intertwined with JD's fate, making the story complex. For JD Logistics, how to make these companies acquired with real money create more returns is the moment to test its integration capabilities.

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