Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Chelsey Tam. She is an Equity Analyst at Morningstar. Hello.
Chelsey Tam: Hello. Hello, Holly.
Black: So, Chelsey, you cover online retailers in China. Tell me is this still a huge growth area as it has been for recent years?
Tam: Yeah, so the online retail sales penetration is about mid-20s right now. So, this number is quite high compared to some of the global peers. But then if we look at categories, such as fresh food, the penetration now is just around mid-single digit. So, we expect to see a lot of growth from that area.
Black: So, something that's recently come in is called the community group purchase. What's that about?
Tam: Yeah, it's a new type of retail model. Basically, a person with a network in a neighborhood. For example, a convenience store manager or owner like he has a number of customers that he knows within his neighborhood, and this person can be a group leader. What it means is that he will be able to add a lot of customers or people that he knows within the same community on WeChat, and they will have a group chat. And in the group chat, they will share – this group leaders will share promotions, or some discounts for certain goods, typically a fresh food. And they can – the customers can place orders through app, or Mini Programs on Weixin. Most of their time, I think they place orders using Weixin's Mini program.
Black: So, out of the major players, which online retailer do you prefer in the region?
Tam: Yeah, so a few main leaders – some of them are not covered by Morningstar. For example, Meituan and Pinduoduo they are not yet covered. We cover Alibaba (09988) and JD.com (09618), at the moment. These two players are quite relatively new, in this area. I like Alibaba more compared to JD because of low valuation, it's been trading at around – below one standard deviation compared to historical last 5-year average, in terms of forward EV/EBITDA multiple.
Black: So, we prefer Alibaba. But is there anything to like about JD.com for investors?
Tam: Yeah, sure. So, I think when we look at the last earnings all of the positive development are still in place. I think they will continue to see margin improvement in the long run, especially for the JD retail unit. And also, I think they still use FMCG as a new user recruitment (indiscernible). I think everything is still falling well in place.
And even for community group purchase, I think they are careful with their spending. They focus on supply chain, which is something that they are good at. So, I think JD is actually also a buy right now. But then it's just that we prefer Alibaba more because Alibaba is even cheaper.
Black: Chelsey, thank you so much for your time. For Morningstar, I'm Holly Black.
