The mainland’s e-commerce platforms endured a hit during COVID-driven lockdowns of major cities. However, the tide might be turning. Data compiled by the National Bureau of Statistics showed that the pace of online retail sales growth picked up after touching the bottom in April this year. Sales in May and June grew slightly less than 10% year-on-year.
Mass lockdowns in major cities like Shanghai also disrupted logistics flow. As lockdowns ease, Tam says: “We think the worst of e-commerce logistics disruption is over as the central government has put orders in place for local governments to follow to minimize logistics disruption.” Thus, supply of e-commerce merchandise and delivery speed of e-commerce parcels can be gradually normalized to the pre-March level.
As the Chinese authorities continue to embrace the zero-covid mindset, demand for discretionary items, especially related to social activities like cosmetics and apparel, will remain weak. But the implication of this will play out differently in the most notable platforms, namely Alibaba Group (09988) and JD.com (09618).
Short-Term Turnaround Lifts Alibaba
The easing COVID-19 restrictions, and improvements in retail sentiment will stand Alibaba in good stead. This is primary driven by a comeback of its stronghold categories, like fashion and cosmetics. Tam highlights a concern with Alibaba losing market share. For example, in the apparel, shoes and bags category, Alibaba’s platform is losing market share to smaller rivals like Douyin, a platform developed by TikTok’s parent company Bytedance. However, Alibaba’s cheap valuation should offer a reasonably wide margin of safety. She adds: “The competition threat from short-form video platforms is already well understood in the market and is reflected in our fair value estimate.”
Apart from a recovery from macro headwinds, Tam expects Alibaba to turn around from year-over-year decline in adjusted EBITA in the December quarter of 2022. The group is also helped with improved sales in the relatively more impacted categories.
“This should reinstate investor confidence in earnings growth in the longer term and serve as a catalyst to the share price. If management imposes stronger-than-expected cost rationalization, we expect positive earnings revision in the next few quarters.”
Alibaba Stock Vs JD Stock: Which Should You Buy?
For the long haul, JD.com remains our top e-commerce bet.
Unlike Alibaba, JD.com may not benefit as much from a potential macro tailwind. JD drew 36% of total revenue from supermarket and other general merchandise goods in the first half of 2022, part of which was driven by stockpiling for food and necessities amid ongoing lockdowns. In a future scenario where the zero-covid policy turns less draconian, this demand may fade.
Though, the company remains Tam’s preferred pick as the platform continues to stand out with its ‘best-in-class’ homegrown logistics and delivery network, which has shown its reliability during sporadic lockdowns.
“JD’s quality self-owned logistics and supply chain capability serves it well both amid China's zero-COVID-19 strategy and in the long run. Self-owned logistics leads to more control over quality of delivery. JD.com's first-party businesses' warehouses are located close to customers compared to Alibaba's third-party businesses, which increases the timeliness of delivery.”
The fair value estimate of JD.com is adjusted downward to US$102 from US$105 to reflect a stronger US dollar and the stock continues to trade a discount. Shares in JD trade a 40% discount to its fair value estimate.
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