Which Chinese e-commerce stock could generate higher returns?

Electronic commerce in China is growing at a substantial rate with increasing internet penetration in the country. Earlier this year, a World Economic Forum reports the cited data of Statistical and eMarketer, indicating that more than 50% of global internet retail sales included Chinese e-commerce. According to eMarketer, e-commerce in China is growing at a faster rate than anywhere else in the world.

Using the TipRanks stock comparison tool, let’s compare two Chinese e-commerce companies, Alibaba and Pinduoduo, and see what Wall Street analysts think about these stocks.

Alibaba (BABA)

Alibaba Group Holding Ltd. is a Chinese e-commerce giant, founded by Jack Ma, which follows a market segmentation strategy with various online marketplaces that cater to different market segments. The company’s TaoBao is a market that targets individuals and small businesses, while TMall is an online marketplace for high-end products.

The company’s Ali Express targets global customers who can buy directly from manufacturers and distributors not only in China but also overseas, while Freshippo is the company’s grocery distribution chain.

Alibaba also operates a logistics network, Cainiao Network, and owns a cloud services business in China. The company also launched an on-demand local service and food delivery platform in China after acquiring Ele.me in 2018.

In the fiscal fourth quarter, BABA reported revenue of 187.4 billion yuan, a 64% year-over-year jump, beating consensus estimates of 179.9 billion yuan. However, the company reported an operating loss of 7.7 billion yuan, its first quarterly loss as a state-owned enterprise since its IPO in 2014.

One of the main reasons for the loss was an 18.2 billion yuan antitrust fine that Chinese regulators imposed on the company in April. Excluding the fine, he reportedly reported operating profit of 10.6 billion yuan.

Following the results, Robert W. Baird analyst Colin Sebastian reiterated a buy but lowered the price target from $ 285 to $ 270 on the stock with a rise of 26.6%. Sebastian said in a note to investors: “Our price target of $ 270 is supported by a combination of our multi-year DCF as well as a 20x EV / EBITDA FY23E multiple, in line with 10-30x market comparables given lack of visibility around regulatory concerns.

“We note that Alibaba’s revenue growth rate, the market model with a strong margin profile and an increasingly diversified business portfolio remain the main drivers of long-term expansion,” added Sebastian.

In FY22, Alibaba plans to increase investments in key strategic areas, including assisting merchants to reduce their operating costs, acquiring new users, technological innovation, strengthening supply chain capabilities, infrastructure development and expansion of geographic coverage in China.

It forecasts FY22 revenue of 930 billion yuan, indicating nearly 30% year-over-year growth.

Sebastian commented on the ramp-up of investments: “In particular, we note that internal (organic) innovations as well as strategic investments continue to broaden the revenue mix and the investment profile. “

Alibaba had around 891 million annual active consumers in China at the end of March. The company aims to grow its Chinese customers to over 1 billion in fiscal year 22.

Sebastian said, “From a secular growth perspective, we expect the growth in Internet and mobile penetration in China, which to date accounts for around half of the population (up from over 80 % in most developed markets), has strong growth potential. despite short-term macroeconomic headwinds.

BABA seeks to reach consumers in rural and underdeveloped areas of China through Taobao Deals, and aims to increase its investment in the app. Taobao Deals offers great value for money to price conscious consumers. The popularity of the Taobao Deals app has resulted in an increase in average spend on Taobao Deals than in the Chinese retail market in general. (See the analysis of Alibaba Group Holding shares on TipRanks)

Sebastian believes BABA is showing strong organic growth, saying, “In fact, Tmall’s biggest source of upstream traffic is the Taobao marketplace, which generates around 7% of total unique visits. We believe this creates an environment in which suppliers and customers are actively involved across all platforms, thus cementing Alibaba’s value proposition for buyers and sellers.

“Second, and like all successful online platform companies, Alibaba’s sites do not depend on external search engine traffic for their growth,” the analyst added.

The analyst also believes that BABA’s logistics network, Cainiao Network, gives the company “a significant competitive advantage over many other e-commerce players, with the capacity to process over 30 million packages. per day, overseeing the shipment of more than five billion packages (54% of the total) to 600 cities last year with an average delivery time of around three days.

The consensus among Wall Street analysts is a strong buy based on 25 buy and 1 wait. BABA analysts’ average price target of $ 301.60 implies upside potential of around 41.4% from current levels.

Pinduo (PDD)

Pinduoduo was founded in 2015 and is an online marketplace that connects customers directly with merchants. The company offers a range of products on its platform, including clothing, footwear, bags, baby products, food and drink, fresh produce, electronics and other items.

The company operates primarily through its mobile platform. This platform offers two purchasing options, including the “individual purchase” and “team purchase” options.

In the case of an “individual purchase” option, a single person places an order or makes a transaction with the merchant, while in the “team purchase” option, two or more buyers come together to buy an item in bulk. particular, thus obtaining a lower price. .

Pinduoduo has also integrated its platform with the main Chinese social networks including Weixin and QQ. Late last month, the company said its next-day grocery pickup service, Duo Duo Grocery (or Duoduo Maicai), is seeing high consumer demand. The company launched this service in August of last year.

In the first quarter, the company reported total revenue of RMB 22,167.1 million, a jump of 239% year-on-year. The company’s average monthly active users (MAU) in the first quarter was 724.6 million, up 49% year-over-year, while the number of active buyers during the 12-month period ended March 31 was 823.8 million. The number of active buyers increased 31% year-on-year in the first quarter. (See the analysis of Pinduoduo shares on TipRanks)

Following the first quarter results, Oppenheimer analyst Bo Pei reiterated a buy but lowered the price target from $ 200 to $ 180 (43.4% increase) “mostly on peer reviews lower “.

Pei commented on the increase in the number of active buyers and the fact that PDD did not disclose the gross value of the goods in the first quarter in a research note to investors: “In accordance with its previous announcement, PDD has stopped disclosing the GMV of the last 12 months. [gross merchandise value] this trimester. Assuming a similar turnout as in previous quarters, GMV would appear to be below consensus, which may be of concern to some investors. The total number of buyers of 824 million was 1% / 2% higher than Opco / Street’s forecast. “

PDD recorded revenue from transaction services of RMB 2,931.5 million in the first quarter, an increase of 180% year-on-year. Bo Pei commented on the growth in transaction revenues: “Transaction revenues of + 180%, mainly driven by the rapid growth of Duoduo Maicai (+ 450% q / q, according to Opco’s estimate). Revenue from 1P merchandise sales has remained relatively stable, contributing around 1% of total GMV, and is not a strategic corporate objective. “

Pei explained the rationale for the buy note for Pinduoduo stock: “The profitability of the core market (except 1P and Duoduo Maicai) was in line with previous quarters (probably non-GAAP profitable). “

“Active buyers of PDD have overtaken those of BABA and JD. Duoduo Maicai also operates an RMB 10T online grocery market and is seeing positive results, ”added Pei, comparing Pinduoduo to retailers Alibaba and JD.com.

The consensus among Wall Street analysts is a moderate buy based on 6 buy and 6 take. The analysts’ average PDD price target of $ 164.61 implies upside potential of around 31.1% from current levels.

Final result

Analysts are cautiously bullish on PDD as the company continues to expand rapidly in China. They are optimistic about BABA, given that the company plans to increase its investments strategically and has a diversified business portfolio.

Considering the upside potential over the next 12 months, BABA looks like a better buy.

Disclaimer: The information in this document is for informational purposes only. Nothing in this article should be construed as a solicitation to buy or sell securities.

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