China: How e-commerce giants are capturing the economic moment
Alibaba was once the poster child for investing in modern China. Now the e-commerce market that fueled its growth is slowing as new players chip away at Alibaba’s market share.
This is reflected in the stock’s performance since the apparent trough in Chinese internet sentiment in mid-March. Pinduodu shares have more than doubled since then, while Meituan shares have risen 80% and JD shares more than 50% in Hong Kong. Kuaishou rose by almost 47%.
Alibaba shares rose about 42% in Hong Kong and 33% in New York. Tencent is only up about 25%. But with the exception of Kuaishou and Pinduodu, stocks are still low for the year so far.
“Our top picks in the industry continue to be JD, Meituan, Pinduoduo and Kuaishou,” Robin Zhu, an analyst at Bernstein, and team said in a report this week. “Interest in Alibaba has continued, mostly from foreign investors, while feedback on Tencent has turned very negative.”
Bernstein expects regulatory and consumer trends to favor stocks in “real” categories — e-commerce, food delivery and local services — over “virtual” ones — gaming, media and entertainment.
China: e-commerce slows down
Over the weekend, the 618 shopping festival run by JD.com saw a 10.3% increase in total transaction volume to 379.3 billion yuan (US$56.61 billion). That’s a new high – but the slowest growth on record, according to Reuters.
Traders who spoke to Nomura said lockdowns due to Covid have halted clothing production while consumer demand is generally low, according to a report published on Sunday. Sales of high-end products fared better than mass-market sales, the report said, citing one retailer.
Alibaba, whose main shopping festival is in November, said only that it had seen an increase in gross merchandise value since last year, without disclosing figures. GMV measures the total value of sales over a period of time.
“Online retail growth is likely to be slower this year than in 2020 and 2021, and growth in the penetration rate could be weaker than the average of 2.6 [pontos percentuais] during 2015-2021,” Fitch said in a report last week.
“This is due to a larger base, deeper integration of online and offline channels … and weaker consumer confidence in light of concerns about a slowing economy and rising unemployment,” the company said. Fitch expects online sales of food and household items to outperform apparel sales.
In May, online retail sales of goods increased by more than 14% compared to the same period last year, but overall retail sales fell by 6.7% in that period. Fitch expects retail sales in China to grow only in the low single digits this year, up from 12.5% in 2021 and 27.7% in 2020.
New companies have appeared on the Chinese market of online commerce as competitors to Alibaba. These include short video and live streaming platforms Kuaishou and Douyin, the Chinese version of TikTok also owned by ByteDance.
In the GMV of the top five e-commerce platforms, Alibaba’s market share fell 6% in the first quarter from the fourth, according to a Bernstein analysis published earlier this month.
JD, Pinduoduo, Douyin and Kuaishou increased market share during the period, the report said. Douyin’s share of GMV grew the most, to 38%, although its joint market share with Kuaishou is only about 12% among the five companies.
In a sign of Kuaishou’s emergence as its own e-commerce player, the app cut links to other online shopping sites in March.
“Your recent decision to sever external ties with Taobao and JD [do Alibaba] it shows that times have changed,” Ashley Dudarenok, founder of Chinese marketing consultancy ChoZan, said at the time of the news. “Taobao is no longer the only major battleground for e-commerce.”
In the quarter ended March 31, Kuaishou reported GMV on its platform of 175.1 billion yuan, up nearly 48% year-on-year.
Last month, ByteDance’s Douyin said its e-commerce GMV more than tripled last year, without specifying when that year ended. Douyin banned links to external e-commerce platforms in 2020.
Even in JPMorgan’s earlier call in March to downgrade 28 “non-investment grade” Chinese Internet stocks, analysts maintained their sole “overweight” in Kuaishou based on “management’s sharper focus on margin improvement, higher gross margin, larger user base and lower risk competition”.
Users such as beauty livestreamer Zhao Mengche often describe Kuaishou as a “community,” in which he said the app tries to integrate multiple brands and mimic a village market — online. Zhao has over 20 million followers on Kuaishou.
During this year’s 6.18 shopping festival, fashion-focused social media app Xiaohongshu claimed more retailers had made their products available directly on the app and said users could also buy imported products from JD.com through Xiaohongshu.
Looking ahead, companies in the first quarter tended to spend more on advertising closer to where consumers might buy, rather than just on awareness, according to Bernstein. They estimated a 65.8% year-over-year growth in Kuaishou e-commerce listings in the first quarter, with Pinduoduo, JD and Meituan also seeing double-digit growth.
However, revenue at the top 25 advertising platforms tracked by Bernstein rose 7.4% year-over-year in the first quarter, down from 10.8% growth in the previous quarter.
And for ByteDance — the largest advertising platform in China in the first quarter alongside Alibaba — Bernstein estimated that domestic ads grew just 15% in the first three months of the year, despite GMV sales for live streaming likely to nearly triple, say analysts. .
They expect ByteDance’s domestic ad business to drop to single digits or even shrink in the second quarter.
Also read: China: JD.com sees slow growth at 618 festivals