After two years of tense relations between Chinese authorities and major tech companies, signs of reconciliation are emerging. Chinese policymakers, in a bid to revive economic growth, have been voicing their support for the booming tech sector in recent months. This is a welcome sign for long-term-oriented investors who have been betting on a resurgence of Chinese tech stocks for more than two years. With many investors focused on e-commerce market leader Alibaba Group Holding Ltd. (BABA, Financial), JD.com Inc. (JD, Financial) seems to be flying under the radar, presenting investors with a good opportunity to gain exposure to the Chinese e-commerce sector at a discount.
China's evolving e-commerce landscape
In response to China's recent economic challenges, the government has taken significant steps to bolster private businesses. A policy document issued in July outlines measures aimed at supporting the private sector, emphasizing the protection of intellectual property rights and fair competition by removing barriers to entry. Further, authorities have begun to reverse some restrictive policies in the tech and property sectors, engaging in meetings with these companies to boost confidence.
Furhter, the Chinese government's recent approval of 88 new video game licenses marks a notable shift in policymakers’ approach, signaling a divergence from the restrictive stance seen during a prolonged period of regulatory intervention beginning in late 2020. This pivot has led to a significant increase in the number of games entering the market this year, which has already surpassed the total for 2022.
Support for tech innovation
Policymakers have also urged tech giants such as Tencent Holdings Ltd. (TCEHY, Financial) and Meituan (MPNGF, Financial) to provide case studies of their successful start-up investments to encourage innovation and sustainable expansion. Additionally, the central bank has called on lenders to actively support technology research and merger and acquisition deals. The motive behind these strategic decisions is to revive economic growth, which slowed to 0.8% in the second quarter.
Exhibit 1: China’s Economic Growth
Source: Reuters
JD.com's resilience amid economic slowdown
Big tech companies such as JD have displayed remarkable resilience amid China's economic slowdown caused by strict pandemic regulations, showcasing the strength of its diversified businesses. As such, the company seems well-positioned to capitalize on the expected growth of the Chinese economy.
While JD.com experienced a decline in revenue in the first quarter compared to the previous quarter, it still made noteworthy progress. However, overall consumer spending has been cautious, impacting several sectors. The recent 618 festival served as a crucial test of household consumption appetite. JD, Tmall, Pinduoduo (PDD, Financial) and other companies invested substantial amounts in subsidies and incentives to boost gross sales during the event.
Performance and future prospects
For the first time, JD did not disclose the actual gross merchandise volume at the end of the festival, leaving both investors and analysts disappointed, which led to doubts about sales meeting expectations. Nonetheless, the company highlighted that new products listed on its platform contributed significantly to total sales, and an impressive 95% of districts in China were eligible for next-day delivery. In a blog post, JD also reported that consumers purchased 10 times more products eligible for its 10 billion yuan subsidies program during the 618 shopping festival compared to March, when the program was launched as a competitive response to Pinduoduo’s similar efforts.
According to eMarketer, China is poised for a significant growth rebound this year, with retail e-commerce sales growth expected to hit 9.3%. It is estimated that total e-commerce sales will surpass $3 trillion by 2024, a figure unmatched by any other country. Given this massive growth opportunity, during the first-quarter earnings call, JD emphasized its commitment to boosting the availability of products from high-quality, small and medium-sized enterprises on its platform as the sector presents a lucrative opportunity.
Exhibit 2: Retail e-commerce sales in China
Source: eMarketer
JD.com's initiatives and mobile shopping trends
In January, JD introduced the Spring Dawn Initiative, aiming to simplify the process for various types of merchants, such as start-ups, self-employed businesses and enterprises, to establish their stores on the platform. In a short span of just over two months, a diverse range of entrepreneurs, including college students, farmers, designers and craftsmen launched their businesses on its platform. The company reported that sales in early March surged by over 200% compared to the previous month. Particularly noteworthy is the impressive 20% sequential growth in the first quarter for third-party merchants with recorded transactions, driven primarily by those in the fashion, home goods and supermarket categories, which have experienced rapid expansion. Additionally, the mobile application witnessed robust traffic growth during the quarter.
The number of people shopping on mobile phones is growing quickly, especially in China, which is the largest smartphone market in the world. According to Daxue Consulting, in 2022, China had a staggering 1.04 billion smartphone users, making up 15% of all smartphone users worldwide. It is projected that this number will increase to 1.18 billion by 2026. In terms of revenue, it is estimated that mobile shopping in China will generate $179.8 billion in 2023. Currently, the top shopping apps in China are Alibaba's Taobao, followed by Pinduoduo and JD.com.
Exhibit 3: MAUs of China’s leading shopping apps
Source: Statista
Emerging competitors and market trends
In China, short-form video apps are dominating the social media landscape and are becoming increasingly popular as digital marketing platforms. ByteDance's Douyin, the Chinese version of TikTok, is taking advantage of its massive user base to enter the e-commerce business. The platform’s biggest advantage lies in its 700 million daily active users, who spend more than two hours on the platform each day, making it a significant player in the social shopping trend.
Douyin's e-commerce efforts have been successful, with its GMV for transactions through the app reaching almost 1.38 trillion yuan ($199.8 billion) last year, exceeding its initial goal of 1.2 trillion yuan set at the start of 2022. This rapid growth poses a challenge to established Chinese e-commerce giants such as Alibaba and JD.com, who took over a decade each to achieve 1 trillion yuan in annual GMV. Not limited to just social shopping, Douyin has also entered the food delivery sector, diversifying its business rapidly, a common trend among Chinese companies. While it may not affect the industry giants immediately, there is a possibility that Douyin may gain a share in some markets, especially in small businesses.
Challenges and opportunities in live-stream e-commerce
The live-streaming e-commerce market in China is projected to experience a notable slowdown this year. This cooling trend is unsurprising, given the country's full reopening and a potential waning of the initial craze. However, live-stream e-commerce still holds a substantial position within China's retail landscape. The introduction of new policies might bring about shifts in the competitive landscape, posing challenges and opportunities for companies operating in this space.
One certainty lies in the logistical challenges faced by newer companie. A robust logistics network is a critical aspect of success in the e-commerce sector, and addressing these challenges will be crucial for growth and sustainability. This is an area where JD.com excels, which should help the company thwart the threat of competitors for the time being.
Strategic moves and outlook
JD.com's performance remains promising, though the second-quarter earnings have yet to be disclosed. The company's strategic moves, such as venturing into new product categories like health care and attracting well-known brands like Tesla (TSLA, Financial) and Longines to launch flagship stores on its platform, are a testament to the proactive approach it is taking to adapt and expand in a dynamically evolving e-commerce market.
Takeaway
Recent measures taken by Chinese policymakers highlight their efforts to revitalize the economy by fostering a more supportive environment for private businesses and tech innovation. JD.com and other Chinese tech giants are already benefiting from these developments, with investors showing confidence in response to the support.
At a forward price-earnings ratio of 13, JD.com offers exposure to the growth prospects of the Chinese e-commerce industry at a cheap price. The projected recovery of China's economy coupled with the massive internet user base of the country should help it thrive for many years.
