JD Wages Price Battle Against Rival Pinduoduo

Video: Could the Chinese e-commerce get earnings boost after the subsidies?

Kate Lin 07.03.2023
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Kate Lin: Welcome to Morningstar. JD.com has recently launched a price war to entice customers away from its rival Pinduoduo. Is JD shifting its positioning away from quality? How will this translate into more profits, if at all? Chelsey Tam, Senior Equity Analyst at Morningstar, is here to tell us.

Hi, Chelsea. What is the context of this price war?

Chelsey Tam: Yeah. So, basically, we have seen JD's revenue growth slow down significantly, and for the fourth quarter, they are guiding single digit growth only for the fourth quarter. But then, at the same time, we see that Pinduoduo's revenue are very strong growing at double digits. So, I think this is one of the reasons. The other reason is that the founder, Richard Liu, returned to JD.com and tried to remind his management that low price is the main weapon, he said, for previous and the future. So, I think that's why they have launched this 10 billion subsidy program.

Lin: So, despite this recent program, JD.com has always positioned itself as a quality platform, and cost saving is also prioritized by many e-commerce businesses. So, how have these changed?

Tam: Yeah. So, I think there is a little bit of a dilemma here. So, I think that there could be some erosion to the image that JD offers the best quality. Like, no matter what you do, what you buy on JD is a lot more likely to come with good customer services and good quality in terms of logistics. I think this could change a bit. Because for example, we did our channel check, and then, we see that out of the 11 categories in the subsidy program, about 9 of them actually are provided by third-party merchants. And these merchants do not have to choose the quality JD Logistics' services, for example. So, I think this is also one concern that we have. On the other hand, if JD is able to build a mindshare that this is the Walmart in China, where when I go into the shop, I'll be able to shop at pretty much the lowest price, so I don't need to do price comparison, is actually good as well.

Lin: So, with the information on hand, what is the implication for the profitability of JD and the whole sector? Have you adjusted any of your estimates?

Tam: Yeah. So, JD will report on March 9th, which is just a few days away. So, we're holding off on our adjustments, and this is because we see that subsidy will drive down margin theoretically speaking. However, we think that there are a few things that could offset the margin pressure. For example, if third-party GMV grow faster, these third-party merchants might be more willing to spend more money on advertising and at the same time, commission will grow as well. So, that will mean that the higher-margin third-party business will have a higher contribution. So, this is one of the things that could offset the margin decline.

Lin: Considering the competition outlook, what is your preferred stock in the sector in China e-commerce?

Tam: We still prefer Alibaba and JD at this stage. So, Alibaba actually mentioned that they will not invest aggressively in subsidy because it's not sustainable in the long term. Once the subsidy dies down, consumers will just leave their platform. And I think that's correct as well. And then, JD, I think that the first-party business can still continue to grow and gain bargaining power against the suppliers, and the JD Logistics is still a quality business in the sense that it can provide support to the JD Retail business.

Lin: All right. Thank you so much, Chelsey. For Morningstar, I'm Kate Lin.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alibaba Group Holding Ltd ADR81.26 USD0.57Rating
Alibaba Group Holding Ltd Ordinary Shares79.20 HKD-0.06Rating
JD.com Inc ADR30.27 USD-2.98Rating
JD.com Inc Ordinary Shares - Class A118.80 HKD0.00Rating
PDD Holdings Inc ADR157.57 USD2.56Rating

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Kate Lin

Kate Lin  is an Editor for Morningstar Asia, and is based in Hong Kong

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