Should You Bet on the Winning PDD Stock, or Switch to JD.com in 2024?

Kate Lin: Welcome to Morningstar. Shares of Alibaba Group (09988, BABA) and JD.com (09618, JD) have experienced a drastic drop from their January peak when hopes of China's reopening were high. Unfortunately, as the economy lost steam, both BABA and JD struggled to keep up. Even as these shares have nearly halved in value, their competitor PDD Holdings (PDD) boasts a 70% year to date gain. Why is that? And will this trend continue into 2024? We are joined by Chelsey Tam, our senior equity analyst today.

Chelsey, how do the most recent earnings reports of Alibaba, JD, and PDD provide insights into the current state of the e-commerce market of China?

Chelsey Tam: Sure, I think the key takeaway is that the market is relatively mature in terms of the number of users that can increase. So however, if we look at the strategy, it seems that it's more on user retention and purchase frequency. And then we see that all of these platforms are focusing on value for money products and third-party platforms.

Lin: I would like to draw attention to a substantial downgrade adjustment to specifically JD's valuation before its earnings. What were the key factors behind this decision?

Tam: Yeah, sure. Basically, if we are talking about third-party platform development, it obviously lags behind Alibaba and PDD because JD is pretty much very roughly half of the GMV is coming from the first party. So I think they still need to recruit a lot of merchants and increase the product offerings. And I think at that time, it seems that the trend was slightly disappointing, but then after the earnings, luckily it seems that the management's guidance is actually decent. It's not bad. They're guiding 2024 GMV growth would be higher than China's retail sales of consumer goods growth, and we are expecting something like a mid-single-digit type of growth, like over 6%. So you can expect that, at least for JD, it will have 6% [growth] or above. So luckily after earnings, I would say that I think investors have more confidence in JD.com.

Lin: And switching gears to another most talked name nowadays PDD, it has done really well, and its strategy has always been value for money. So how does this strategy make it a more compelling option compared to the more established peers like JD and Alibaba?

Tam: Yeah, I think it's just that PDD has entered the lower-tier cities, markets, and focuses on white-label products and uses subsidies to drive purchases of higher-tier cities like users or like people that actually buy higher-value goods. So I think that quite early they have the brand name, and they are I think that like my channel check shows that they still are able to deliver or display products that are more value for money or lower price of the same kind. So I think this is one of the issues, especially now that consumption is weak. So it actually plays quite well in that case. So we think that in the third quarter, the GMV probably still rose about maybe mid-20s. And then in addition, they are doing overseas expansion. Temu is doing quite well. So I think that a lot of the earnings speeds in terms of revenue actually came from Temu.

Lin: And in other words, are there any specific concerns you have for Alibaba and JD into 2024?

Tam: Yeah, I think that now my order of preference is PDD, followed by JD.com, followed by Alibaba. I mentioned that JD.com now likely doing better next year, they will have a cleaner base, which means a lower base in terms of revenue. But then for Alibaba because they will not distribute cloud as a stock dividend anymore. And it's unclear that's about the size of the return to return of capital to shareholders. So the timing is not certain as well. So now we actually place Alibaba as the third preferred name.

Lin: That's very detailed. Thank you, Chelsey. For Morningstar, I'm Kate Lin.