China is the fastest recovering country from the COVID-19 global pandemic induced economic slowdown and consequent recession. Seeing this, many investors earlier in the year began shifting to the American Depository receipts of the biggest Chinese companies. However, some Chinese mega companies are not attractive anymore.
Over the past month, the Chinese government has come down hard on the multinational giants that dominate the country’s tech and e-commerce space. The State Administration for market regulation recently prohibited an IPO by Ant, an affiliate of Alibaba, that was to be dual listing. The transaction had been anticipated as the largest IPO in history.
In the U.S., a new regulation passed earlier this month is also seeking to curb the influence of the biggest Chinese companies. The regulation requires that companies listing their shares on a U.S. stock exchange must comply with U.S. accounting and auditing standards.
With the biggest Chinese companies under regulators’ microscopes, relatively smaller companies such as JD.com, Inc. (JD) and Vipshop Holdings Ltd. (VIPS) may be nicely situated to capitalize on the re-engagement of China’s economy over the coming months.
JD.com, Inc. (JD)
JD is the second largest e-commerce company in China, with a 25.7% market share (as of the third quarter of 2019). Operating in two segments – Retail and new Business, JD is well positioned to become the largest e-commerce channel in China soon, now that Alibaba Group Holdings Ltd. (BABA) is under regulatory investigation.
On December 5, JD became the first platform to accept digital yuan for payment, as part of the Chinese government’s trial digital currency initiative. This allows the company to solidify its position as one of the best organizations in the country, while ironing out the kinks in the digital currency system before its nationwide rollout.
JD’s previously halted IPO of its fintech subsidiary JD Digits is expected to move ahead in the next few months. As a major competitor of BABA’s Ant Financial Services, JD Digits should benefit from a first-mover advantage because it is expected to begin trading before Ant Group.
JD gained significantly from the Singles day sales in November. Over the 11-day period from November 1t – 11, the company generated ¥271.5 billion in revenues, up 32.8% year-over-year.
JD’s net revenues have increased 29.2% year-over-year to RMB174.20 billion in the third quarter ended September 30, 2020. This can be attributed to a 34.8% increase from the year-ago value to RMB58.10 billion. Income from operations rose 1166.7% from the same period last year to RMB7.60 billion, while EPS its increased 1046.3% from the prior year quarter to RMB4.70.
The consensus EPS estimate of $0.24 for the current quarter ending December 31, 2020 indicates a 200% improvement year-over-year. The company has an impressive earnings surprise history as well; it beat the Street EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $33.49 billion represents a 37.3% rise from the same period last year.
JD gained more than 180% to hit its 52-week high of $92.77 in November since hitting its 52-week low of $32.70 in March.
How does JD stack up for the POWR Ratings?
B for Trade Grade
B for Buy & Hold Grade
B for Peer Grade.
B for Overall POWR Rating.
It is currently ranked #8 of 115 stocks in the China industry.
Vipshop Holdings Ltd. (VIPS)
VIPS is an online discount retailer focused on apparel, accessories, and other lifestyle products across China. The company operates four segments – Vip.com, Shan Shan outlets, Internet Finance, and Others.
Considering recent antitrust allegations affecting the biggest companies in the Chinese markets, VIPS as a relatively small player should profit from the change in securities regulations. With China currently investigating BABA for unlawful monopolistic practices as well as halting what was deemed to be the biggest IPO in history, rising consumer demand in a recovering economy should bode well for VIPS in terms of revenue and market share.
VIPS’ total revenues have increased 18.2% year-over-year to RMB23.20 billion in the third quarter ended September 30, 2020. This can be attributed to a 21% rise in gross merchandise value over this period. Net income increased 42.1% from the same period last year to RMB1.20 billion. Its EPS has risen 40.4% from the prior-year quarter to RMB1.84.
The consensus EPS estimate of $0.48 in the current quarter ending December 31, 2020 indicates a 20% rise year-over-year. Moreover, VIPS beat the Street EPS estimates in three of the trailing four quarters, which is impressive. The consensus revenue estimate of $5.33 billion for the ongoing quarter indicates a 27.2% improvement from the year-ago value.
VIPS has gained more than 120% since hitting its 52-week low of $11.53 in March. The stock hit its 52-week high of $26.45 yesterday.
It is no surprise then that VIPS is rated “Strong Buy” in our POWR Ratings system with an “A” for Trade Grade, Buy & Hold Grade and Peer Grade. It is currently ranked #3 of 115 stocks in the same industry.
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JD shares were trading at $86.00 per share on Tuesday afternoon, up $4.39 (+5.38%). Year-to-date, JD has gained 144.11%, versus a 17.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don’ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More…
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