Forensic Analyst

Jason Yap, CFA

Forensic Accounting

PDD posted its first quarterly profit since listing and committed to re-invest net profits towards a newly launched RMB10 billion Agriculture Initiative.
Revenue and active buyers recorded strong growth but otherwise confirmed signs of decelerating growth compared with prior quarters.  Further, PDD's management confirmed that its profitability going forward is likely to be affected both by investments in the Agriculture Initiative and intensifying competition in an evolving China e-commerce landscape.
Notwithstanding the above, US investors read PDD's significant profit milestone positively, with PDD's share price up 22.3% by US trade closing (24 Aug 2021).  
We previously discussed deteriorating sequential quarter on quarter financial and operating metrics and operating cashflows, PDD's pivot to asset heavy strategy, and decelerating GMV and revenue growth.  To its credit, PDD's strong Q2 2021 results has debunked some of these concerns although PDD's latest disclosures and management representations indicate that the strong performance may not repeat in H2 2021. 
We provide updates on the Q2 2021 results and discuss the relevant issues in this article.

PDD posted its first quarterly profit since listing and committed to re-invest net profits towards a newly launched RMB10 billion Agriculture Initiative.
Revenue and active buyers recorded strong growth but otherwise confirmed signs of decelerating growth compared with prior quarters.  Further, PDD's management confirmed that its profitability going forward is likely to be affected both by investments in the Agriculture Initiative and intensifying competition in an evolving China e-commerce landscape.
Notwithstanding the above, US investors read PDD's significant profit milestone positively, with PDD's share price up 22.3% by US trade closing (24 Aug 2021).  
We previously discussed deteriorating sequential quarter on quarter financial and operating metrics and operating cashflows, PDD's pivot to asset heavy strategy, and decelerating GMV and revenue growth.  To its credit, PDD's strong Q2 2021 results has debunked some of these concerns although PDD's latest disclosures and management representations indicate that the strong performance may not repeat in H2 2021. 
We provide updates on the Q2 2021 results and discuss the relevant issues in this article.

PDD - Strong (And First Ever) Profit in Q2 2021 but Likely Transient

Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a>'s 2Q21 results may not seem inspirational, but a closer look under the hood reveals a solid business that is continuing to improve.  Considering the regulatory overhang and the near-term losses from the new community group buying business offsetting the overall profit growth, poor investor sentiment may continue for the Chinese e-commerce stocks including JD.  However, I remain constructive on JD's fundamentals, and I believe JD is a good rebound candidate when the overhang is lifted.      What I saw under the hood: <ul>
<li>Solid top-line growth of 26%. </li>
<li>Historic quarterly active user additions.</li>
<li>Rising appeal from lower-tier market users.</li>
<li>Higher engagement from existing users. </li>
<li>Acceleration of order volume growth.</li>
<li>Healthy core JD retail operating profit  </li>
</ul>

JD.com Inc (ADR) (JD US)'s 2Q21 results may not seem inspirational, but a closer look under the hood reveals a solid business that is continuing to improve.  Considering the regulatory overhang and the near-term losses from the new community group buying business offsetting the overall profit growth, poor investor sentiment may continue for the Chinese e-commerce stocks including JD.  However, I remain constructive on JD's fundamentals, and I believe JD is a good rebound candidate when the overhang is lifted.      What I saw under the hood: 
Solid top-line growth of 26%. 
Historic quarterly active user additions.
Rising appeal from lower-tier market users.
Higher engagement from existing users. 
Acceleration of order volume growth.
Healthy core JD retail operating profit  


JD.com (JD US): Solid Growth Flying Under the Radar

In June, I turned more constructive on <a href="https://www.smartkarma.com/entities/vipshop-holdings-ltd-adr" target="_blank" data-smartkarma-citation="entities:1088:1" rel="noopener">Vipshop Holdings (VIPS US)</a> as a rare value play among the online shopping platforms after the stock price fell more than 50% from the peak in March.  Since then, the stock price fell another 26% as the Chinese tech selloff continued even though VIPS faces relatively lower regulatory risk. Considering the continued operational improvements (even though the profits missed consensus expectations, margins remained stable). I believe the stock offers an attractive risk-return proposition.   I find VIPS more attractive at this point because of the following three reasons:<ol>
<li>
Vipshop is subject to relatively lower regulatory risk.  VIPS was penalized just a small fine thus far. VIPS is relatively immune from the new Data Security Law (DSL) to be adopted on 1 September.    </li>
<li>
Vipshop is trading near historic low valuations. VIPS shares trade at 8.6x FY21 and 7.4x FY22 consensus earnings and at the historic low P/E band.  This level is similar to when the company recorded 9% revenue growth and a 3.5% operating margin.  This is a whole new company with substantially higher revenue and profit growth. </li>
<li>
Weak 2Q21 results provide a better entry point. VIPS' 2Q21 showed resilient top-line growth but margins took a hit, indicating the higher cost of acquisitions.  But VIPS is a different company than the weaker 2018-2019 self.      </li>
</ol>

In June, I turned more constructive on Vipshop Holdings (VIPS US) as a rare value play among the online shopping platforms after the stock price fell more than 50% from the peak in March.  Since then, the stock price fell another 26% as the Chinese tech selloff continued even though VIPS faces relatively lower regulatory risk. Considering the continued operational improvements (even though the profits missed consensus expectations, margins remained stable). I believe the stock offers an attractive risk-return proposition.   I find VIPS more attractive at this point because of the following three reasons:

Vipshop is subject to relatively lower regulatory risk.  VIPS was penalized just a small fine thus far. VIPS is relatively immune from the new Data Security Law (DSL) to be adopted on 1 September.    

Vipshop is trading near historic low valuations. VIPS shares trade at 8.6x FY21 and 7.4x FY22 consensus earnings and at the historic low P/E band.  This level is similar to when the company recorded 9% revenue growth and a 3.5% operating margin.  This is a whole new company with substantially higher revenue and profit growth. 

Weak 2Q21 results provide a better entry point. VIPS' 2Q21 showed resilient top-line growth but margins took a hit, indicating the higher cost of acquisitions.  But VIPS is a different company than the weaker 2018-2019 self.      


Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*Results Deteriorating As Distractions Mount: Tencent Holdings’ (700.HK) [Tencent] 2Q21 GAAP net income declined CNY 5.2 bn (10.8%) on a linked quarter basis – and were of poor quality. Results were challenged by the following: cost of revenue increase; operating expense increase; losses in associates; higher impairment charges; and weaker online games. Were it not for the artificially lower tax rate, results would have been even more challenged; and     *Elephants In The Room: Mainland China's crackdown on capital markets has rapidly expanded under the broad narrative of "financial stability". We have already witnessed fines at Tencent, new user WeChat suspensions,  and Tencent may have to give up its exclusive music rights and possibly dispose of Kuwo and Kugou. Further, there no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. Its pretty surprising that Tencent refuses to discuss these matters.

*Results Deteriorating As Distractions Mount: Tencent Holdings’ (700.HK) [Tencent] 2Q21 GAAP net income declined CNY 5.2 bn (10.8%) on a linked quarter basis – and were of poor quality. Results were challenged by the following: cost of revenue increase; operating expense increase; losses in associates; higher impairment charges; and weaker online games. Were it not for the artificially lower tax rate, results would have been even more challenged; and     *Elephants In The Room: Mainland China's crackdown on capital markets has rapidly expanded under the broad narrative of "financial stability". We have already witnessed fines at Tencent, new user WeChat suspensions,  and Tencent may have to give up its exclusive music rights and possibly dispose of Kuwo and Kugou. Further, there no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. Its pretty surprising that Tencent refuses to discuss these matters.   

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Hang Seng China Enterprises Index / Event-Driven

Most Chinese companies will announce their half yearly results in the next couple of weeks. Some will announce their interim dividends as well.With most of the dividends for 2021 having already gone ex, we see little upside/downside in the HSCEI 2021 dividend futures contract.The HSCEI 2022 dividend futures are another story though. There are a lot of potential events that could change the fair value of the futures. Taking into account all the changes expected to take place by the December rebalance, we see the current dividend futures market trading around 6 index points higher than our fair value. In terms of future events, we find a lot more potential negative catalysts as compared to positive catalysts.We recommend selling the HSCEI 2022 dividend futures at 245 or higher (equivalent to around -25 on the HSCEI 2021/22 dividend steepener) and buying the dividend futures at 230 or lower. These estimates will change as the CNYHKD fx rates move around and some of the catalysts come to pass.

Most Chinese companies will announce their half yearly results in the next couple of weeks. Some will announce their interim dividends as well.With most of the dividends for 2021 having already gone ex, we see little upside/downside in the HSCEI 2021 dividend futures contract.The HSCEI 2022 dividend futures are another story though. There are a lot of potential events that could change the fair value of the futures. Taking into account all the changes expected to take place by the December rebalance, we see the current dividend futures market trading around 6 index points higher than our fair value. In terms of future events, we find a lot more potential negative catalysts as compared to positive catalysts.We recommend selling the HSCEI 2022 dividend futures at 245 or higher (equivalent to around -25 on the HSCEI 2021/22 dividend steepener) and buying the dividend futures at 230 or lower. These estimates will change as the CNYHKD fx rates move around and some of the catalysts come to pass.

HSCEI Dividend Futures: Fair Value & Catalysts Point to Downside for 2022

China

PDD Holdings Inc. is a multinational commerce group that owns and operates a portfolio of businesses. The Company focuses on digital economy so that local communities and small businesses can benefit from the increased productivity and new opportunities. PDD Holdings has built a network of sourcing, logistics, and fulfillment capabilities for its underlying businesses.

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PDD Holdings (PDD US)

PDD - Strong (And First Ever) Profit in Q2 2021 but Likely Transient

PDD posted its first quarterly profit since listing and committed to re-invest net profits towards a new RMB10bn Agriculture Initiative. We discuss...

Jason Yap, CFA

JD.com (JD US): Solid Growth Flying Under the Radar

JD's results may not seem inspirational, but a closer look under the hood reveals a business growing faster than market expectations. I believe JD...

Mitchell Kim

Vipshop (VIPS US): Too Cheap to Ignore

Rejuvenated growth slowed in 2Q21, but I offer three reasons why investors should use the recent pullback as an opportunity.

Mitchell Kim

Tencent Holdings – Pig Piling

TENCENT: Tencent's QOQ 2Q21 income declined 10.8% due to cost of revenue and opex increases; associate losses; higher impairments; and weak online...

Thomas J. Monaco

HSCEI Dividend Futures: Fair Value & Catalysts Point to Downside for 2022

We see around 6 points of downside on the HSCEI 2022 dividend futures from the last traded price. There are more negative catalysts for the 2022...

Brian Freitas

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