Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Thematic (Sector/Industry)

COVID-19 is having a devastating human and economic impact across the globe.  However, supermarkets and grocery delivery businesses (thanks to the essential workers) are one of few sectors to have benefitted from rising demand due to the homebound consumers, and the stocks of the companies in these sectors broadly have outperformed YTD.  In my previous report, <a href="https://www.smartkarma.com/insights/strategy-looking-for-inspiration-in-the-time-of-covid-19" target="_blank" data-smartkarma-citation="insights:38624" rel="noopener">Strategy: Looking for Inspiration in the Time of COVID-19</a>, I posed that in an uncertain market, investors should favor those sectors with superior earnings in the recovery cycle, i.e., Internet services sectors including e-commerce, but be more selective given the outperformance.  In this report, I highlight some thoughts for investors seeking direction related to e-commerce stocks as we head into the 1Q20 results season:
<ul class="">
<li>
Theme-driven outperformance:  Outperformance of these shares, especially for the online platforms, was driven more by the favorable signs of accelerated consumption migration towards online from offline rather than the visible financial impact in the near-term, in my view.  (Fig 1)  </li>
<li>
Be selective to manage near-term risk: There is a short-term risk of sharp growth decline for revenues and earnings of e-commerce platforms in 1Q20, but the market will likely be forgiving considering the unforeseen circumstances and the favorable long-term demand shift to online, with the exception of those platforms with a higher concentration in consumer discretionary categories such as apparel and shoes as well as durables.  (Fig 2 for Chinese online retail % of total retail spending, Fig 3 for 1Q20 online spending growth by category.)   </li>
<li>
Groceries mitigate revenue decline: Explosive demand for groceries from supermarkets and grocery delivery service from the Lunar New Year holiday onwards will help e-commerce platforms to offset the sharp revenue decline in other areas.  However, the impact on earnings will be small.  For <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" rel="noopener">Alibaba Group (BABA US)</a>, other commerce revenues (including Freshippo) make up 15% of total revenue and generate nearly half of the non-platform China retail commerce growth. As a comparison, Whole Foods and Amazon Fresh make up 5% of Amazon’s <a href="https://www.smartkarma.com/entities/amazon-com-inc" target="_blank" rel="noopener">Amazon.com Inc (AMZN US)</a> total revenue.  (Fig 6 &amp; Fig 7)       </li>
<li>
Investor expectations for 1Q20 partly managed: Most companies already tried to manage investors’ expectations for 1Q20.  Alibaba, <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> , and others warned during their December quarter earnings call their revenue growth could significantly decelerate.  <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> warned its revenues in 1Q20 could decline 15-20% (Fig 9: Companies’ guidance for 1Q20). The market will be looking for signs of recovery in the earnings calls, in my view.    </li>
</ul>

COVID-19 is having a devastating human and economic impact across the globe.  However, supermarkets and grocery delivery businesses (thanks to the essential workers) are one of few sectors to have benefitted from rising demand due to the homebound consumers, and the stocks of the companies in these sectors broadly have outperformed YTD.  In my previous report, Strategy: Looking for Inspiration in the Time of COVID-19, I posed that in an uncertain market, investors should favor those sectors with superior earnings in the recovery cycle, i.e., Internet services sectors including e-commerce, but be more selective given the outperformance.  In this report, I highlight some thoughts for investors seeking direction related to e-commerce stocks as we head into the 1Q20 results season:


Theme-driven outperformance:  Outperformance of these shares, especially for the online platforms, was driven more by the favorable signs of accelerated consumption migration towards online from offline rather than the visible financial impact in the near-term, in my view.  (Fig 1)  

Be selective to manage near-term risk: There is a short-term risk of sharp growth decline for revenues and earnings of e-commerce platforms in 1Q20, but the market will likely be forgiving considering the unforeseen circumstances and the favorable long-term demand shift to online, with the exception of those platforms with a higher concentration in consumer discretionary categories such as apparel and shoes as well as durables.  (Fig 2 for Chinese online retail % of total retail spending, Fig 3 for 1Q20 online spending growth by category.)   

Groceries mitigate revenue decline: Explosive demand for groceries from supermarkets and grocery delivery service from the Lunar New Year holiday onwards will help e-commerce platforms to offset the sharp revenue decline in other areas.  However, the impact on earnings will be small.  For Alibaba Group (BABA US), other commerce revenues (including Freshippo) make up 15% of total revenue and generate nearly half of the non-platform China retail commerce growth. As a comparison, Whole Foods and Amazon Fresh make up 5% of Amazon’s Amazon.com Inc (AMZN US) total revenue.  (Fig 6 &amp; Fig 7)       

Investor expectations for 1Q20 partly managed: Most companies already tried to manage investors’ expectations for 1Q20.  Alibaba, JD.com Inc (ADR) (JD US) , and others warned during their December quarter earnings call their revenue growth could significantly decelerate.  Vipshop Holdings (VIPS US) warned its revenues in 1Q20 could decline 15-20% (Fig 9: Companies’ guidance for 1Q20). The market will be looking for signs of recovery in the earnings calls, in my view.    


Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

We relaunch coverage of Sun Art Retail with a fair value estimate of HKD 6.2 per share and no-moat and negative moat trend ratings. Our fair value estimate implies adjusted fiscal 2017 P/E of 19.4 times and an enterprise value/adjusted EBITDA ratio of 5.8 times. It is based on a discounted cash flow analysis, with a weighted average cost of capital of 8.5%.We think an investment in Sun Art at the current stage would be speculative. The share price has increased by about 40% in the past two months, as the market is expecting some further cooperation with e-commerce or Internet leaders. In addition, the market sentiment has been boosted by the concept of new retailing formats, or multichannel retailing, and the e-commerce giant <a href="https://www.smartkarma.com/entities/787" target="_blank" data-smartkarma-citation="entities:787:1">Alibaba Group Holding Ltd (BABA US)</a> has invested in several regional offline retailing leaders, such as <a href="https://www.smartkarma.com/entities/10786" target="_blank" data-smartkarma-citation="entities:10786:1">Sanjiang Shopping Club Co A (601116 CH)</a> and Yintai’s founder announced the privatization of Yintai with a premium of over 40% relative to the close price of Dec. 28, 2016. However, Sun Art didn’t mention any possible equity cooperation in the previous earnings release, and the company has previously focused on organic growth rather than mergers and acquisitions.Analyst: Marie Sun

We relaunch coverage of Sun Art Retail with a fair value estimate of HKD 6.2 per share and no-moat and negative moat trend ratings. Our fair value estimate implies adjusted fiscal 2017 P/E of 19.4 times and an enterprise value/adjusted EBITDA ratio of 5.8 times. It is based on a discounted cash flow analysis, with a weighted average cost of capital of 8.5%.We think an investment in Sun Art at the current stage would be speculative. The share price has increased by about 40% in the past two months, as the market is expecting some further cooperation with e-commerce or Internet leaders. In addition, the market sentiment has been boosted by the concept of new retailing formats, or multichannel retailing, and the e-commerce giant Alibaba Group Holding Ltd (BABA US) has invested in several regional offline retailing leaders, such as Sanjiang Shopping Club Co A (601116 CH) and Yintai’s founder announced the privatization of Yintai with a premium of over 40% relative to the close price of Dec. 28, 2016. However, Sun Art didn’t mention any possible equity cooperation in the previous earnings release, and the company has previously focused on organic growth rather than mergers and acquisitions.Analyst: Marie Sun

Relaunching Coverage of Sun Art Retail With No-Moat Rating, Negative Trend

China

Sanjiang Shopping Club Company Limited operates community budget supermarket franchises. The Company provides customers with retail services.

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Sanjiang Shopping Club Co A (601116 CH)

China E-Commerce as a Supermarket Play

COVID-19 is having a devastating human and economic impact across the globe. However, supermarkets and grocery delivery businesses (thanks to the...

Mitchell Kim

Relaunching Coverage of Sun Art Retail With No-Moat Rating, Negative Trend

We relaunch coverage of Sun Art Retail with a fair value estimate of HKD 6.2 per share and no-moat and negative moat trend ratings. Our fair value...

Morningstar, Inc.

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