Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Equity Bottom-Up

Alibaba Group Holding  / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> has had a disastrous year, ever since the IPO of their FinTech arm, <a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a>, was pulled last minute in November 2020. Since then, they have faced continued regulatory hurdles, including an RMB18.2bn anti-monopoly fine, which has culminated in a 51% share price drop, since its November 2020 peak, which means that Alibaba is currently trading on only a 14.3x forward PE ratio. Given that this is nearly 4 standard deviations below its 5-year historical average trading range, and that this multiple would imply only a 0.72x PEG ratio, for a company with an extremely strong net cash balance sheet, delivering returns on capital well above its cost of capital, with positive free cash flow generation, and a $15bn share buyback program, indicates that there is a massive disconnect between long-term Buy-side expectations and near-term Sell-side estimates. Looking at the reported group financials over this period it does not seem as though the regulatory impact has been that significant on core operations. The key concern, however, is that Alibaba is losing market share in its core businesses. In this insight, I take a closer look at the broader Chinese retail market, as well as the Chinese digital advertising market (I estimate that Alibaba still generates more than 40% of its Chinese commerce revenue, and roughly 1/3rd of group revenue, from marketing activities), to analyse Alibaba’s relative revenue share loss. Finally, I also revisit current valuation levels and analyse what this implies for its Core Commerce operations.

Alibaba Group (9988 HK) has had a disastrous year, ever since the IPO of their FinTech arm, Ant Financial Services Group (6688 HK), was pulled last minute in November 2020. Since then, they have faced continued regulatory hurdles, including an RMB18.2bn anti-monopoly fine, which has culminated in a 51% share price drop, since its November 2020 peak, which means that Alibaba is currently trading on only a 14.3x forward PE ratio. Given that this is nearly 4 standard deviations below its 5-year historical average trading range, and that this multiple would imply only a 0.72x PEG ratio, for a company with an extremely strong net cash balance sheet, delivering returns on capital well above its cost of capital, with positive free cash flow generation, and a $15bn share buyback program, indicates that there is a massive disconnect between long-term Buy-side expectations and near-term Sell-side estimates. Looking at the reported group financials over this period it does not seem as though the regulatory impact has been that significant on core operations. The key concern, however, is that Alibaba is losing market share in its core businesses. In this insight, I take a closer look at the broader Chinese retail market, as well as the Chinese digital advertising market (I estimate that Alibaba still generates more than 40% of its Chinese commerce revenue, and roughly 1/3rd of group revenue, from marketing activities), to analyse Alibaba’s relative revenue share loss. Finally, I also revisit current valuation levels and analyse what this implies for its Core Commerce operations.

Alibaba: How Much Core Market Share Loss Has Been Priced In?

Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

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.      


Coupang's share price fell 8% in the first-day trading session after the company's 2Q21 results were announced.  Does this present an entry opportunity?  No, I believe there is still a downside to Coupang's story. I believe the results validated my concerns highlighted in my previous two reports ( <a href="https://www.smartkarma.com/insights/coupang-cpng-us-crack-in-the-armor" target="_blank" data-smartkarma-citation="insights:51455" rel="noopener">Coupang (CPNG US): Crack in the Armor</a> and <a href="https://www.smartkarma.com/insights/coupang-cpng-us-going-mano-e-mano-with-jd-com" target="_blank" data-smartkarma-citation="insights:49065" rel="noopener">Coupang (CPNG US): Going Mano E Mano with JD.com</a>): <ol>
<li>
Coupang's revenue growth is sharply decelerating towards 60% in 2H21.  In my "Mano e Mano" report, I highlight what happened to high-growth stocks when their growth slowed to 50% - 60% (e.g.,<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>, <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>).</li>
<li>
Operating leverage has not been reached yet. In fact, operating losses still doubled even after excluding costs associated with the FC Fire as losses from Eats and Rocket Fresh grocery delivery continues.  </li>
<li>
 Adding new customers is key as revenue per customer growth continues to decelerate. </li>
</ol>Valuations remain uncompelling. Coupang trades at a significant premium to JD.com on EV/revenue and EV/Gross Profit even after considering the difference in growth. The key upside risk is if investors rotate from Chinese platforms to Coupang to mitigate Chinese regulatory risk.  I would note though that Coupang also faces regulatory risk and poor public perception as highlighted in my previous report, <a href="https://www.smartkarma.com/insights/coupang-cpng-us-under-the-regulator-s-microscope" target="_blank" data-smartkarma-citation="insights:54103" rel="noopener">Coupang (CPNG US): Under the Regulator's Microscope.</a>

Coupang's share price fell 8% in the first-day trading session after the company's 2Q21 results were announced.  Does this present an entry opportunity?  No, I believe there is still a downside to Coupang's story. I believe the results validated my concerns highlighted in my previous two reports ( Coupang (CPNG US): Crack in the Armor and Coupang (CPNG US): Going Mano E Mano with JD.com): 

Coupang's revenue growth is sharply decelerating towards 60% in 2H21.  In my "Mano e Mano" report, I highlight what happened to high-growth stocks when their growth slowed to 50% - 60% (e.g.,JD.com Inc (ADR) (JD US), Vipshop Holdings (VIPS US)).

Operating leverage has not been reached yet. In fact, operating losses still doubled even after excluding costs associated with the FC Fire as losses from Eats and Rocket Fresh grocery delivery continues.  

 Adding new customers is key as revenue per customer growth continues to decelerate. 
Valuations remain uncompelling. Coupang trades at a significant premium to JD.com on EV/revenue and EV/Gross Profit even after considering the difference in growth. The key upside risk is if investors rotate from Chinese platforms to Coupang to mitigate Chinese regulatory risk.  I would note though that Coupang also faces regulatory risk and poor public perception as highlighted in my previous report, Coupang (CPNG US): Under the Regulator's Microscope.

Coupang (CPNG US): Heavier Bleeding Takes the Wind Out of Coupang's Sails

Investors' concerns over increasingly expanding regulatory restrictions and the potential market intervention led to a rout of Chinese tech and education stocks over the last several trading sessions. The select 9 Chinese tech stocks I follow collectively lost USD320 billion in value over 20 July to 27 July.  While some of the regulatory risks were known from March 2021, ramifications of the potential value-destroying restrictions on the education companies, termination of <a href="https://www.smartkarma.com/entities/tencent-music-entertainment" target="_blank" data-smartkarma-citation="entities:27255:1" rel="noopener">Tencent Music (TME US)'s</a> exclusive rights, and the suspension of new user registration for <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>'s Wechat spook the market. Tencent's market cap has declined 19% during the seven-day period, which cannot be fully explained by the potential value lost from the recently announced regulatory measures, in my view.  Back in April (see <a href="https://www.smartkarma.com/insights/tencent-700-hk-fintech-risk-is-lurking" target="_blank" data-smartkarma-citation="insights:50512" rel="noopener">Tencent (700 HK): Fintech Risk Is Lurking</a>) I pointed out that Tencent shares could be overvalued by 20% on fintech risk alone.  The shares are down nearly 30% since then. I now believe the shares could be undervalued by 10%, notwithstanding the undefined regulatory risks ahead.  Having said that, catching a falling knife is not for the faint-hearted. These stocks rebounded on the US Wednesday trading session, possibly reflecting the sentiment "enough is enough." Bloomberg reported that the securities regulator assured select investment bankers that the education policies are not to be for other industries.     In this report, I summarize the announced regulatory events this year to date and share my thoughts on why the market may be over discounting Tencent's value by looking at the potential value impact of Tencent's fintech value (a reiteration from the April report) and the impact of the value decline of <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi Chuxing (DIDI US)</a> and Tencent Music.

Investors' concerns over increasingly expanding regulatory restrictions and the potential market intervention led to a rout of Chinese tech and education stocks over the last several trading sessions. The select 9 Chinese tech stocks I follow collectively lost USD320 billion in value over 20 July to 27 July.  While some of the regulatory risks were known from March 2021, ramifications of the potential value-destroying restrictions on the education companies, termination of Tencent Music (TME US)'s exclusive rights, and the suspension of new user registration for Tencent (700 HK)'s Wechat spook the market. Tencent's market cap has declined 19% during the seven-day period, which cannot be fully explained by the potential value lost from the recently announced regulatory measures, in my view.  Back in April (see Tencent (700 HK): Fintech Risk Is Lurking) I pointed out that Tencent shares could be overvalued by 20% on fintech risk alone.  The shares are down nearly 30% since then. I now believe the shares could be undervalued by 10%, notwithstanding the undefined regulatory risks ahead.  Having said that, catching a falling knife is not for the faint-hearted. These stocks rebounded on the US Wednesday trading session, possibly reflecting the sentiment "enough is enough." Bloomberg reported that the securities regulator assured select investment bankers that the education policies are not to be for other industries.     In this report, I summarize the announced regulatory events this year to date and share my thoughts on why the market may be over discounting Tencent's value by looking at the potential value impact of Tencent's fintech value (a reiteration from the April report) and the impact of the value decline of DiDi Chuxing (DIDI US) and Tencent Music.          

Tencent (700 HK): When to Catch a Falling Knife

Thematic (Sector/Industry)

The China National Bureau of Statistics retail sales data for June 2021 appears to show a softer YoY growth compared to an outlier growth in 1Q21, but the 2YR CAGR of 17% outpaced 1Q21's 15%. (See April and May sales tracker in the report, <a href="https://www.smartkarma.com/insights/china-online-retail-sales-tracker-april-and-may-sales-growth-slows-on-unfavorable-comps" target="_blank" data-smartkarma-citation="insights:53557" rel="noopener">China Online Retail Sales Tracker: April and May Sales Growth Slows on Unfavorable Comps</a>.)  This solid online spending growth suggests China's consumption remains robust and the Chinese e-commerce names could receive greater attention from global investors especially if a rotation from the developed market to emerging market ensues. The solid growth of online sales is positive for all online platforms including <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US), </a><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><a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">,  and  </a><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>I like all three names as they currently trade at attractive valuations, but VIPS stands out with its nearly single-digit forward P/E and favorable operating metrics.  I am less sanguine on <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a> because of its high marketing cost-powered business model despite its industry-leading growth.        <h3>Key takeaways from China retail sales data: </h3><ul>
<li>
Total retail sales grew 14% YoY in 2Q21, lower than the 34% growth in 1Q21, but on a 2-year CAGR accelerated in 2Q21 to 4.8% from 3.8% in 1Q21. </li>
<li>In 2Q21, apparel and cosmetics categories (total including offline and online) grew solid 19% and 16%, while household appliances sales growth was more muted at 5%.    </li>
<li>
Online sales (physical goods) grew 9% YoY in 2Q21, lower than 24% in 1Q21, but 2YR CAGR was 17% and 15%, respectively.  Because the soft YoY comparison may not do much to thaw investor sentiment on Chinese e-commerce, but I believe the current adverse optics provides opportunities.   </li>
<li>
Online sales for apparel-related categories along with general merchandise grew 13% ( by my estimate) for 2Q21 compared to 40% and 21%, respectively, for 1Q21.  However, again, on a 2YR CAGR basis, 2Q21 growth of 10.3% outpaced 1Q21's 9.3%.   Vipshop's revenue growth outpaced online apparel growth by 11% points in 1Q21.  This trend is expected to continue in 2Q21, especially when considering the 6/18 Festival promotions. </li>
</ul>

The China National Bureau of Statistics retail sales data for June 2021 appears to show a softer YoY growth compared to an outlier growth in 1Q21, but the 2YR CAGR of 17% outpaced 1Q21's 15%. (See April and May sales tracker in the report, China Online Retail Sales Tracker: April and May Sales Growth Slows on Unfavorable Comps.)  This solid online spending growth suggests China's consumption remains robust and the Chinese e-commerce names could receive greater attention from global investors especially if a rotation from the developed market to emerging market ensues. The solid growth of online sales is positive for all online platforms including Alibaba Group (BABA US), JD.com Inc (ADR) (JD US),  and  Vipshop Holdings (VIPS US).I like all three names as they currently trade at attractive valuations, but VIPS stands out with its nearly single-digit forward P/E and favorable operating metrics.  I am less sanguine on Pinduoduo (PDD US) because of its high marketing cost-powered business model despite its industry-leading growth.        Key takeaways from China retail sales data: 

Total retail sales grew 14% YoY in 2Q21, lower than the 34% growth in 1Q21, but on a 2-year CAGR accelerated in 2Q21 to 4.8% from 3.8% in 1Q21. 
In 2Q21, apparel and cosmetics categories (total including offline and online) grew solid 19% and 16%, while household appliances sales growth was more muted at 5%.    

Online sales (physical goods) grew 9% YoY in 2Q21, lower than 24% in 1Q21, but 2YR CAGR was 17% and 15%, respectively.  Because the soft YoY comparison may not do much to thaw investor sentiment on Chinese e-commerce, but I believe the current adverse optics provides opportunities.   

Online sales for apparel-related categories along with general merchandise grew 13% ( by my estimate) for 2Q21 compared to 40% and 21%, respectively, for 1Q21.  However, again, on a 2YR CAGR basis, 2Q21 growth of 10.3% outpaced 1Q21's 9.3%.   Vipshop's revenue growth outpaced online apparel growth by 11% points in 1Q21.  This trend is expected to continue in 2Q21, especially when considering the 6/18 Festival promotions. 


China Online Retail Sales Tracker: Steady Recovery in June Without the Optical Illusion

China

Vipshop Holdings Ltd. retails branded products at discount over the Internet. The Company retails through flash sales, in which limited quantities of an item are sold at deep discount for a specified period of time.

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Vipshop Holdings (VIPS US)

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

Coupang (CPNG US): Heavier Bleeding Takes the Wind Out of Coupang's Sails

Coupang's share price fell 8% after the company's 2Q21 results were announced. Does this present an entry opportunity? I believe there is still a...

Mitchell Kim

Tencent (700 HK): When to Catch a Falling Knife

Chinese tech stocks are reeling from the latest regulatory announcements. Tencent fell 19% in 7 days. Is the time ripe to catch a falling knife?...

Mitchell Kim

China Online Retail Sales Tracker: Steady Recovery in June Without the Optical Illusion

Consensus revenue estimates for Chinese e-commerce platforms could be too conservative based on comparison to the NBS data. 2Q21 revenue and...

Mitchell Kim

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Alibaba: How Much Core Market Share Loss Has Been Priced In?

In this insight, I analyse Chinese retail sales and digital advertising market share changes and what is implied by Alibaba’s current valuation...

Wium Malan, CFA

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

Coupang (CPNG US): Heavier Bleeding Takes the Wind Out of Coupang's Sails

Coupang's share price fell 8% after the company's 2Q21 results were announced. Does this present an entry opportunity? I believe there is still a...

Mitchell Kim

Tencent (700 HK): When to Catch a Falling Knife

Chinese tech stocks are reeling from the latest regulatory announcements. Tencent fell 19% in 7 days. Is the time ripe to catch a falling knife?...

Mitchell Kim

China Online Retail Sales Tracker: Steady Recovery in June Without the Optical Illusion

Consensus revenue estimates for Chinese e-commerce platforms could be too conservative based on comparison to the NBS data. 2Q21 revenue and...

Mitchell Kim