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Alibaba's Hong Kong Listing Benefits; Amazon-Pinduoduo Intriguing Partnership; Trip.Com Booming International Business

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About: KraneShares CSI China Internet ETF (KWEB), TCOM, CQQQ, FXI, Includes: AAPL, AMZN, BABA, JD, MMYT, NTES, PDD, WMT, WUBA
by: ALT Perspective
ALT Perspective
Long/short equity, growth at reasonable price, contrarian, Deep Value
Summary

The Hong Kong secondary listing is said to benefit Alibaba in more ways than just raising money, which the technology titan already has plenty of.

The news of Amazon.com setting up shop on Pinduoduo made eye-catching headlines. However, it is important to look into the details of the deal.

Trip.com Q3 2019 result announcement could be considered a non-event, given the in-line EPS and revenue. However, that would be most unfair to its achievements in the quarter.

Short-term headwinds from events like the ongoing Hong Kong protests could be offset by favorable long-term mega-trends.

By ALT Perspective

Last week, the attention was arguably mostly on Alibaba Group Holdings (BABA) among Chinese Internet companies (FXI) (CQQQ). The e-commerce and cloud giant conducted a secondary listing in Hong Kong on Tuesday that raised as much as US$13 billion. The flood of interest from Asian investors including those from mainland China helped the successful IPO subscribers with a paper gain of almost 16 percent in three days since the Alibaba Hong Kong shares began trading on Tuesday morning.

The ticker code for the shares from the secondary offering is 9988, which is appropriate since the Chinese pronunciation of 88 is 'ba ba'. More importantly, 9988 is a set of very auspicious numbers to the Chinese, as it represents prosperity for a very long time. Shareholders of the American Depositary Shares (ADSs) listed in New York since 2014 were able to join in the party as well, with the ADSs jumping 8.2 percent for the week.

One ADS of Alibaba on the New York exchange is equivalent to eight Alibaba shares on the Hong Kong exchange. With the Alibaba shares listed in both stock exchanges fully fungible, the enthusiasm in the Hong Kong listing would pull up demand for the ADSs, since shareholders could theoretically buy the 'cheaper' shares on one exchange and convert to sell in the other. SCMP, a media outlet owned by Alibaba, has done a Frequently Asked Questions on the 'fully fungible' topic.

The Hong Kong listing is said to benefit Alibaba in more ways than just raising money, which the technology titan already have plenty of (USD33 billion excluding the latest IPO). Alibaba's Hong Kong shares are said to qualify for the fast entry rule for admission into the Hang Seng Composite Index. On December 9, less than two weeks after the Hong Kong list, Alibaba's Hong Kong shares will be admitted into the benchmark stock index, joining more than 400 constituents already in it. The entry would mean Alibaba would find its way into more funds, including passive ones that aim to track the indices.

An exciting time for Alibaba shareholders indeed. Nevertheless, let's not forget that the Chinese Internet sector is made up of many significant players with their own compelling stories to tell. For instance, shares of Pinduoduo (PDD) soared following the announcement by Amazon.com Inc (AMZN) on Monday that it would open a pop-up store on the Chinese e-commerce platform better known for its success tapping on the rural market and residents in lower-tiered cities. On a five-trading-days basis, Pinduoduo's 13.8 percent gain surpassed Alibaba's 8.2 percent comfortably.

Performing just under Alibaba but better than the Chinese Internet sector representative ETF, the KraneShares CSI China Internet ETF (KWEB), were Trip.com (TCOM), NetEase (NTES), and 58.com (WUBA) with gains of 7.2 percent, 7.1 percent, and 6.8 percent respectively, compared with 4.1 percent for the ETF.

As explained in a past issue of the Chinese Internet Weekly, I found the KWEB ETF holding the most representative stocks in the sector. As such, an overview of the week's share price movements of the top few holdings of KWEB as compared with the ETF itself is provided as follows for convenient reference especially for the stocks mentioned in this article. In the subsequent sections, I will elaborate on the Amazon partnership with Pinduoduo and offer my belated commentary on the Q3 2019 results of Trip.com.

ChartData by YCharts

Amazon's pop-up store with Pinduoduo

The news of Amazon.com setting up shop on Pinduoduo made eye-catching headlines. It was understandably so - the notion of the world's largest e-commerce company partnering with the second-largest in China certainly lends much credibility to the latter. After all, despite all its successes growing the Gross Merchandise Value ('GMV') per user and the huge subsidies on higher-priced items like Apple's (AAPL) iPhones as well as Dyson's premium home appliances, Pinduoduo continues to face challenges shaking off user apprehension of buying higher valued goods on its platform.

Amazon.com global pop-up store on Chinese e-commerce platformPinduoduoImage source

The timing was also appropriate, given that the store was able to launch with offers for Black Friday-Cyber Monday. There were promotions on cross-border goods like Nintendo Switch consoles and Australian baby formula milk, which were essentially cherries on the cake given that such overseas items were already well sought-after.

The greater availability of products on Pinduoduo would also help the e-commerce platform increase its range of offerings. This is critical to its growth given that it had previously complained about its peers locking in brand owners and restricting Pinduoduo's ability to secure new reputable suppliers.

However, it is important to look into the details of the deal. The Amazon Global Store pop-up store on Pinduoduo will operate only for a limited period - until the end of this year. The emphasis on the provision of an 'authenticity guarantee' for products on the store sort of reinforces the perception that shoppers on the platform lack confidence they would get genuine products otherwise.

The tie-up is also not exclusive. Amazon will continue to operate official stores on Alibaba's Tmall and JD.com (JD). Also not mentioned is how much of a cut is Pinduoduo getting from the partnership. For all we know, Pinduoduo could even be subsidizing Amazon for the store, with the former prioritizing user experience over short-term revenue increases and earnings.

The pop-up store would carry a selection of only about 1,000 products from outside of China. It is probable that the 1,000 available items are carefully curated and what Amazon.com deems to be popular with the Chinese consumers. Nevertheless, it is what it is - the pop-up store is not a Chinese version of Amazon.com and shareholders should temper their expectations as to the benefits the deal brings.

Lest I'm being accused of being a naysayer, I would also like to point out some potential upsides too. Given the temporal nature of the pop-up store, Pinduoduo could receive another boost for the next 'limited-time-only' store that Amazon could be announcing if the current exercise proved successful. This could be the upcoming Chinese New Year (also commonly referred to as the Spring Festival) in late January next year, the International Women's Day on March 8 (the 3.8 International Women's Day shopping festival which targets female consumers), Labour Day in May, the 618 shopping extravaganza in June, Mid-Autumn Festival in October, Singles Day in November, and Double 12 in December.

Better still, if after 'testing the water' Amazon.com decides that it would have a permanent store on Pinduoduo, that would be a more sustainable valuation booster. When that happens, Amazon.com could even take an equity stake in Pinduoduo in the hope of forming a more collaborative partnership. That would emulate the footstep of Walmart (WMT) which invested in JD.com a couple of years back.

Trip.com finding its footing - longer-term outlook underpinned by favorable mega-trend

Trip.com reported its Q3 2019 results in mid-November. While the leading Chinese online travel agency ('OTA') is a top 10 holding of the KWEB ETF, I garnered from the readership of my past Trip.com articles that the interest level on the stock is not high. Hence, I was surprised when several readers sent me private messages inquiring if I would cover the earnings report. Hence, given the peak reporting season has passed and the interest in Trip.com quarterly update, I would provide a belated follow-up on this issue.

Trip.com Q3 2019 result announcement could be considered a non-event, given the in-line EPS and revenue. However, that would be most unfair to its achievements in the quarter. With a 12 percent year-on-year increase in net revenue to RMB10.5 billion (US$1.5 billion) in the third quarter of 2019, Trip.com managed to grow its income from operations by 52 percent year-over-year to RMB2.2 billion (US$314 million), from RMB1.5 billion in the same period in 2018 and RMB1.3 billion in the previous quarter. Both the revenue and operating income established fresh records in the third quarter of 2019.

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Data by YCharts

The improved profitability was driven by a higher operating margin at 21 percent for the third quarter of 2019, compared to 16 percent in the same period in 2018, and 15 percent in the previous quarter. Income tax expense ballooned 42 percent to RMB365 million (US$51 million), compared to RMB257 million in the same period of 2018 and RMB336 million in the previous quarter.

Despite this, net income attributable to Trip.com Group's shareholders for the third quarter of 2019 was RMB793 million (US$112 million), reversing from the net loss of RMB1.1 billion in the same period in 2018 and RMB403 million in the previous quarter. On a trailing-twelve-months ('TTM') basis, Trip.com's net income has yet to reach record levels unlike its revenue and operating income, as reflected in the lackluster performance of the stock.

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Data by YCharts

One thing I'm watching is the continued escalation in the debt level of Trip.com. It has been on an uptrend since early 2018 and climbed to $1.82 billion by the third quarter of 2019, a three-year high.

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Data by YCharts

The management of Trip.com emphasized on two metrics in its international businesses (excluding Greater China destinations) in demonstrating "sustained robust growth momentum":

  • The year-over-year revenue growth rate of international hotel business (excluding Greater China destinations) reached 50 percent in the third quarter of 2019.
  • Trip.com brand's international air ticketing volume maintained triple-digit growth for the 12th consecutive quarter.

While the growth might seem unbelievably good, I can appreciate the impressive growth the company has achieved given my personal experience with Trip.com's portal. I have shared in an earlier article a pleasant flight thanks to an unexpected upgrade in class following a 'last-minute' issue of my flight tickets. I also noticed unabated marketing efforts by Trip.com, particularly the use of rebate programs, to entice travelers to book with the Chinese OTA.

The company also saw a "steady increase" in the booking ratio at Skyscanner, a platform it has acquired in 2017 as part of the Trip.com when the latter was essentially a travel recommendation service. Over the next three to four years, Jane Sun, the CEO of Trip.com, shared that the management was confident that the contribution from the international business segment will contribute between 40 percent to 50 percent of the total revenue.

Naspers had in September announced the completion of the exchange of its stake in Nasdaq-listed MakeMyTrip Limited (MMYT) for newly issued shares equivalent to a 5.6 percent stake in Trip.com. In turn, Trip.com will receive 42.5 percent of the outstanding voting shares in MakeMyTrip. The latter is an Indian-based OTA. While optimistic about the deal, I shared in an earlier article some concerns for keen investors to watch out for.

For the fourth quarter of 2019, Trip.com guided for the net revenue growth to come in at a year-over-year rate of "approximately 8% to 13%". The forecast factored in a 600 to 700 basis point impact related to recent macro and industry headwinds. The ongoing protest movement in Hong Kong earned a highlight with respect to the "industry headwinds" mentioned by the management during the earnings conference call for the Q3 2019 results.

"Certainly, the recent events in Hong Kong certainly has a negative impact on our outbound business, not just in Hong Kong, Hong Kong-Macau, also Taiwan, Greater China regions, they all are negatively impacted. And also not just from China, inbound to Hong Kong is almost completely gone." - James Liang, Executive Chairman, Trip.com

Trip.com also saw growth coming from travelers in third- and fourth-tier cities, supported by an increase in the opening of offline shopfronts. The population in these cities is getting more affluent but a significant segment, particularly the older generation, is not as savvy or comfortable with tapping the internet for their travel needs. Hence, the presence of brick-and-mortar stores would greatly help drive sales.

Global consultancy firm McKinsey recognizes the increase in travelers from lower-tiered cities, and despite them lowering the average expenditure per trip for China as a whole, these travelers are key to the continuing strong growth in total outbound trip expenditure in dollar value.

Increase in outbound trips from Chinese travelers (McKinsey)

Source: McKinsey

Analysts are apparently unimpressed with the latest quarterly performance of Trip.com. The consensus price target continues to head south, even as the share price of Trip.com embarks on a rebound since October. For PRO+ subscribers, you may wish to check out my exclusive write-up on Trip.com where I elaborated on the unlocking of Trip.com's potential via internationalization and premiumization.

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Disclosure: I am/we are long BABA, JD, NTES, BIDU, TCEHY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.