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While U.S. stocks are still up convincingly for the year, Chinese stocks listed in Shanghai, as well as Hong Kong, are in the red. The comparison turns even bleaker if we compare the price action of tech names, specifically, which have led the U.S. market rally in 2023.
Alibaba (BABA) and JD.com (JD) are down 7.1% and 54% YTD, respectively. By contrast, Amazon (AMZN) shares are up a whopping 67% over the period. More broadly, Chinese tech shares have been out of favor with investors ever since the country took on Alibaba in late 2020, and even stalled the IPO of its affiliate company Ant Financial – which was set to become the biggest listing ever, and commanded a market cap higher than that of JPMorgan Chase (JPM), the biggest U.S. bank.
Chinese Tech Stocks Have Been Out of Favor
The 2021 tech crackdown and the controversial zero-COVID policy that led to supply chain disruptions across several developed countries did not help matters, either, for Chinese stocks. Ongoing structural tensions between the U.S. and China also aren't doing any favors for Chinese companies, and many fund managers now find them “uninvestable.”
To make things worse, China’s economic growth rates have slowed, and are expected to fall even more in the coming years. Add the ongoing real estate crisis and the already high debt levels in the world’s second-largest economy to the discussion, and there are plenty of reasons to be bearish on Chinese stocks.
Are Chinese Tech Stocks Worth a Look Amid the Crash?
To be sure, Chinese stocks face multiple headwinds, which is well reflected in their share prices. However, another aspect worth considering is that - even at a projected 2023 GDP growth of 5.4%, as per IMF’s most recent prediction - the Chinese economy would add more incremental growth in absolute dollar terms than any other economy, and that trend is expected to continue over at least the next few years.
While it seems that the valuations of Chinese stocks have deteriorated structurally amid some of the actions taken by the all-powerful President Xi Jinping, at some point these names will start looking attractive to global funds chasing value.
Chinese e-Commerce Stocks Look Well-Placed
While some sectors of the Chinese economy - especially real estate, which was once the pillar of its growth - seem to be on shaky ground and could have a domino effect on other sectors as well, I believe China’s e-commerce industry looks well-placed.
First, the industry aligns well with the Chinese government’s goal of boosting domestic consumption while lowering its reliance on real estate and exports. Second, and as is the case in all major economies, e-commerce continues to grow more than overall retail sales in China amid growing penetration of online shopping.
Alibaba or JD.com: Which is a Better Chinese Stock to Buy?
There are several e-commerce plays in China, including PDD Holdings (PDD), which not only owns Pinduoduo but also Temu – the hugely popular shopping app in the U.S., which competes with the privately held rival Chinese company Shein.
For our analysis, though, we’ll focus on BABA and JD - which are more China-focused plays, since they get the majority of their revenues from the country. However, while JD is almost entirely an e-commerce play, Alibaba’s revenues are much more diversified, and it also has significant cloud and growing artificial intelligence (AI) operations.
Earlier this year, Alibaba reorganized its business into six divisions. which might pursue independent listings in the future. In terms of growth, Wall Street analysts expect Alibaba’s revenues to rise 10.5% and 9.4% YoY in fiscal years 2024 (ending in March 2024) and 2025, respectively, while predicting that earnings per share (EPS) will rise 25% and 12% during these years.
As for JD, analysts expect sales to rise 3.4% in 2023 and 8% in 2024. While analysts expect its EPS to rise 31% this year, they are predicting the metric to be almost flat in the next year.
Analysts Prefer BABA over JD
Wall Street analysts are quite bullish on BABA, as it has an average Strong Buy rating from the 14 analysts in coverage. Its mean target price of $141 is a 72% premium to current prices.
In contrast, JD has an average Moderate Buy rating from analysts. Only 57% of analysts rate it as a Strong Buy, compared to 85% for BABA.
Why BABA Looks Like a Better Buy Than JD
In terms of valuation, JD trades at a next 12 months price-to-earnings multiple of 8x, while BABA trades at 9.2x. At current levels, I believe BABA is a better buy than JD for the following reasons.
- Alibaba’s woes – including its troubles with the Chinese government – mostly seem to be in the rearview, and the company’s growth should stabilize going forward (albeit at a much slower pace than in the past).
- Alibaba’s business restructuring will also add unlock value, and the sum of the parts valuation might be higher than the current consolidated value. Also, an eventual listing of Ant Financial would help BABA monetize the stake, even though the IPO might not happen anytime soon.
- Markets might not be fully appreciating the company’s AI foray, even as U.S.-based tech companies have seen a significant rerating amid the AI pivot.
To be sure, JD stock also looks undervalued, and could be a good buy when considered on its own - but when compared with BABA, the latter looks like a better investment proposition, with a more attractive risk-reward.
On the date of publication, Mohit Oberoi had a position in: BABA , JD , AMZN . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
