The faltering recovery in China has spurred investors to raise their bearish wagers on Chinese e-commerce stocks. For example, short interest in PDD Holdings (PDD) has risen to about 8% of total shares outstanding, according to IHS Markit data. That’s higher than e-commerce peers JD.com (JD) and Alibaba Group Holding (BABA).
China’s economic recovery weakened further in May, with manufacturing activity contracting more than expected, retail sales slowing, and May exports posting their biggest decline in 4 months. The fragile recovery in China has engendered pessimism toward Chinese e-commerce stocks as evidence grows that consumer consumption in China is waning. Since rallying to a 1-1/2 year high in January, PDD Holdings dropped to a 7-month low late last month.
Since posting a 1-1/2 year high in January, PDD Holdings has tumbled -30%, a larger decline than the -20% drop in the Nasdaq Golden Dragon China Invesco ETF (PGJ). Goldman Sachs warns that increased competition and higher overseas investment in its online shopping app Temu pose risks to PDD Holding’s margins. Investors are also concerned that PDD Holding’s aggressive campaign to gain market share by boosting discounts to lure buyers will hurt the company’s bottom line.
The peers of PDD Holdings are also ramping up their discounts to lure customers. Alibaba Group Holding plans to accelerate expansion offshore via its Southeast Asia online platforms Lazada and AliExpress, popular in parts of Europe and Latin America, forcing PDD Holdings to spend more to retain its customers. Bloomberg Intelligence expects PDD Holdings to cede profit to competitors heading into this month’s 618 shopping festival, the second largest in China.
Elevated valuations are also a concern for PDD Holdings. While JD.com and Alibaba Group Holding shares have also slumped this year amid a broader market decline, their cheaper valuations show much of the macro weakness has been priced into the stocks and may even entice bargain hunters. PDD Holdings trades at 16.1 times forward earnings, compared with 12.4 times for JD.com’s ADRs and 10.3 times for Alibaba’s ADRs. PDD Holdings is attempting to recover after it reported last week that Q1 revenue rose a stronger-than-expected 58% and, in an earnings call, said it plans to speed up shipping times and take a more proactive approach to customer service due to increased competition.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
