After three brutal years of intense lockdowns, the Chinese economy started to finally get past the COVID-19 pandemic restrictions at the beginning of 2023. Investors -- seeing how stocks performed in other markets after pandemic restrictions were lifted -- started to bid up shares of Chinese stocks in hopes the companies would start improving their financials again.
However, there is one sector of the economy investors have been bearish on coming out of the lockdowns: e-commerce. E-commerce sales boomed around the world during the COVID-19 pandemic but have seen slowing growth in certain markets after economic reopenings. The funny thing is that the Chinese e-commerce market continues to grow, and is expected to reach $3.3 trillion in sales in 2023 and $3.56 trillion in 2024. It is the largest e-commerce market in the world and makes up over 50% of the sector's global payment volumes.
JD.com (JD 6.12%) and PDD Holdings (PDD 2.80%) are two Chinese e-commerce stocks that have sold off so far this year. Should you buy shares at these depressed levels to play the Chinese e-commerce boom?
1. JD.com: Infrastructure advantage, but low growth
JD.com is an older Chinese e-commerce business that also operates a huge logistics and delivery network. With this network, the company can offer fast delivery times to consumers around the country, similar to how Amazon operates in the United States. It also outsources its logistics network to other companies.
The company generates a ton of revenue, but at razor-thin margins. Over the last 12 months, JD has generated $153 billion in revenue and $2.87 billion in net income, which equates to a net margin of just 1.9%. The stock trades at a fairly cheap price-to-earnings (P/E) ratio of 20.6, but investors need to expect either sustained margin expansion or further revenue growth for an investment in JD.com to work over the long haul.
The problem with JD.com is that it is facing intense competition, mainly from the second company on this list.
2. Pinduoduo: Innovative e-commerce and international expansion
PDD Holdings -- which operates the e-commerce marketplace Pinduoduo -- jumped onto the Chinese e-commerce scene in 2015 and took the country by storm. Since going public, PDD has grown its revenue by close to 8,000%, which trounces the 215% growth by JD.com over that same time period.
Consumers in China adopted the Pinduoduo marketplace due to its social features and wide selection of products. Over the last 12 months, Pinduoduo has generated $21 billion in revenue and $5.4 billion in net income, giving it a much higher profit margin than JD.com. This is because PDD does not do first-party sales for e-commerce, but simply takes a cut of transactions flowing through its marketplace.
PDD has huge ambitions, recently expanding into Western markets with the launch of the Temu app. Temu has been the most downloaded app in the United States and other Western countries for months now, which indicates that PDD is succeeding mightily with its international expansion plans.
Today, PDD trades at a P/E of 19.4, which is actually cheaper than JD.com. With a much better track record of growth, investors will likely do better owning PDD Holdings compared to JD.com if shares are bought at current prices.
JD PE Ratio data by YCharts
The Alibaba risk is real
The problem with Chinese stocks is that the government has complete control of the economy and can change the laws governing businesses on a whim. This is what happened with another e-commerce giant, Alibaba, which faced a major regulatory crackdown out of the blue and even saw its founder Jack Ma disappear inexplicably for a time. The crackdown on Alibaba has helped Pinduoduo gain market share and keep rapidly growing revenue, but foreign investors -- and likely Chinese ones as well -- have no idea when this could happen to other e-commerce stocks.
There is also the risk around the simmering trade war between China and the United States. The U.S. has threatened to delist Chinese stocks for not following local auditing rules, which would make it impossible for individual investors to buy shares in these companies. In general, Chinese stocks have done poorly over the long term even though China's gross domestic product has grown at an impressive clip, which shows that the government doesn't prioritize business profits. The Shanghai Index is up barely 50% cumulatively over the last 25-odd years. That compares to a 1,500% total return for S&P 500 investors even though the U.S. economy has grown much more slowly than China over this time frame.
Taking all these factors into consideration, it seems like a fool's errand for foreign investors to think they can readily make money in Chinese e-commerce stocks. Stick with countries that have a consistent rule of law and you'll set yourself up much better for long-term success. If you still want to invest in e-commerce companies, there are plenty of Western-based stocks that are much safer bets to have in your portfolio.
