BABA, PDD, Tencent, Meituan, NetEase, JD - Key Drivers, Debates and Baiguan Non-Consensus Views #1

As data and information explode, it’s easy for investors to lose sight of the part of the reality that truly matters. We are fatigued by information overload. More information actually leads to more noise, not less.

Comes in our new series, which is (temporarily) named Key Drivers, Debates, and Baiguan’s Non-Consensus Views.

This series is the anti-noise filter for investors. Here, we provide clean and easy takes on the most valuable China equities, with a focus on 1) identifying key drivers and debates of the time that determine their value and 2) market consensus views and our non-consensus views regarding those key drivers.

Although we intend to make our takes as succinct as possible, bear in mind those short takes are based on an aggregation of 1) massive troves of data collected and curated by our parent company BigOne Lab, 2) conversations with BigOne Lab’s clients, and Baiguan’s premium subscribers, 3) our unique framework of understanding of China’s economy, business landscape, and policy-making.

Why should non-investors also care about this? The equities we cover represent some of the largest companies in their respective sectors, so understanding what drives their growth (or no-growth) can also be a sign for the economy at large.

For this first installment, we will cover China’s largest internet names, which have just announced their 2024 Q2 results. The parts about Alibaba and PDD are free, while the parts about Tencent, Meituan, NetEase, and JD are only accessible to paying subscribers. Our paying subscribers can also access the exclusive Discord community to continue the conversation. (If you are a paying subscriber, you can find the link to our Discord at the top or bottom of this email.)

If you like this format, please write to us to provide your feedback or the other tickers/sectors you wish us to cover. We will consider whether to expand this format beyond just internet names.

#1 Alibaba

Key debates and drivers

There is a large gap between GMV growth rate ("high-single-digit growth" per management) and Customer Management Revenue growth rate (+0.6% only, lower than consensus), which is likely due to more fee-reduction programs for merchants and also due to more consumer-friendly policies resulting in more returned goods, leading to questions about the sustainability of market share stabilization and long-term profitability.

Consensus view

E-commerce market shares in China are stabilizing. Alibaba's earnings are about to inflect.

Baiguan's non-concensus view

PDD's comments on higher costs and investments to support merchants are likely to delay the much anticipated "earnings inflection" point while the gap between GMV growth and revenue growth is likely to persist. The competitive environment from what we can see is not going to get much better.

AliCloud, despite management enthusiasm and a relatively high growth rate, is not as important a driver for Alibaba's value. Cloud services in China are currently a much smaller pie with many more players than the US market.

#2 PDD

Key debates and drivers

PDD’s very strong results but very unorthodox earnings call sent investors into a huge shock and what one analyst called “decision paralysis”. Management essentially said they are going to have declining profit due to investments in merchant support etc. Their blunt assessment that there will not be share buybacks and dividends for years also didn’t help sentiments. Questions loom large on how large and for how long this decline in profits will look like.

Consensus view

Shocked, the market doesn't know how to act. A huge level of uncertainty hangs on this stock. So many investors just leave and seem to be done with it. PDD stock price ended the trading session at exactly $100 with a ~30% drop-off and a 14% turnover rate on the date of the earning call.

Baiguan's non-concensus view

This results announcement is PDD in its element. It confirms once again that this is not a company giving a damn about short-term stock prices while sticking with things they think are the most correct at the time, regardless of what investors think. It's a sign of management's grit and clear-headedness in setting strategic priorities.

It looks likely that they now see their major problem as the heightened platform-merchant tension with Colin Huang being the richest person in China at the same time, which increasingly looks to spiral out of control and is both economically and politically unsustainable. Perhaps they are also comfortable enough about their market shares and user mindshares now so they have decided to shift more attention to defuse the tension.

The only alternative explanation for this kind of unorthodox self-sabotage approach is that they are a fraud, which, again, we disagree with.

Investing in PDD is also a test of whether you are comfortable with investing in a management team that doesn’t care about pacifying shareholders at all. This certainly isn’t for everyone. Therefore, a “shareholder mistreatment” discount is likely to persist, as those who don’t want to get hurt run away from it, depressing its valuation and stock price potential for an indefinite period.

[The rest of the article on Tencent, Meituan, NetEase, and JD is reserved for paying subscribers of Baiguan. Paying subscribers can also join our exclusive Discord community for further discussion of these topics]

#3 Tencent