Strategic trade
Trade view / 17 November 2015 at 4:25 GMT

Alibaba proves itself best in ecommerce class

China Watcher / Shanghai
China
Instrument: BABA:xnys
Price target:
Market price:
Background

Alibaba announced its calendar third quarter earnings at the start of the month, prior to Singles Day and about two weeks earlier than its rivals. At the time of its earnings release, the market reacted reasonably well, and I gave my verdict that the results looked strong. As the market digests the weak earnings of its rivals, Alibaba's results look a lot better than we all thought.

On Friday, flash retailer VIPshop pre-announced that its Q3 revenues would be weak, and Alibaba's biggest rival JD.com reported its results on Monday morning, missing on both revenues and earnings.

I'll write a more in-depth piece about JD.com's earnings on Wednesday, but the fundamental takeaway is that Alibaba has proved itself to be best in class of Chinese ecommerce platforms. The point that will make this more poignant is that Alibaba always outperforms its rivals in the fourth quarter, simply because of its Single’s Day performance.

Despite JD.com's miss, investors were impressed with the strong Q4 guidance, which saw the share price end the day up 7.7%. My initial impression is that investors should have expected a strong Q4, given the Single's Day shopping event. But it's worth noting that JD deliberately doesn't report its Single's Day sales figures, because they would look very small compared to Alibaba's.

After a strong third quarter, investors can already expect a strong fourth quarter from Alibaba. The Single’s Day figures were release in real time, and although they didn’t generate the positive response in equity markets that they probably deserved, it should transpire when the fourth quarter earnings are released in February. On the other hand, JD has given itself a major target to hit.

It should be noted that the ratio of Alibaba’s GMV relative to JD.com’s GMV has been shrinking since 2013, but there was a notable increase in the ratio in the third quarter. After Alibaba’s GMV being 5.9 times the size of JD.com’s in the second quarter, this increased to 6.2x in the third quarter.

It is also worth noting that this ratio always increases in the fourth quarter, due to Alibaba’s Single’s Day performance. My take on this is that although I am bullish on JD.com’s long-term potential, particularly in regards to its collaboration with Tencent, it would be a dangerous game to bet against Alibaba ahead of its fourth quarter results.

Alibaba's share price since its IPO


Alibaba share price chart
 Source: Stockcharts.com

Management and risk description

As we're in the midst of earnings season for Chinese firms, there is the possibility of short-term volatility. Whilst I expect that the logic of my trade view will transpire, it may be the case that rivals' earnings see investors turn bearish on the industry in the short term. To overcome this, I have set the trade view to three months in order to cover the calendar fourth quarter earnings releases of both Alibaba and JD.com, as well as their smaller rivals.

Parameters

Entry: $78.30

Stop: $75

Target: $90

Time Horizon: Three months


— Edited by Adam Courtenay

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