Strategic trade
Trade view / 20 October 2015 at 1:39 GMT

JD and Tencent tie-up takes fight to Alibaba

China Watcher / Shanghai
China
Instrument: JD:xnas
Price target:
Market price:
Background

JD.com, Alibaba's biggest retail rival, and Chinese tech giant Tencent have strengthened their relationship in order to further monetize the WeChat platform. The pair will work together to develop joint solutions, which will see JD retailers being able to reach more customers through WeChat and QQ. This is an interesting move by the two firms, which have both benefited from the partnership since Tencent acquired a 10% stake in JD.com early last year.

WeChat has 600 million users, QQ has 843mln, although most QQ users will have WeChat. So the total user base should be seen as a minimum of 843mln. Yet despite the growth of the WeChat platform, efforts to actually monetize it have been slow. Earlier this year, Tencent introduced advertisements to the Moments page (the equivalent of Facebook’s news feed), but it has been a gradual process because the popularity of such instant messaging apps can be precarious.

An over-saturation of advertisements could easily encourage users to download similar instant messaging apps, of which there are many, and this is something that Alibaba has spent years trying to develop. This introduction of online retail into WeChat should be an effective monetization strategy because it expands the services that WeChat offers to users.

With the further integration of JD.com’s retail platform into WeChat, it begs the question of how this will affect Alibaba. As I have discussed numerous times, Tencent has the best mobile ecosystem in China because of WeChat. As the most popular app among Chinese users, it provides the best entry point to a services ecosystem, and hence platforms within the Tencent ecosystem benefit greatly from the organic traffic flow.

This collaboration between JD.com and Tencent has parallels to the new e-commerce platform on Weibo, in which Alibaba holds a large equity stake. There is a clear trend of monetizing social media platforms by introducing online shopping, something that caters to Chinese users’ two most popular app types. Ahead of Singles’ Day on November 11, it appears that there will be a major focus on attracting users via social media, more than ever before. It has always surprised me that it is something that hasn’t been done before, because typically Singles’ Day is the most popular trend on both WeChat and Weibo, yet there has only ever been a passive attempt to turn this into actual sales.

JD.com's collaboration with Tencent will have long-term benefits for investors. With JD.com being US-listed, investors would be able to profit from this collaboration. In the short term, JD.com’s management should provide commentary on the joint solutions in the earnings conference call, expected in the middle of November, but initial signs could be evident during Singles’ Day next month.

JD.com’s share price since its IPOJD.com's Share Price Since Its IPO














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Management and risk description

Singles’ Day will be a major driver for the trade view, but investors should also pay close attention to the 5th Plenum of the 18th Party Congress, which starts next week. The agenda for the meeting will be industries that will be the focus of next year’s 13th Five Year Plan, and the increasing number of leaks to the media should provide welcome volatility. Online retail will likely be a major benefactor as the government focuses on making consumption the major driver of the Chinese economy.

Yesterday’s GDP release showed investors that any data release from China can be taken either positive or negative. Despite beating consensus, the 6.9% GDP growth was the lowest reading since 2009, so investors should be aware that near term data releases may cause volatility.

Parameters

Entry: $27.09

Stop:
$24

Target:
$32

Time Horizon:
Three months

— Edited by Robert Ryan

Non-independent investment research disclaimer applies. Read more

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