Analyst: China's A Big Enough Sandbox For Both Alibaba And JD.Com To Play In

While Alibaba Group Holding Ltd BABA might be leading the Chinese e-commerce sector, there’s room for two, according to MKM Partners.

The firm upgraded JD.Com Inc (ADR) JD from Neutral to Buy and raised its price target from $33 to $51 Wednesday.

JD has “pulled back sharply” on margin and competition, but the Chinese retail opportunity is large enough “to support a strong No. 2,” said Rob Sanderson, managing director at MKM.

“We think that JD’s opportunity to increase margin remains unchanged and would recommend buying the recent weakness.”

MKM surveys of Chinese consumers have found “a consistent and large cohort,” or about 20 percent of those surveyed, who prefer a direct sales model such as JD’s to a third-party marketplace like Alibaba.

What To Watch

A critical metric for JD is gross margin, Sanderson said. The company has become China’s largest retailer on a low-margin, high-volume business model, the analyst said, and is just now reaching sustainable profitability with gross margin improvement.

The second quarter, when JD holds a June 18 anniversary sale, is a promotional one for the company, the analyst said.

“The company was more aggressive with promotions after meaningful first quarter margin outperformance,” Sanderson said. MKM estimates that the gross margin on JD’s direct sales is up by over 50 basis points.

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