Why Pinduoduo Could Be 'Primary Beneficiary' Of Alibaba's China Regulatory Misfortunes

Pinduoduo Inc PDD and JD.com, Inc  JD could benefit from antitrust proceedings against Alibaba Group Holding Ltd BABA in China, according to KeyBanc Capital Markets analyst Hans Chung.

What Happened: “We believe PDD could be the primary beneficiary of the investigation, and JD could be secondary,” Chung said in a note.

The Chinese investigation is mostly centered around exclusive agreements with merchants on the Tmall platform, which prohibit them from opening stores on rival platforms, the analyst noted.

Pinduoduo could stand to benefit if the unfair practice is removed “given its customer scale and [return on investment] are attractive to merchants.”

“Not only upside in [gross merchandise value,] it could also result in lower selling and marketing expense or a higher take rate as [Pinduoduo] may not need to attract merchants to the platform through subsidy or traffic incentives,” the analyst observed.

For JD, the analyst believes the regulatory action could be beneficial to its apparel category but the upside “may be limited” due to the company’s customer profiles and the nature of the platform, which is more akin to retailers than shopping centers.

Chung assigned a price target of $355 and rated the shares as Overweight.

Why It Matters: As for the fallout for Alibaba itself — the KeyBanc analyst does not expect “meaningful changes in the competitive landscape,” and viewed concerns as “overdone.”

Chung said that the pull-back in the shares since November creates an attractive entry point for “long-term opportunity” in Alibaba.

KeyBanc said in its note that fines — and not a breakup —  are the “most likely outcome” along with greater scrutiny on business operation in the case of Alibaba.

Based on the rectification requirements imposed by Chinese regulators, a breakup of Ant Group is signaled, as per Chung. 

On Monday, Alibaba shares traded nearly 8% lower at press time in Hong Kong, after the company announced plans to raise its stock buyback threshold by an additional $4 billion to $10 billion through the end of 2022. 

Price Action: Alibaba shares closed 13.34% lower at $222 on Thursday in New York.

On the same day, Pinduoduo shares closed nearly 8.9% higher at $152.75 on Thursday and gained 0.66% in the after-hours session. JD shares closed 1.14% lower at $84.49 and fell 0.22% in the after-hours session.

Photo: courtesy of Alibaba