德银-中国-软件服务业-中国电子商务：两个阵营的故事——我们看好有着强劲增长前景的公司-2019.5.27-72页 (2).pdf

27 May 2019Deutsche BankResearch Asia China Technology Software&Services Industry China E-commerce Date Initiation of Coverage A tale of two camps-and we favor the one with strong growth prospectsWe have a growth bias in the China e-commerce landscape and hence favor Alibaba and Pinduoduo(PDD).We also like VIPS as a GARP stock.We reiterate Buy on Aliba-ba,initiate coverage of PDD as a Buy,VIPShop(VIPS)as a Buy,and JD.com(JD)as a Hold.We adjusted Alibabas valuation in synchronizing all our e-commerce stocks,which lifts its target price to US$220 from US$197.In this report,we look at the key themes reverberating across the China e-commerce landscape,which we have put together after our interviews with companies,industry experts and merchants.We look at the evolution of the FMCG segment and the demographic and geographic penetration in China,along with a comparison of the key metrics and market positioning of leading companies.We favor the growth-oriented campAt the risk of oversimplifying a dynamic and complex market,we see two camps emerging in the Chinese e-commerce landscape.One camp comprises companies with a meaningful TAM(total addressable market)outlook but a weaker near-term profit momentum as they invest in operations.We include Alibaba and PDD in this growth-oriented camp.The other camp consists of companies with slower top-line growth but which are transitioning towards a focus on sustainable profit rather than revenue growth.JD and VIPS are in this camp.Both camps are equally viable as investable stocks but we favor the growth-oriented camp for two reasons.1)We are not paying for a significantly higher valuation of these stocks underlying core oper-ations.For example,Alibaba is trading at 17x EV/EBITDA vs.JD at 22x in CY19E and PDD is trading at 7x EV/FCF vs.VIPS at 10 x in CY20E.2)The latter camp has shifted to a profit-focused strategy in the past few quarters and we are not yet sure whether this strategy will be sustained and executed on a multi-year basis.After all,China has a dynamic e-commerce scene that is prone to new competitive and regulatory risks.KPI comparison across e-commerce platforms,including a merchant ROI analysisGiven the notoriously different disclosure metrics and definitions across the com-panies and data sources,we spent a meaningful amount of time curating the data shown herein.We compare and contrast key KPIs such as the GMV,fulfilled order volume and average ticket size,fulfillment cost and user acquisition efficiency of leading e-commerce players.We took time to interview merchants and analyze CompanyTarget PriceRatingBABA.N197.00 to 220.00-JD.OQ-to 29.40-to HoldPDD.OQ-to 26.20-to BuyVIPS.N-to 9.30-to BuyKey ChangesSource:Deutsche BankAlibaba(BABA.N),USD156.00Buy2019A2020E2021EP/E(x)29.722.716.5EV/EBITDA(x)21.716.611.6EV/FCF(x)35.129.121.4JD.com(JD.OQ),USD26.70Hold2018A2019E2020EP/E(x)69.735.725.0EV/EBITDA(x)42.921.914.9EV/FCF(x)-42.512.7Pinduoduo(PDD.OQ),USD20.53Buy2018A2019E2020EP/E(x)-30.3-35.140.7EV/EBITDA(x)-40.9-20.735.4EV/FCF(x)18.321.57.2Vipshop(VIPS.N),USD7.50Buy2018A2019E2020EP/E(x)12.911.28.3EV/EBITDA(x)7.26.14.3EV/FCF(x)13.518.210.0Companies featured Source:Deutsche BankHan Joon KimResearch Analyst+852-2203 6157Maria MaResearch Associate+852-2203 6242Deutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports.Thus,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MCI(P)066/04/2019.THE CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLES REPUBLIC OF CHINA(THE PRC)(EXCEPT IN COMPLIANCE WITH THE APPLICABLE LAWS AND REGULATIONS OF PRC),EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAU.Distributed on:26/05/2019 21:00:14 GMT7T2se3r0Ot6kwoPa27 May 2019Software&ServicesChina E-commercePage 2Deutsche Bank AG/Hong Kongdata on brands and customers,which resulted in our merchant ROI calculations of different e-commerce platforms.The results present a clearer picture of market positioning and the key pain points,which we advise investors to look out for.For one,we believe PDD will need to justify its merchant ROI over the coming quarters.Valuations and key risksOur analysis of the historical valuations of the e-commerce stocks indicates that investors have valued growth significantly over value in this space;there is a wide range of valuations,depending on the perceived growth prospects.We use EV/EBITDA and EV/FCF to focus on a cash-based earnings outlook.The key industry risks are increasing user acquisition cost due to competition,regulatory interven-tion,and an aggressive pace of investment.27 May 2019Software&ServicesChina E-commerceDeutsche Bank AG/Hong KongPage 3Table Of ContentsIndustry overview.5Focus on New Retail for growth.5Geographic expansion.8Focal points for key e-commerce stocks in 2019.14Profit margin trend to stabilize in 2019E;signs of a rising marg.14Driver of profit margin#1:User acquisition cost.16Driver of profit margin#2:Compare unit economics among merchant.16Valuations.18Valuation framework.18Valuation details.18Valuation comparisons.19Alibaba.23JD.com.25Outlook and financial forecasts.27Valuation and key risks.33Valuation.33Key risks.33Company profile.34Shareholding structure.34Management profile.35Pinduoduo.36Outlook and financial forecast.38Marketing cost is the key variable in turning profitable.39Financial forecasts.40Valuation and key risks.45Valuation framework.45Key risks.45Company profile.46Shareholding structure.46Management profile.47Vipshop.48Outlook and financial forecasts.5027 May 2019Software&ServicesChina E-commercePage 4Deutsche Bank AG/Hong KongTable Of ContentsValuation and key risks.55Valuation framework.55Earnings sensitivity.55Key downside risks.56Company profile.57Shareholding structure.57Management profile.5827 May 2019Software&ServicesChina E-commerceDeutsche Bank AG/Hong KongPage 5Industry overviewWe see two main industry trends driving the corporate strategy of major e-com-merce players in China:1)a category shift towards FMCG and a repositioning of core expertise,and 2)diverse demographic and geographic segmentation,which encourages companies to seek a larger user base.Focus on New Retail for growthKey growth focus in underpenetrated FMCG segmentOne of the key underlying themes in e-commerce continues to be the push towards FMCG(fast-moving consumer goods)segment penetration,as e-commerce evolves from standardized products with a longer shelf life(e.g.3C-computer,communication,consumer electronics)towards non-standard products with a shorter shelf life(e.g.groceries).We believe China is still at an early stage of its investment cycle,which may continue for several more years before we enter a meaningful harvesting cycle.To put the figures into perspective,Euromonitor data indicates that Chinas e-com-merce penetration is 23%in 2018,one of the highest among other developed e-commerce markets.However,in the FMCG category,and in particular,the food and beverage segment,China still has room to scale up,with a penetration rate of 9%.In comparison,South Korea has high penetration in both total e-commerce and FMCG,at least providing an indication that FMCG penetration can rise meaningful-ly once infrastructure is developed.Figure 1:E-commerce penetration comparison by country1010%1515%2020%2525%ChChi in na aKoKor reaeaJapJapananB Br ra az zi il lSource:Euromonitor27 May 2019Software&ServicesChina E-commercePage 6Deutsche Bank AG/Hong KongFigure 2:FMCG penetration and breakdown by sub-categoryOnline penetration,2018China KoreaUSJapanBrazilFMCG9.0%21.1%4.1%3.6%0.4%Food and drink7.7%22.1%2.3%3.2%0.2%Consumer Health22.2%11.8%11.5%8.3%1.4%Home Care 15.2%10.5%2.8%2.1%0.4%Pet Care 36.9%36.0%16.8%11.7%2.2%Source:EuromonitorFood and drink,which contributes nearly 80%of FMCG category,has only 7.7%online penetration,vs.Korea at 22.1%.Euromonitor estimates suggest food and drinks online penetration could rise to 10.4%in 2022E,within which we believe the upside will mostly come from the fresh food sub-category.Major market players such as Miss Fresh an upcoming start-up in the fresh food delivery segment in China and internet giant-backed Hema and Super Species leverage their online-offline integrated experience and logistics capability to educate users and drive online fresh food growth(aka New Retail).For other sub-categories,we also see further upside from a higher online penetration into consumer health(22.2%in 2018 to 30.0%in 2022E),home care(15.2%in 2018 to 19.2%in 2022E)and pet care(36.9%in 2018 to 45.2%in 2022E),according to Euromonitor.In theory,if China can triple the FMCG segments online penetration from 9%in 2018 to 27%over the next few years,we believe the online e-commerce market size will grow from RMB4,315bn in 2018 to RMB8,603bn in 2022E.Figure 3:Total retail market split by key categories2 2,4 490902 2,6 64 48 82 2,8 80 09 92 2,9 97 72 23 3,1 13 36 62 2,0 032322 2,1 14 44 42 2,2 28 82 22 2,4 42 28 82 2,5 58 86 63 3,6 607073 3,9 91 19 94 4,2 26 61 14 4,6 62 24 45 5,0 00 04 41 10 0,4 41 11 11 11 1,23231 11 11 1,9 99 91 11 12 2,7 72 22 21 13 3,4 41 10 00 05,5,00000 01010,0,000001515,0,000002020,0,000002525,0,000003030,0,000002020181820201919E E20202020E E20202121E E20202222E ER RMMB B bn nA Ap pp parare el lF FMMCGCG-f-fo oo od d an and d d dr ri in nk kF FMMC CG G-o-ot th herers sO Otherthers sSource:EuromonitorFigure 4:Online retail market split by key categories1 1,3 370701 1,5 547471 1,7 728281 1,9 908082 2,0 088881 1,0 002021 1,1 111111 1,8 835352 2,3 37 76 62 2,8 880803 3,3 397973 3,8 896960 02,2,00000 04,4,00000 06,6,00000 08,8,00000 02020181820201919E E20202020E E20202121E E20202222E ER RMMB B bn nA Ap pp parare el lF FMCGMCG-f fo oo od d and and d dr ri inknkF FMMCGCG-o-ot theher rs sO Othether rs sSource:EuromonitorFor a comparative measure,the 3C and apparel segments represent 24%of total retail consumption in China(online penetration of 37%),and FMCG is only 9%pene-trated digitally in China,so in theory,there is a larger RMB1,120bn market opportu-nity for e-commerce players to capture.The investment to secure the large TAM(total addressable market)is already under-way.Chinas National Bureau of Statistics(NBS)indicates that the food category and non-food FMCG category have been growing 34%and 26%yoy respectively,outpacing the growth of 7%yoy for apparel in 2018.27 May 2019Software&ServicesChina E-commerceDeutsche Bank AG/Hong KongPage 7Figure 5:NBS-reported online FMCG retail sales growth is faster than that of other categories in 2018FMFMCG-CG-f fo oo od d an nd dd dri rin nk kF FMCG MCG-otherthers sA Ap pp pa ar re el lSource:NBSAccording to Euromonitor and our own calculation,the 3C segment is already 37%digitally penetrated with JD capturing 47%market share overall while the apparel segment has 55%penetration with Alibaba holding 45%market share.Figure 6:Online penetration and market share by key verticalApparel3CFMCGFMCG-Food and drink Online retail sales,RMBbn1,370749362279Online penetration,%55.0%36.8%9.0%7.7%Market share,%BABA45%25%42%22%JD6%47%12%10%PDD6%2%31%20%VIPS3%1%6%1%Source:Euromonitor,company data,Deutsche Bank estimatesNote:Market share based on our estimation of fulfilled GMV ratio of company reported GMV.Dominance and profitability in the FMCG segment is yet unclearOne of the critical challenges to growing into the FMCG segment is that the tradi-tional core expertise that helped the e-commerce platform grow is less of a strength in succeeding in the FMCG segment.For example,competitive pricing may be a relatively high decision-making criterion for a consumer when deciding where/how to purchase a computer,but quality of goods or convenience/immediacy may be greater decision-making factors when a consumer decides where to shop for gro-ceries.The end result is that e-commerce platforms are investing heavily into peo-ple,operations and infrastructure(e.g.cold chain logistics)to bolster their market position across brand positioning,product selection,delivery time and conve-nience to consumers.We believe existing offline retailers are also taking the threat from e-commerce players more seriously and now treat digital transformation as a critical part of their sustainability strategy.27 May 2019Software&ServicesChina E-commercePage 8Deutsche Bank AG/Hong KongFigure 7:No single offline FMCG retailer has more than 10%market share5 5.4 4%3 3.0 0%2 2.6 6%2 2.0 0%1 1.9 9%1 1.4 4%0.0.0%0%2.2.0%0%4.4.0%0%6.6.0%0%8.8.0%0%1010.0.0%Source:KantarAs a result,we believe investments and competition will cause overall profit mar-gins for e-commerce players to fall.In fact,New Retail dragged Alibabas non-GAAP EBITA margin down by 7%to 28%in FY19 and we expect similar level of drag in FY20.While the TAM opportunity is large,we do not see a clear path for earnings recovery across the entire space in a systematic fashion as relating to New Retail initiatives.Geographic expansionMeanwhile,Chinese consumers needs are quite diverse with meaningful differ-ence in consumption patterns across income brackets and cultural backgrounds.Given the diverse nature of consumers in China,online platforms have remain focused on growing users,particularly in lower tier cities where penetration has room to scale further.As shown below,the income disparity between Tier 3-5 cities and Tier 1 cities is more than 10 years difference,showing how much room there is for consumption upgrade as the Chinese middle class grows.Tier 3-5 is also supposed to represent 50%of total Chinese income by 2022E at an estimated RMB20.3tn in disposable income.27 May 2019Software&ServicesChina E-commerceDeutsche Bank AG/Hong KongPage 9Figure 8:Disposable income of tier 3-5 cities will account for 50%of total Chinese income in 2022ESource:CEIC,Wind,NBS,Deutsche Bank estimatesFigure 9:Different Chinese cities positions on annual expenditure per capita S-curve05,00010,00015,00020,00025,00030,00035,00040,00045,000RMBShanghaiBeijingGuangzhouShenzhenNew Tier 1Tier 2Tier 3-5Source:CEIC,Wind,NBS,Deutsche Bank estimatesAs a point of reference,China has 65%of its total population in Tier 3 and below cities,based on NBS data.Comparatively,our data analysis shows that China e-commerce players have 50%of users from lower tier cities with PDD the most skewed towards Tier 3 and below city consumers,while JD has the highest portion of Tier 1-2 city consumers.The seasonal pick-up in lower tier city consumers during the Chinese New Year(typically in January and February)spending season,also indicates that lower tier city consumers are digitally connected and willing to spend online,but are yet to make it a recurring and frequent experience.Figure 10:MAU mix across platforms vs.China total popu-lation mix by different tier citiesChChi in na ta to ot tal alp po op pu ul latati io on nT Taoa