Top 3 players account for 80% of goods sold online

Alibaba, JD and VIPS collectively command 80% of market share of goods sold online in China. With more than 460m online shoppers chalking up RMB5,200b (USD750b) in sales last year making China the world’s largest e-commerce market. China’s online retail market will reach USD1,700b by 2020, double the size today as reported by Goldman Sachs.

6 new China billionaires form parcel service

The online boom has created newly minted billionaires delivering parcels for Alibaba, JD, VIPS and other online players. ZTO Express (75% revenue from Alibaba) is one of China’s largest express delivery companies with 14% market share. The other major players are listed in Shenzhen and Shanghai namely SF Express, YTO Express, Yunda Express and STO Express.

Alibaba going “Hybrid”; online + brick & mortar

Alibaba struck a strategic partnership with Balian Group, one of China’s biggest retail conglomerates, which control five listed companies, Friendship Group, LianHua Supermarket, Material Trading Center, No 1 Pharmacy and Fudan Mircoelctronics. It connects with 20 provinces with 6,000 outlets and 200,000 employees.

China E-Commerce major players

• Based on our preliminary observation as per data collected on Table 1 in the Appendix, the well-known major E-Commerce players in China; (BABA, JD and VIPS) and biggest parcel delivery players (ZTO, STO, SF and YTO).
• Consensus is forecasting the China E-Commerce players to record blistering +65.9%/+72.8% NP growth for FY17E/FY18E and the parcel delivery players is expecting 27.6% NP growth in FY18E.
• The average PER/Fwd. PER of China E-Commerce listed players are 55.1x/27.2x and the parcel delivery listed players are 41.3x/32.4x.
• Industry ROE averages 16.0% for E-Commerce while parcel delivery players see an average of 6.5%.

Looking on the surface…

• Across the board, JD showcased the strongest consensus Net Profit growth of +173.95% for FY18E and followed by Alibaba +65.8%/+23.69 for FY17E/FY18E.
• Meanwhile, VIPS looks attractive at 13.3x Fwd. PER vs. industry average of 31.1x for E-Commerce. ZTO, on the other hand, traded at 13.9x Fwd. PER vs. industry average of 27.2x for parcel delivery.
• The other China-listed players i.e. STO (25.9x Fwd PER), SF (54.9x Fwd. PER) and YTO (35.4x Fwd PER) traded at much higher valuations as opposed to VIPS and ZTO.

So what can we do?

For investors who want to participate in the electrifying growth of China online sector, VIPS seems to offer cheaper entry at 13.3x Fwd. PER while ZTO parcel delivery appears to be an attractive proxy to (ECommerce) parcel delivery play trading at only 13.5x Fwd. PER. Furthermore, ZTO's share price has corrected from recent IPO euphoria to the current more attractive level (52-week low).

Source: Kenanga Research - 15 Mar 2017