Feb 3 2020 - Alibaba, JD.Com Can Deliver Amid Virus Outbreak; Trip.Com Defy Naysayers

Summary

When the statistics of the Wuhan virus are compared to other major virus outbreaks, the severity does not correspond to the high scrutiny and fear level accorded to it.

Trip.com displayed remarkable resilience, eking out a small gain for the week, perhaps due to local reports of heartwarming stories about Trip.com employees going beyond the call of duty.

Contrary to popular belief of logistics difficulties, official statistics revealed a huge jump in postings and deliveries between January 24 and January 29 across China.

Even if e-commerce is hampered by delivery challenges amid the epidemic, Alibaba and JD.com can still benefit from their substantial offline presence.

By ALT Perspective

The Wuhan viral outbreak began in December last year and I mentioned the possible negative impact on Chinese technology companies in this year’s first issue of the Chinese Internet Weekly titled Tough Time For Shareholders Of China Internet Stocks. Unfortunately, the situation is much worse than anticipated, with the death toll at 259 out of 11791 cases at the time of writing (Saturday 2/1/2020).

2019 nCoV number of cases and death toll (Wuhan virus)

Source: SCMP

Editor's Note: Current global coronavirus cases stands at 17,489.

What is more damaging, in my opinion, is the proliferation of fake news and videos where the creators apparently aim to create unwarranted panic or distrust in the Chinese government. I wouldn’t be surprised if some of the perpetrators turn out to be short-sellers of Chinese stocks (CQQQ)(FXI)(MCHI). It’s noteworthy that when the increases in the number of reported cases and deaths were low, critics were quick to voice their skepticism over the official statistics.

Yet, whenever the numbers jumped, there were comments that the situation was getting more alarming and that it proved the officials were ‘catching up’ on the gap between the actual and reported numbers. Seems like the Chinese government can never win. I also note that many statistics trackers of the Wuhan viral outbreak omit the number of patients who recovered from the virus. Providing the recovery rate could help to reduce the anxiety over the crisis, like the map from Johns Hopkins (as follows).

Map with the outbreak showing the number of patients who recovered (right-hand side)2019-nCoV Global Cases (by Johns Hopkins CSSE) with the number of patients who recovered from the Wuhan virus

Source: Johns Hopkins CSSE

When the statistics of the Wuhan virus are compared to other major viral outbreaks, the severity in terms of the number of deaths and fatality rate does not correspond to the high scrutiny and fear level accorded to it.

wuhan coronavirus compared to other major viral outbreaks, death toll, fatality rate, number of countries affected

Source: Business Insider

Nevertheless, market players continue to be gloomy. The Chinese Internet sector representative ETF, the KraneShares CSI China Internet ETF (KWEB), extended losses from the previous week, closing down 2.8 percent for the week. As explained in a past issue of the Chinese Internet Weekly, I found the KWEB ETF holding the most representative stocks in the sector. As such, an overview of the week's share price movements of the top few holdings of KWEB as compared with the ETF itself is provided as follows for convenient reference especially for the stocks mentioned in this article.

ChartData by YCharts

In the previous issue, I stated the challenges for TAL Education (TAL) but noted the stock seemed "technically stronger than Trip.com." Indeed, the leading education services provider did not disappoint, and surprised on the upside, rising nearly 7 percent for the week, leading the top holdings of KWEB by far. Investors are apparently buying into the idea that iQIYI (IQ) would benefit from more video-streaming with the majority of the Chinese staying indoors during this period, sending its share price higher by 1.7 percent for the week.

Trip.com surprisingly ended the week in positive territory, up 0.8 percent. I will elaborate more on the stock in this article. E-commerce players Alibaba Group (BABA), JD.com (JD), and Pinduoduo (PDD) plunged, losing between 3.4 percent to 5.7 percent. The declines are understandable, given the disruptions in logistics and supply chain. However, e-commerce players are expected to gain market share in the retail business from this episode. It's not difficult to see why but I provide some justifications in subsequent sections.

Trip.com proving to be resilient amidst the Wuhan virus epidemic

My prior article has been misconstrued by some as suggesting the stocks of companies like Alibaba Group, JD.com, and Tencent Holdings (OTCPK:TCEHY)(OTCPK:TCTZF) would see immediate gains in their share prices with the crisis in full swing. I wrote in the conclusion that "we are now presented with the opportunity to get into stocks at a discount from early January."

This is not the same as saying I expected a quick rebound. Even so, we have seen it happen in online travel agency Trip.com (TCOM, formerly Ctrip.com) last week. Trip.com displayed remarkable resilience, eking out a small 0.81 percent gain for the week. In the previous issue, I showed a price chart for TCOM with a multi-year trend-line rising from just below presently and heading towards by the end of 2020. I said that line could "serve as a strong support for the beleaguered travel company".

Trip.com share price chart

Trip.com share price chart by ALT Perspective (using Yahoo Finance charting tool)

Source: ALT Perspective (using Yahoo Finance charting tool)

Yet, I was not confident that the line would hold amid the onslaught of bearish developments in the Wuhan viral outbreak and that it was still "early days". In such pandemics, the travel industry would be one of the most severely affected, if not the worst. The initial impact has already been materialized. Trip.com has had to offer free cancellations of travel bookings to appease customers and avoid being accused of profiteering from the administrative fees. This happened during the peak travel season and Trip.com would have to pay its staff more during the holiday period to handle the aftermath. I regrettably wrote:

"The gap from the last traded price and the multi-year support look awfully insufficient to last the next few trading sessions, not to mention weeks. I'm not confident that a few brave souls with a long-term perspective or intrepid bottom-fishing traders could keep the stock from breaching the support."

How wrong I was. Turns out, there were many more "brave souls with a long-term perspective or intrepid bottom-fishing traders" than I anticipated, helping to keep the stock from breaching the support. Things might still change in the next few weeks though but Trip.com might emerge a big winner from this epidemic in the longer run.

The local news outlets have been littered (contents in Chinese) with heartwarming stories about Trip.com employees displaying exemplary behaviors, helping stranded customers beyond the call of duty. Its brick-and-mortar outlets were also reportedly contributing donations in the form of money or essential supplies to their neighboring hospitals.

Last week, Las Vegas Sands (LVS) reported its 2019 Q4 results and we heard the optimism of Robert Goldstein, its President and Chief Operating Officer, in response to an analyst's postulation of a pent-up demand following the disruption the viral outbreak has on the casino business. It would be fair to say his expectation of pent-up demand materializing upon the resolution of the epidemic should bode well for the travel industry and Trip.com, as the leading online travel agency in China.

"As for pent-up demand, I'm a big believer in pent-up demand. The fact there - and in fact, this is killing Chinese New Year, so I think we'll - when this does resolve, whether it's next month or next quarter - I don't know when it will resolve. I don't want to pretend to know. There's a very good article in the journal today about the history of these viruses in the last 60, 70 years and they get solved.

With the Hong Kong flu, the Russian flu, the Asian flu, the flu I had when I was 12 years old, they resolved. And they will resolve this time, whether that's February or March, I don't know. But when it does resolve, Macao's going to be very, very, very busy because whether you know it or not, these folks like to gamble. And we have the biggest and best properties in Macao. They will come back in force."

How are food and e-commerce deliveries affected during the viral outbreak?

In my prior write-up titled Viral Outbreak A Fortuity For Alibaba, JD.com, And Tencent, I noted it was boom time for e-commerce companies as shoppers turned to online channels and shunned brick-and-mortar outlets for fear of contagion from those already infected with the novel coronavirus. I provided a short history of JD.com (JD) in the article for the uninitiated, where I reiterated how the e-commerce giant leveraged on the 2003 SARS outbreak to transform into an online shopping platform:

"Followers of JD.com know very well its history where co-founder Richard Liu boldly moved his business online when the SARS outbreak in 2003 impacted brick-and-mortar stores badly. Since then, it has built a reputation for quality goods, and shoppers have greater confidence in getting an authentic product from JD.com than other platforms. It was perhaps market players' recognition of JD.com's strength in this difficult period that resulted in its remarkable share price performance last week - staying mildly positive even as its peers tanked. It's times like this where having consumer trust is paramount and the price is secondary."

Some readers commented that e-commerce would not work as “there is no-one to deliver it”. Despite replies on the contrary from other readers, similar comments kept sprouting up. I posted Google-translated snippets of news reports of roaring online sales and delivery personnel taking the necessary precautionary actions before performing their roles with dedication but skepticism remained unabated.

It can be argued that delivery personnel are still working for fear of losing their ‘active status’ – habitually not accepting ‘jobs’ could lead to the system assigning them fewer and fewer ‘jobs’ subsequently. Nevertheless, based on my personal experience, many Chinese have a strong sense of responsibility. The couriers still fulfilling their roles delivering essentials to the households amidst the tense environment likely see it their societal duty to do so, as much as the need to keep their ‘job record’ pristine and bring home the dough.

For instance, Alibaba's Ele.me has reportedly declared it would deliver food from 100 restaurants to frontline medical staff in Wuhan, reversing its decision to halt food deliveries to some hospitals in Wuhan affected by the coronavirus outbreak. Alibaba's food and lifestyle unit Koubei has also pledged to supply medical staff in Wuhan with local services including convenience stores for fresh produce. It can be argued that they are doing so out of societal pressure or for marketing purposes. The point is that deliveries are happening, and even to risky destinations.

The words of a Chinese journalist might be more believable. Li Lei of China Daily wrote: "this year, many of [the deliverymen] in Hubei province have given up their valuable vacations and continued working to deliver daily necessities and much-needed materials, including surgical masks, antiviral drugs and disinfection products, to affected regions."

Contrary to popular belief of a reduction in postings and deliveries, Li Lei cited figures from Hou Yanbo, deputy director of the State Post Bureau's market monitoring division, that 81.25 million packages were sent between January 24 and January 29 across China, a 76.6 percent increase year-on-year. Some 78.17 million packages were delivered during the period, a 110.34 percent increase year-on-year.

This is not to say, whether for food deliveries or any other deliveries, that there are no delays but it's not as bad as some are thinking, with claims that "online stores have no business". Of course, there would be bottlenecks and delays in deliveries but the Chinese are adept in coming up with solutions.

Meituan-Dianping (MEIT)(OTCPK:MPNGF)(OTCPK:MPNGY), the ubiquitous restaurant review and food ordering platform, launched (content in Chinese) its "contactless delivery" service in 184 cities across China, after a successful pilot program in Wuhan. Users would be able to select the option of having their orders delivered to an agreed placement area for collection, i.e. the user would not need to come into contact with the delivery personnel, minimizing the chance of infection.

Would e-commerce have anything to sell with factories closures extended?

There were comments that e-commerce companies could have shortages of supplies due to the closure of factories and that workers have difficulties returning. However, China was already in the midst of a week-long national holiday last week. The government announced an extension till February 2nd, just a few days longer than usual.

Some regions indeed mandated that companies start work only from February 10th. However, factories in China have typically shut for two weeks or longer anyway, due to the lull period in orders and the lack of workers for myriad reasons. With the high worker turnover a historical phenomenon, factories are already used to disruptions in manpower after the festive season.

Don’t take my words for it. Genimex describes itself as a "leading contract manufacturing company with product manufacturing and supply chain solutions in China and Southeast Asia". The following is an extract from an article titled How does the Chinese New Year impact Manufacturing? published on its website (emphasis mine):

"The official government holiday is only one week, however, that is not relevant. As an acceptable rule of thumb, most service-oriented companies in international trade industry like sourcing, quality control, logistics, etc. would close for roughly 2 weeks. …

Additionally, they often remain closed for an additional two weeks after the specific CNY date for the reverse commute. A total of 4 weeks the production is stopped! They can take 4 weeks as factory workers normally ‘accumulate’ holidays during other important holidays such as the National Day (a week-long holiday) by working overtime. The first workers start to return after the “Lantern Festival” just 15 days after CNY, with others following within the next few weeks. …

Even after factories reopen, they rarely can produce at full capacity as they still might be missing quite a few workers on the floor. Sometimes factories resume production with only 35% of the workforce back. Unfortunately for factories, depending on the labor market, some of those workers may never return. This uncertainty is one of the issues Chinese factories face after CNY. Indeed, it is very much a workers’ market right now, and many do not return as they find opportunities closer to home or more lucrative ones."

Shortages are likely to be for products deemed essential for defending against the novel coronavirus, e.g. masks, protective suits, disinfectants, air purifiers, sanitizers, etc. Given the strong demand, even with factories running normally, it would be tough for suppliers to match the required quantities. Unfortunately, without the full story, one cannot help but wrongly interpret the delays in the fulfillment of these items to be extrapolated to represent the entire supply chain in China during this period of lockdowns and extended holidays.

I believe Chinese factories are capable of ramping up production to catch-up on the one-two weeks of mandatory closures once they are allowed to reopen. After all, it was just a few months ago when a New York Times article expressed concerns about China's excess capacity for "making cars, steel and other staples of global trade."

Analysts from Swiss bank UBS were reported to have stated sectors such as food retailers, online streaming, gaming and e-commerce are beneficiaries of the Wuhan viral outbreak "as people remain indoors". Furthermore, the Chinese government "may introduce easing policies to offset the negative impact of the virus on consumption". I would expect their optimism to be based on sound reasoning and analysis.

Online purchases not able to be delivered immediately or within days do not necessarily mean shoppers would cancel their orders. If allowed to stretch the example of Tesla (TSLA), I would like to point out that Tesla buyers often wait for months or years for their vehicles to be delivered. The long delivery period has not deterred drivers from buying vehicles from Tesla.

Those who doubt the viability of e-commerce in this period and dismissed Alibaba and JD.com as potential winners from the epidemic might have forgotten that the duo also have substantial offline presence. I have noted in prior articles about the prevalence of the duo's convenience stores even in lower-tiered cities. Alibaba's Freshippo stores, part of the company online-to-offline strategy, were also reported to be doing roaring business in the past week, with the order volume 30 percent higher than anticipated (content in Chinese).

An Alibaba's Tmall neighborhood convenience store in a fourth-tier cityAlibaba

Source: ALT Perspective

JD.com neighborhood convenience store in a fourth-tier cityJD.com neighborhood convenience stores in fourth-tier city

Source: ALT Perspective

To round up this week's issue, I provide the following price chart of Alibaba. Before the Wuhan viral outbreak appeared on the front pages of mainstream media, some readers were optimistic that the share price of Alibaba could reach 0 per share. While plausible given time, based on the historical channel movement, it could be the second-half of 2021 before we see the upper channel breaches 0.

Even without the current crisis, it might require outstanding earnings results and heightened optimism to have the chance that the share price breaks out of the price channel. Meanwhile, the multi-year uptrend line seems to suggest good support around the 0 level. What do you think? Looking forward to your comments!

44555366-15805553869129944.png

Source: ALT Perspective, using the charting tool of Yahoo Finance

Disclosure: I am/we are long BABA, TCEHY, JD, NTES, BIDU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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