德银报告：中国电子商务报告China E-commerce：A tale of two camps - and we favor the

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 Alibaba's 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 10x 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 PEOPLE'S 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 GMT7T2se3r0Ot6kwoPa 27 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, re