To The Moon

$JD-SW(09618)$  is firing the first cannon among Hong Kong's big techs on their latest earnings releases when the Chinese e-Commerce company announces its first-quarter earnings results today ahead of $TENCENT(00700)$  and $Alibaba(09988)$  on 17 May and 18 May respectively.

Alibaba and JD are the two largest Chinese e-commerce companies, both of which also operate brick-and-mortar grocery stores, although their stores contribute relatively lower revenues compared to their respective e-commerce businesses. While Alibaba and JD are typically compared as the closest competitors with one another, their major business models are actually distinctly different. Alibaba offers third-party platforms for consumer-to-consumer and business-to-consumer on-line transactions, whereas JD derives most of its revenue from its first-party marketplace by maintaining its own inventories of merchandise and selling them directly to consumers, not unlike Amazon, even though it also operates a smaller third-party marketplace the likes of Alibaba and eBay.

Hence, for the purpose of comparing performance, I would regard Amazon's e-Commerce business, rather than Alibaba's, as the peer, albeit a much larger peer, to JD's. With the capital-intensive business model of maintaining its own inventories, it should not come across as surprising that JD's operating margin is considerably lower than that of Alibaba. Nevertheless, the same business approach also affords much higher quality assurance by JD to its customers, gaining JD their trust as a result. Nevertheless, advertising fees for listings promoted on their e-Commerce platforms are increasingly becoming important sources of revenue for both Alibaba and JD.

I expect JD's revenue to be between flat to low single-digit growth for the first quarter due to tightened consumers' consciousness on discretionary spendings amidst inflation and a looming recession. That will be the slowest pace of growth for JD on record.

The lackluster expectations are also being reflected in the options market with a rise in the put-to-call ratio. Bearish investors may place their bets through buying puts or writing calls, though the latter approach unless it is a covered call strategy may present unlimited risk if the call seller does not already own the underlying asset, in this case the quantity of shares of JD in the call option contract.

Despite easing of the clampdown on the tech sector lately, unless there is a significant and sustainable consumption-led pickup in the Chinese economy along with its re-opening, I believe that tech stock performance like that of JD may remain subdued. With macro headwinds not helped by high borrowing interest rates on the back of stubbornly high inflation, rising geopolitical tensions and an impending global recession, there may be more difficult times before things get better for the Chinese e-Commerce sector.

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