Ecommerce is one thing China does well what with mega players like Alibaba BABA and smaller ones like JD.com JD , DangDang DANG, Vipshop VIPS and Jumei JMEI.
China wants foreign capital but it can’t jeopardize local players in the process, so only sectors with strong Chinese players can see some relaxation. Even then, it will at first try out the thing at its free trade zones, as was done in this case at the Shanghai Free Trade Zone since January.
Xinhua now reports that the Chinese Ministry of Industry and Information Technology (MIIT) has opened up the online data processing and transaction processing segment to foreign investment with a view to increase competition and drive higher standards. The telecom authorities in the country will oversee regulation and supervision of foreign players.
It has thus far been very difficult for foreign investors to invest in Chinese companies, which had to set up a variable interest entity (VIE) that could list in a foreign country on the basis of profit-transfer agreements with a company headquartered in China. Alternatively, foreign companies could form joint ventures with Chinese companies to operate in China.
Just How Attractive Is China Ecommerce Right Now?
The China E-Commerce Research Center (CECRC) has said that the market grew 31.7% in 2014 to the equivalent of $2.1 trillion in 2014 and iResearch estimates that it will grow to $4 trillion by 2018. While B2B made up the bulk of sales last year, B2C transactions grew much faster, touching $450 billion according to the CECRC. A Forrester report says that China B2C or retail ecommerce will be a trillion dollar market by 2019.
Factors driving the market thus far are a growing middle class looking for quality products, mobile penetration, Internet penetration and massive promotional activity by ecommerce players. But penetration of mobile and Internet should become lesser factors over the next few years leading to moderation in growth rates. The fact that Alibaba founder Jack Ma has started stepping out of the country and intends to focus on international growth appears significant in this context.
It’s one thing to invest in a Chinese company and another thing to compete with local players. And this remains the other concern related to China. Even if the biggest obstacle in the form of the Chinese government steps out of the way, there are significant other barriers, such as market position, mind share, existing local relationships with suppliers and distributors, as well as word-of-mouth advertisement. Even rural China actively participates in ecommerce, so there’s hardly a niche that a foreign player can exploit. This could be the reason that U.S. ecommerce giant Amazon AMZN, after years of effort managed to take less than 2% market share. In March this year, Amazon finally decided to set up a flagship store within Alibaba’s Tmall.
What About The Chinese Stock Market?
Chinese stocks, particularly Internet stocks are grossly overvalued at the moment with the Chinese bull market looking like the only way to go is down. The government is doing all it can to maintain the excitement, but is fast running out of ideas even as the bond market bears the brunt.
U.S-listed Chinese companies reflect some of this volatility, as sentiments on Chinese stocks wax and wane faster than the moon. There is little focus on the growth prospects, or the individual company’s competitive strengths/weaknesses as people try to figure out whether China remains hot.
Bottom Line
U.S. listed Chinese companies can do well, especially if they are key players like Alibaba or JD because they are strongly positioned to benefit from the growth in China. And yes, there remains good growth opportunity out there with strong demographics, increasing consumerism and increase in cashless transactions supporting ecommerce.
The Chinese stock market may be a bit crazy right now, but thankfully we have the option of these U.S.-listed stocks. That said the volatility does affect investor returns, so unless you’re in it for the long haul, it may be a better idea to avoid them.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment