Analyst Note| Chelsey Tam |
We think Alibaba’s offer to double its stake in China’s largest hypermarket Sun Art to 72.4% from 36.2% is strategically positive to Alibaba, although the financial impact is small. Alibaba’s net profit for the 2019 calendar year was CNY 172 billion versus CNY 2.8 billion for Sun Art. The move also eats into JD.com’s attraction to some investors as the largest supermarket business in China by sales. If Sun Art were consolidated into Alibaba’s revenue, Alibaba would be larger than JD based on 2019 figures. We think this has weakened the uniqueness of JD’s investment thesis in the supermarket business. This is because both Alibaba and JD can claim they are able to reduce sourcing costs, probably at a similar pace given their almost equally large scale. We keep our forecasts and fair value estimate for Alibaba as we await concrete plans on how Alibaba will accelerate Sun Art’s transformation post-acquisition, and more importantly how Alibaba’s new retail and first-party supermarket business strategy will evolve in the long run. The shares of Alibaba and JD are fairly valued in our view. Sun Art itself saw a nice 19% bounce in its share price, bringing it closer to our HKD 10.30 fair value estimate.