China's market will be largely driven by continued market reforms, prominence of policy-driven thematic opportunities, diversification benefits, and tailwinds from institutional participation.
Alibaba
Given COVID impact and the soft macro climate, China's e-commerce might remain weak. VAT impact in Europe, geopolitics, and FX fluctuations could pressure International Commerce.
However, we expect the new businesses loss to improve via cost discipline and efficiency gain.
We see limited near-term catalysts, but P/E and core P/E valuations remain attractive. At current levels, we think the stock under-represents the value of Alicloud and international businesses.
Share buyback could also provide downside support.
In the near term, JD looks set to gain user mindshare thanks to its strong supply chain capabilities and extra efforts to fulfill social responsibilities.
In the medium term, we see JD benefiting from changes in consumer behavior.
In the longer term, its improving financial state and operating efficiency should create more value as the e-commerce segment slows.
Our US$65 price target implies a 24x 2023e non-GAAP P/E with a 1.2x PEG ratio on a 20% earnings CAGR seen over 2023-26e.
Yum China
We see large "white space" potential given lower restaurant penetration in China, especially in lower-tier areas relative to other emerging markets.
Digital and delivery execution remain strong, as penetration rises and the company harvests customer data.
Strategic partnerships offer big data and mobile opportunities to drive traffic.
New development opportunities with the Chinese Dining Business Unit (Little Sheep, Huangjihuang) and Taco Bell offer "option value."
YUMC is showing operational resilience during a new wave of Covid-19 in comparison with its peers.
We believe that 15x 2023E EV/EBITDA is warranted.
References:
Lou, Lillian. “Morgan Stanley Research.” Morgan Stanley, https://www.morganstanley.com/what-we-do/research/.
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