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China Equity Strategy: Alibaba, JD.com, Yum China

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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