2022 had been a year of reckoning for Singapore investment firm Temasek Holdings.
The state investment arm shrank its portfolio by over US$10 billion as global stock markets fell.
In light of the abysmal performance in the stock market, Temasek sold off large positions of its US-listed holdings.
Despite the negative outlook, the firm added more than five times the number of shares in JD.com, Inc. (NASDAQ: JD) within a space of three months.
We take a deeper dive into the possible reasons for Temasek’s purchase decision and examine whether investors should follow suit.
JD.com has performed well in the past few years
JD.com (JD) is a Chinese e-commerce company that derives almost 90% of its net revenues from its JD Retail segment which delivers online retail, marketplace and marketing services in China.
The company has nearly 600 million active customer accounts and focuses on the sale of electronic and home appliances via its marketplace.
JD has posted strong growth in the past few years, growing its net revenues at a compound annual growth rate of 23.6% between 2017 to 2022.
This was achieved while maintaining positive free cash flow throughout the years except in 2018, with the most recent year’s free cash flow registering at RMB 35.6 billion.
Nevertheless, there are other factors that drive Temasek’s conviction in the Chinese e-commerce giant.
Border reopening provides tailwind for Chinese e-commerce
One such factor is China’s border reopening.
Banks such as Morgan Stanley (NYSE: MS), Goldman Sachs (NYSE: GS), and UBS (SWX: UBSG) have articulated their bullish view on Chinese stocks.
More specifically, investment powerhouse Fidelity International guided that the recovery will be driven by domestic consumption of goods and services.
Even without the relaxation of COVID-19 restrictions, Temasek has always maintained a sizable exposure in the Chinese market.
The firm takes a long-term view on China, highlighting its consumer and enterprise sectors as emerging areas of interest.
Temasek reiterated its commitment to investment trends which include digitisation and the future of consumption.
Late last year, Temasek expressed its intent to shore up its investments once market valuations correct.
Interestingly, Temasek actually quintupled its JD holdings despite JD’s share price rallying from US$50.30 to US$56.13.
In fact, the stock has lost 20.3% since Temasek most recently filed its shareholdings.
Institutional investors place bets on Chinese e-commerce
Even though JD’s share price fell slightly, Temasek is not alone in its e-commerce bet.
Prominent hedge fund manager Farallon Capital Management bought over US$197 million worth of shares in Alibaba Group Holding Ltd (NYSE: BABA), one of JD’s key competitors.
There were also other notable investors such as Scion Asset Management and Coatue Management who placed bets on both JD and Alibaba in the fourth quarter of 2022.
Together with the upbeat guidance from banks, it shows that institutional investors are optimistic about the e-commerce segment in China.
China signals easing of tech crackdown
Alongside China’s reopening which looks set to spur consumption, the Chinese government signalled the end of its regulatory crackdown on the tech segment.
Since 2020, the campaign to rein in the country’s private enterprises has battered tech behemoths besides JD and Alibaba, including the likes of Meituan (SEHK: 3690) and Tencent Holdings Ltd. (SEHK: 700).
More recently, the Communist Party pivoted its focus towards promoting healthy development of internet platforms, leading economic growth, creating more jobs, and competing globally.
This implies a spate of policies that positively impact internet companies, including mandates that allow mainland companies to go for offshore listings with fewer restrictions.
Chinese e-commerce companies face elevated competition
In spite of the above, investors should still do their due diligence instead of following the herd.
Prior to formulating a view, it is helpful to think of reasons as to why an investment could go wrong.
For example, there are justifications supporting the view that domestic consumption will experience a weaker resurgence.
China’s consumer price index (CPI) inflation rose at the slowest pace in twelve months, with both consumer and producer prices reflecting anaemic demand.
By extension, investors may have priced in excessive tailwinds for e-commerce firms.
Rating agencies project flattish online retail sales in 2023 due to increased competition.
JD recently launched a US$1.4 billion subsidy campaign in hopes of acquiring new shoppers and retaining existing customers.
Such promotional events can lead to price wars, with higher traffic likely to only be temporary as these subsidies deplete over time.
Therefore, these initiatives will increase customer acquisition costs which may not translate into sticky revenues over the longer term.
Tech crackdown may resume
Furthermore, China’s easing of its crackdown on the technology sector remains to be seen.
A climate of uncertainty lingers, and investor confidence remains weak.
There have been signs of policy U-turns, such as the disappearance of China’s top technology banker Bao Fan, who was reported to be cooperating with a government probe.
This follows a practice of Chinese executives becoming uncontactable in recent years.
Key man risk is particularly acute in China as many corporate founders such as JD’s Liu Qiangdong play pivotal roles in the company’s operations.
Investors thus bear the brunt following their disappearance as stock prices tumble.
Get Smart: Avoid following blindly
The bottom line is that Temasek did not underline its reasons for adding more shares in JD.
Blindly mirroring the investments of reputable firms is a perilous move.
The reasons outlined above can spell either good or bad news for China’s e-commerce industry.
Regardless of which camp investors are in, they must arrive at a conclusion after conducting their analysis and accounting for the risks.
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Disclosure: Tan Ke Xuan does not own shares in any of the companies mentioned.
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