China Is Killing Alibaba And JD.com Shareholders

• Alibaba Group Holding Ltd BABA shares plunged 7 percent since December 30, while shares of JD.Com Inc (ADR) JD plummeted 9 percent.
• MKM Partners’ Rob Sanderson maintained Buy ratings on both companies.
• While investors are concerned about the Yuan devaluation, Alibaba and JD would not be as significantly hurt, Sanderson stated.

“For the second time in 3-days, circuit breaker rules halted Chinese stock market declines last night at 7%,” analyst Rob Sanderson mentioned. He expects shares of Alibaba and JD to sell off, along with other China shares.

“Currency devaluation is the primary concern. For several months, we have been highlighting devaluation as the largest risk to our positive thesis on Chinese Internet stocks under coverage,” Sanderson wrote.

The Yuan declined about 1 percent this week, which was less than the Euro, the Pound, the Canadian dollar and currencies of other emerging markets. The Yuan decline does not impact the MKM estimates for Q1, since they already reflected a 2 percent drop in the Chinese currency. The Q2 estimates reflect a further 2 percent devaluation, the analyst stated.

The Yuan decline adversely impacts dollar-denominated EPS for US-listed ADRs, including that of Alibaba and JD. Sanderson added, however, that FX itself will not have a material impact on domestic consumption. “If China does experience slowing economic growth this would also slow consumption. We think this would likely drive an even faster shift of offline commerce to online outlets.”

Alibaba has more FX exposure than JD. “With lower cross-border activity, we think JD is relatively indifferent to f/x besides the conversion to dollar-denominated EPS,” Sanderson pointed out. He added that for Alibaba import is a priority and devaluation would hurt versus US sellers. On the other hand, Alibaba’s international commerce sales should benefit.