China’s E-Commerce Diverge: JD Sees No Slowdown, Vipshop Downgraded

China’s largest e-commerce JD.com (JD) soared 7.7%, recovering its loss from competitor flash-sale e-commerce Vipshop‘s (VIPS) profit warning on Friday.

Investors are worried China’s macro slowdown would affect its fast-growing e-commerce too. But JD’s latest earnings eased some of that concern. Third-quarter revenue at JD grew 52%from a year ago to 44.1 billion yuan, meeting the company’s guidance of 43.2-44.5 billion yuan. JD said it expected its fourth-quarter revenue to increase by 47-51% to 51-52.5 billion, above the street consensus of 51 billion yuan.

It was a sigh of relief. On Friday, Vipshop issued a profit warning, expecting its third-quarter revenue to grow 61-63% to 8.6-8.7 billion yuan, below its previous guidance of 9.1-9.3 billion yuan. JD, which also sells a lot of apparels, slumped 7.1% as a result. For details, see my blog “Vipshop Slumps On El Nino Profit Warning: Deutsche Quick To Slash Target By 33%“.

The excuse Vipshop gave was strange. It said it was not selling enough winter clothes because of this year’s El Nino. Yes, China is having a very warm fall this year, but the three months of the third-quarter were solidly in the summer!

Morgan Stanley downgraded Vipshop to Hold, with a new price target of $13. Analyst Robert Lin wrote:

We have already been seeing intensifying competition in the apparel category from Alibaba and JD in 2015. Alibaba’s group-buy channel JHS cut commission rate in April and JD has been subsidizing its marketplace merchants to fuel growth. Based on our rough estimate, JD’s apparel GMV was likely 2-3x larger than Vipshop’s in 2Q15. Apparel is the largest category for both Alibaba and JD, so we expect Vipshop to reduce 1P commission rate (23-25% currently) in order to improve market share and maintain its relationship with larger brands / suppliers.

We expect Vipshop’s user growth to slow down meaningfully in coming years: Its penetration rate is relatively high in its core customer group in urban areas (urban females aged 25-45 in Tier 2 and Tier 3 cities).

Morgan Stanley’s price target implies 26 times of their 2016 earnings estimate, or 1.2 times PEG. Vipshop closed at $12.50 on Monday. It is by no means a cheap stock.

Alibaba Group (BABA) rose 3.2%, recovering from Friday’s 3.7% slump, thanks to JD’s strong results.