PDD’s nearly 30% plunge last week on disappointing quarterly results is a reminder that the Chinese consumer is largely past its double-digit growth years. The slowdown shows little sign of turning around anytime soon. That’s not to say it’s sold off. PDD’s revenue grew about 90% from a year ago, while earnings more than doubled, noted Charlie Chen, managing director and head of Asia research at China Renaissance Securities. “The reaction of its stock price is not in line with its fundamentals,” he said in Chinese, as translated by CNBC. “The entire Chinese consumer market is weak, yes, (but) the very strange comments of PDD’s management have caused the stock price to fall,” he added. Chen Li, PDD’s chairman and co-CEO, warned several times on the earnings call about future earnings declines. But analysts note that despite the price target cut, the stock remains attractively valued. Other earnings have painted a less bleak picture. Chinese food delivery company Meituan on Wednesday reported second-quarter revenue and earnings that beat FactSet expectations sharply. Revenue grew 21%, while adjusted earnings nearly doubled from a year ago. Morgan Stanley raised the Hong Kong-listed stock to overweight from equal weight, while JPMorgan raised its price target to HK$140 ($17.95) with an overweight rating, according to FactSet. That represents an 18% rise from where Meituan shares closed on Friday, up about 10% on the week. The delivery company, which also owns the Chinese version of Yelp, said its in-store, hotel and travel businesses maintained “solid growth.” Management did not comment much on consumer sentiment, other than an apparent preference for value for money. “Under the current macro environment, demand for low-star hotels has increased,” Chief Executive Wang Xing said on an earnings call, according to a FactSet transcript. Chinese booking site Trip.com, which is listed in the U.S. and Hong Kong, reported a slight rise in net profit and loss on Aug. 26, according to FactSet. Trip.com said travel bookings from China recovered to 100% of pre-Covid levels in the second quarter of 2019. That’s despite international flight capacity being only 75% of pre-pandemic levels, the company said. Trip.com’s Hong Kong-traded shares rose about 12% last week. “I think people are also shifting to experiential consumption a little bit more than commodity consumption, because commodity consumption, you can only get it in that amount,” said Liqian Ren, head of quantitative investment at WisdomTree. She noted that there is more pent-up demand for travel, which she expects to last for another year or so, as people can buy goods through e-commerce platforms during the pandemic. However, Ren noted that the housing slump and general uncertainty about income are constraining consumer spending. Retail sales rose 2.7% in July from a year earlier, after a 2% increase in June. One effective way China could boost the economy, Ren said, might be to be proactive, not reactive: removing all restrictions on home purchases and allowing all people living in cities to access the same benefits. People who move to a city just to work can’t enroll their children in local schools without a so-called hukou. Many cities, including Beijing, still restrict the number of properties people can buy. “As long as the Chinese government realizes that it has a number of tools to get ahead of the market, it will stop this slow grind of people who don’t want to spend,” Ren said. Other companies, such as Yum China, are using new business strategies to boost profits despite the slowdown in consumer spending. In early August, the operator of KFC and Pizza Hut restaurants in China reported a 19% rise in second-quarter profit to 55 cents a share, beating the FactSet estimate of 47 cents. About 80% of those Pizza Hut stores have automated fryers and 50% have robotic servers, according to CEO Joey Watt, referring to the comprehensive automation of tasks from labor scheduling to inventory management. Yum China’s U.S.-traded shares rose more than 1% last week. Meanwhile, the generally muted environment has supported a more conservative bet from investors. Banks are one of the few sectors in Hong Kong’s Hang Seng Index that have risen double digits so far this year, according to Wind Information. Hong Kong-listed Postal Savings Bank of China is Morgan Stanley’s new top pick in the sector, analyst Richard Xu and his team said in a mid-August report. “We believe the changing monetary policy framework, moderate loan growth window guidance and the People’s Bank of China’s support for long-term bond yields will create a favorable environment for banks’ (net interest margin) to stabilize and recover,” the report said. “Of all the banks, we think Postal Savings Bank of China is one of the best-positioned to benefit from this trend,” he said. Morgan Stanley expects Chinese bank stocks to outperform for a fourth straight year this year. “We think inventory in the property market will come down to a more reasonable level by mid-2025. That means the downward pressure on the economy from a property market correction or slowdown will be much less,” Xu said in an interview. He is also watching to see whether pressure to expand industrial capacity eases, helping commercial margins. “If these factors start to moderate over time, some other sectors may do better than banks.”
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PDD Just Issued New Market Warning About China's Consumer Protection Policy
