Our goal as investors is to purchase high-quality companies at reasonable prices and maintain our holdings for an extended period. Although this approach may appear straightforward, it is challenging to implement successfully. Many companies fail to meet the standards of being considered high-quality, and those that do are often expensive.
Nevertheless, if investors are open to exploring foreign stocks outside of their familiar territory, they are more likely to discover such companies. Currently, one of the overlooked sectors that present potential opportunities for investors is China and its businesses.
Here are two top e-commerce companies in China that might be good options for long-term investment.
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An up-and-coming talent in the online retail industry
PDD Holdings ( PDD 0.33% ) The parent company of Pinduoduo may not be as widely recognized as other bigger companies. Alibaba and JD.com ( JD -0.80% ) , but it holds considerable power in China e-commerce industry.
Established less than ten years ago, PDD leveraged the widespread use of smartphones and its unique business approach to connect with a vast number of consumers in China. By focusing on rural regions initially, the company strategically avoided competing directly with existing players, gaining a significant edge that it fully utilized. It was only in the later stages that the company redirected its focus towards urban centers.
The company’s strategy is simple: providing customers with the best prices and ensuring an enjoyable shopping experience on its application. It operates using the group-buy model, where users can bring in relatives and friends to collectively buy items in large quantities from the original manufacturer. This method benefits both the manufacturers by receiving more orders and the customers by enjoying heavily discounted prices.
Pinduoduo incorporates games and rewards to enhance the shopping experience. An instance of this is the ability for users to cultivate virtual fruit trees within the app, and in return, receive real fruits when these trees mature. Recently, the company introduced short video features to its app as well, aiming to boost user interaction.
The unique method used to create an e-commerce platform has proven to be very effective, as shown by the impressive results it has achieved. To provide context, when Pinduoduo went public in 2018, the company that was only three years old generated $1.9 billion in revenue. revenue During the year 2023, the company’s revenue amounted to $34.9 billion with a net profit of $8.5 billion.
Pinduoduo’s achievements in China have provided it with the expertise and assets to venture into the global market through a new branch named Temu, starting in 2022. It is too soon to determine if this move will be profitable in the future, given that it is still in its initial stages. Nevertheless, if Temu replicates the success of the Pinduoduo platform in China, it could bring substantial benefits to its shareholders.
A varied Chinese technology company
In contrast to Pinduoduo, which utilized the smartphone for expansion, JD.com seized the opportunity of the early internet trend to establish a large technology empire.
Established in 1998 as a physical store, JD did not begin selling its merchandise on the internet until 2004. Amazon JD began its online business by buying products directly from suppliers and offering them to customers at discounted rates. Its initial achievements enabled it to expand into a comprehensive online marketplace that includes both products sold by JD and those sold by third-party sellers.
JD provides customers with a compelling offer that includes competitive prices, high-quality products, and excellent customer service. The company’s increasing economies of scale enable it to maintain low prices, and its comprehensive business approach guarantees quality and superior service. JD’s business model, which heavily invests in assets such as warehouses and logistics networks, gives it a distinct edge over its competitors. By managing the entire shopping process and minimizing logistics expenses, JD follows a strategy similar to Amazon’s playbook.
The company’s achievements in the online shopping industry provided it with the resources it needed, such as money and a large group of customers, to gradually venture into different industries. For instance, JD supports customers with financial services through its financial technology arm, delivers healthcare products and services through JD Healthcare, and offers logistic services to other clients beyond its online retail business.
JD has established a growth mechanism by utilizing a varied business framework. This approach involves reinvesting its profits into long-term growth initiatives, thus ensuring a sustainable and resilient earnings performance that can withstand short-term industry fluctuations.
Put differently, JD may have reached a significant size by generating $153 billion in revenue in 2023, but there is still plenty of potential for the company to expand its operations.
The significance for individuals who invest.
Currently, there is a pessimistic sentiment surrounding Chinese companies, resulting in their stocks being undervalued. To provide an example, Pinduoduo and JD are trading at low price-to-earnings ratios. (P/E) ratios aged 17 and 11, in that order.
The modest valuations of these companies are a reflection of the potential risks associated with investing in them, such as geopolitical tensions, political uncertainties, and regulatory challenges. However, for investors willing to accept these risks, Pinduoduo and JD are promising options worth considering.
