JPMorgan Chase and Goldman Sachs are bullish on Alibaba: Introducing WeChat to expand users, the new strategy of Pinduoduo has limited impact on monetization, buy!

Wall Street's two major investment banks, Goldman Sachs and JPMorgan Chase, are both bullish on Alibaba, believing that the introduction of WeChat Pay on Taobao will pave the way for further cooperation between Alibaba and Tencent. Pinduoduo's new monetization strategy proposed a week ago has little impact on Alibaba. Alibaba's new investment strategy has achieved preliminary success and may evolve into China's largest consumer stock in the future.

Goldman Sachs believes that Taobao's announcement of adding WeChat Pay is beneficial for Taobao to further expand into the lower-tier markets and provide more convenience to existing users, thereby driving user penetration and total merchandise transaction volume.

JPMorgan Chase, on the other hand, stated that Pinduoduo's new monetization strategy has limited impact on Alibaba because Pinduoduo's new strategy mainly focuses on the merchant ecosystem rather than the consumer end. Moreover, there is a significant difference in monetization rates between Alibaba and Pinduoduo. Even if Taobao's monetization rate increases, it may still be the lowest-cost channel for merchants.

JPMorgan Chase also has a positive outlook on the trend of Alibaba's domestic e-commerce Gross Merchandise Volume (GMV), believing that Alibaba's narrative in the next 6-12 months will shift from being a "market share relinquisher" to a "stable e-commerce growth stock." Inclusion in the "Stock Connect" and accelerated growth in Customer Management Revenue (CMR) will serve as short-term catalysts.

Introduction of WeChat Pay on Taobao and Tmall

In November 2013, Taobao and WeChat blocked each other, nearly 11 years ago.

On September 4th, Alibaba announced the first introduction of WeChat Pay on the Taobao and Tmall platforms. Goldman Sachs stated that this change was in line with its expectations, as starting from September 1st, Tmall began to charge software service fees (covering payment processing costs), creating conditions for expanding online payment options.

Goldman Sachs believes that adding WeChat Pay can help Taobao and Tmall attract new user groups, especially beneficial for developing users in lower-tier cities, and provide more convenience to existing users, thereby driving user penetration and total merchandise transaction volume.

Furthermore, the Taobao Tmall Group has been cooperating with Tencent in WeChat advertising campaigns for multiple quarters. Goldman Sachs believes that the introduction of WeChat Pay on Taobao and Tmall can further pave the way for cooperation between Alibaba and Tencent. For example, Taobao-Tmall may have mini-programs in the WeChat ecosystem in the future.

This is significant for Alibaba because Tencent dominates China's social applications with over 1 billion monthly active users, and Alibaba is the only e-commerce platform that does not yet have a shopping mini-program in the WeChat ecosystem. According to Quest Mobile data, about 247 million WeChat users in China have not yet installed the Taobao application.

Meanwhile, Goldman Sachs also noted that Alipay recently launched mini-programs for Meituan Takeaway and Meituan Hotels, whereas users could only order from Ele.me within Alipay before. Goldman Sachs believes that after the completion of the Alibaba antitrust review, announced by Chinese regulators on August 30, 2024, this marks an important milestone for cooperation among internet giants. Subsequently, cooperation among internet giants has increased, moving away from the relatively closed ecosystems of the past.

Limited Impact of Pinduoduo's New Strategy on Alibaba's Monetization

On August 29th, Pinduoduo proposed a new investment strategy during a conference call, including allocating 10 billion yuan to support high-quality merchants, improving platform ecosystem construction, and refunding commissions and advertising fees for direct refund orders.

JPMorgan Chase stated:

"The impact of Pinduoduo's new monetization strategy on Alibaba is limited, as Pinduoduo's new strategy mainly focuses on the merchant ecosystem rather than the consumer side. Pinduoduo's investment in the merchant ecosystem is intended to improve the supply ecosystem for long-term sustainable growth, rather than seeking the maximum market share growth in the short term."

In the current retail environment, enhancing the profitability of high-quality merchants has a minor impact on driving consumer spending, and therefore will not have a significant impact on the total transaction volume of goods in Alibaba's domestic e-commerce business.

Slight Increase in Taobao's Monetization Rate Has Little Impact

JPMorgan Chase stated that over the past three years, Alibaba has been relatively restrained in monetizing its e-commerce business, while its peers have significantly increased their e-commerce monetization during the same period. JPMorgan Chase stated that the difference in monetization rates between Alibaba and Pinduoduo may be larger than it appears, as Alibaba's investment strategy has led to faster growth in lower-priced channels compared to higher-priced channels.

For example, JPMorgan Chase estimates Taobao's monetization rate to be 6%, while Tmall is 2%, and Pinduoduo is over 5%. Therefore, even if Taobao's monetization rate increases slightly, it may still be the lowest-cost channel for merchants, and Alibaba's moderate increase in monetization rate will not change its relative value proposition to merchants.