2 Solid Chinese E-Commerce Companies to Keep on Your Radar

As investors, we try to buy good companies at attractive prices and hold them for the long term. This strategy may seem simple, but it is actually difficult to do. Most companies fail to meet the criteria of being good companies, and the few that do are usually priced high.

But for investors willing to step outside their comfort zone to consider foreign stocks, their chances of finding such companies are growing. In fact, one of the least popular areas for investors to look for opportunities right now is China and its companies.

Here are two leading e-commerce giants in China that could potentially be good long-term investments.

A rising star in e-commerce

PDD Holdings (PDD 1.09%)Pinduoduo’s parent company may not be as well-known as its larger competitors, Alibaba AND JD.com (JD 0.23%)but it is a significant force to be reckoned with in the Chinese e-commerce industry.

Founded less than a decade ago, PDD leveraged the proliferation of smartphones and its innovative business model to reach hundreds of millions of customers in China. Initially, it targeted rural areas to avoid direct competition with incumbents, giving it a significant advantage that it has thoroughly exploited. It was only in later years that the tech company shifted its focus to big cities.

The business model is simple: offer users the lowest price and make in-app shopping enjoyable. It uses a group-buying business model, which allows users to invite family and friends to buy products in bulk directly from the manufacturer. It’s a win-win approach, as manufacturers get more orders and customers benefit from the lowest prices.

Pinduoduo also gamifies the shopping experience with all sorts of games and perks. For example, users can grow virtual fruit trees on the app and receive real fruit when those virtual trees reach maturity. The tech company also recently introduced short video services on its app, which should help increase user engagement.

This unconventional approach to building an e-commerce platform has been a huge success, and the numbers show it. By comparison, when Pinduoduo went public in 2018, the three-year-old company had $1.9 billion in revenue that year. In 2023, revenue was $34.9 billion, with net profit of $8.5 billion.

Pinduoduo’s success in China has given it the experience and resources to expand overseas through a new subsidiary, Temu, in 2022. The venture is still in its early days, so it’s too early to tell whether this expansion will yield good returns in the long term. However, if Temu can achieve anything like the success of Pinduoduo’s platform in China, it will generate huge value for shareholders.

Diversified Chinese Tech Giant

Unlike Pinduoduo, which grew thanks to smartphones, JD.com quickly capitalized on internet trends and built a massive tech empire.

Founded in 1998 as a brick-and-mortar store, JD only began selling its products online in 2004. AmazonJD started out selling online, buying goods directly from suppliers and selling them to customers at low prices. Its early success allowed it to grow into a full-fledged e-commerce marketplace with first-party and third-party sales.

JD’s value proposition for customers combines low prices, high-quality goods and great services. JD’s ever-increasing economies of scale help keep prices low, while its integrated business model ensures quality and good services. In particular, JD’s asset-based business model of operating warehouses and logistics networks gives it a competitive advantage over its competitors. It can control the shopping experience while keeping logistics costs low, a handbook copied from Amazon.

The company’s success in e-commerce has given it the necessary resources—financial resources and a huge customer base—to expand into new sectors over time. For example, JD finances consumers through its fintech division, offers healthcare products and services through JD Healthcare, and provides logistics services to third-party customers outside of its e-commerce operations.

With its diversified business model, JD has created a growth machine that continually recycles unused profits to sustain long-term growth. Such a model also helps to mitigate the volatility of each industry in the short term, giving it more balanced and sustainable profit performance in the long term.

In other words, JD may already be a giant — the company reported revenue of $153 billion in 2023 — but it still has significant room to grow its business.

What does this mean for investors?

Currently, the general sentiment towards Chinese companies is negative, which means that most Chinese companies are trading at attractive valuations. In comparison, Pinduoduo and JD are trading at price-to-earnings (P/E) ratios of 17 and 11, respectively.

These low valuations reflect the fundamental risks associated with investing in these companies – geopolitical tensions, political and regulatory risks, etc. However, for those who can stomach these risks, Pinduoduo and JD are worthy candidates for further investigation.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lawrence Nga holds positions in Alibaba Group and PDD Holdings. The Motley Fool holds positions in and recommends Amazon and JD.com. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.