One of the fastest-growing industries in China in the last few years has been the e-commerce industry, which has benefitted from trends such as a growing middle class, high smartphone penetration, extensive logistics networks, rising incomes, and more.

Moreover, industry experts have predicted that e-commerce in China will continue to grow in the foreseeable future, especially considering that online retail spending is still less than 20% of total retail spending. For investors who want exposure to this industry, which of the two largest players in China (by the number of active users) should they consider, Alibaba Group (NYSE: BABA) (SEHK: 9988) or JD.com(NASDAQ: JD)?

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#1 Alibaba (9988.HK)

Consumer spending in China sets Alibaba up for success

Alibaba going public on the Hong Kong market allows Mainland China investors, through the Hong Kong Stock Connect schemes, to access one of the most powerful e-commerce companies in the world. And this is a great thing, since Alibaba has had a phenomenal 2019 and still has room to grow. 

The company just broke sales records on Single’s Day, the biggest shopping day in China, raking in over US$30 billion in gross value merchandise (GMV) in less than 24 hours. This marks a 26% increase over the prior year, far exceeding any numbers seen in the US. 

This trend of Chinese consumer spending is set to continue. The disposable income of Chinese households tripled between 2010 and 2020. As a result, Alibaba is looking at more customers and more consumer spending. 

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#2 JD.com (NASDAQ:JD)

JD.com(NASDAQ:JD), the largest direct retailer in China, lost half its market value in 2018 amid concerns about its decelerating growth and rising expenses, along with a rape allegation against founder and CEO Richard Liu.

Its expansion into lower-tier cities

JD’s number of annual active customers grew nearly 10% year-over-year to 334.4 million last quarter, marking its strongest growth in four quarters. 70% of those new customers came from China’s lower-tier cities. JD’s new discount marketplace, Jingxi, also posted robust growth when it launched near the end of the quarter.

JD’s expansion into lower-tier cities is offsetting its slower growth in top-tier cities like Beijing and Shanghai. It also contains the growth of Pinduoduo (NASDAQ:PDD), its rapidly growing discount rival, which surpassed JD in total shoppers (but not revenue) last year.

The stabilization and possible spin-off of JD Logistics

JD stores its own inventories across a massive network of over 650 warehouses, and fulfills orders via seven fulfillment centers and front distribution centers in 29 cities. That platform can fulfill approximately 90% of JD’s orders across China within 24 hours.

That logistics unit was a constant weight on its bottom line in previous years, but its losses narrowed last year thanks to its scale, tighter cost controls, and its decision to offer the service to third-party customers. The network is also increasingly automated, with warehouse robots, autonomous delivery vehicles, and drones.

JD Logistics will likely continue to stabilize throughout 2020, and a recent Reuters report suggests that JD could even spin off the unit in an IPO in the second half of the year to boost its cash flows and improve its operating margin.

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