Buy Alibaba, Sell Meituan Pair Trade Thrives on Price War Bets

(Bloomberg) — Betting on the widening gap in stock performance of two of China’s biggest internet companies has been a slam-dunk this year, and analysts say the trade may have further to run.

Going long on Hong Kong-listed Alibaba Group Holding Ltd. combined with a short on Meituan would have delivered a return of 130% year to date. That’s come as Meituan shares slumped on market share loss to Alibaba in food delivery, while Alibaba’s stock has doubled on the artificial intelligence boom.

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Fierce competition continues despite the government’s attempts to curb disastrous price wars, which have hit Meituan harder. Analyst ratings and short-selling data point to Alibaba’s stock extending its record outperformance this year.

“We maintain a cautious stance on Meituan and a relatively positive view on Alibaba, and believe the pair-trade strategy can continue,” said Julia Pan, an analyst with UOB Kay Hian Holdings Ltd. in Shanghai. “Alibaba’s advantage lies in its deep cash reserves, which allow it to sustain subsidies and flexibly adjust strategies.”

Price battles in food delivery have intensified since Alibaba ramped up its push in April, with signs of an escalation to other arenas in recent weeks. Alibaba is enhancing its app to better cater to local brick-and-mortar services, and has begun offering in-store dining vouchers in three mainland cities.

“The offline, in-store segment is emerging as the next battleground,” said Willer Chen, an analyst at Mizuho Securities Asia Ltd. “Alibaba has only launched in three cities, and it is reasonable for it to expand to more along with its food-delivery ambition.”

Meituan has undertaken various steps to compete with Alibaba, JD.com Inc., PDD Holdings Inc. and others for Chinese internet user traffic and spending. The company plans to raise around $3 billion in bonds to fund these moves.

Under one initiative, it’s building warehouses for merchants selling via its quick-commerce delivery service — a business that UOB’s Pan says has even lower margins than food delivery and requires huge investment.

As such, Meituan is projected to post a net loss of around 14.5 billion yuan ($2 billion) for the quarter ended Sept. 30. Alibaba is expected to show better resiliency with a net profit of 9.5 billion yuan, though that’s a 78% drop compared with a year ago.

Results due from both companies as well as data from promotions tied to China’s Singles’ Day sales events could be catalysts for stock moves over the next week or so. Shares of each fell more than 2% Friday.

While Meituan is already the worst performer on the Hang Seng Tech Index this year with a decline of 33%, it may be poised for more pain. Short interest has climbed to more than 2% of the free float and remains near its highest in over five years, according to data from S&P Global. Short interest on Alibaba’s Hong Kong stock is less than 0.2%.

Not that Alibaba has been completely unscathed.

“Alibaba has been losing e-commerce market share for a long time,” and will keep investing heavily to try and stop the slide, said Xin-Yao Ng, a fund manager at Aberdeen Investments. He’s cautious on Alibaba, as “the e-commerce profit drag will outweigh cloud growth for some time.”

Still, Alibaba is unanimously rated buy by the sell side, with the consensus price target of 47 analysts implying a further 23% rise over the next year. Meituan’s 43 buy recommendations mark the lowest total since 2020, and its price target is down more than 40% from a March peak.

“Meituan is largely in a defensive posture, while Alibaba currently holds the initiative,” said Mizuho’s Chen. Meituan’s stock looks cheap and the bond issuance strengthens its financial position, “yet uncertainty remains elevated,” he said.

(Updates share price data as of Friday)

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