Short interest in the H.K./China region has increased by $7.9 billion, or 8.70%, in 2018 with the largest amount of short exposure residing in four main sectors: the Internet, Insurance, Banking and Real Estate.
Recently, at the Sohn Conference Hong Kong, Wong Kok Hoi of APS Asset Management presented a short thesis on JD.Com Inc ADR (JD US). The main point of his presentation was that JD.Com is actually just an online retailer in a low margin labor intensive commoditized business. Competition from the likes of Alibaba, Suning and Gome making raising prices a non-starter even as costs, such as labor, continue to increase. Unlike Amazon.com, it has not invested in cloud computing, media or video but in additional e-commerce acquisitions. JD.Com’s stock price has fallen 28% since hitting its historical high in late January, and short selling has picked up in the stock.
JD.Com is the 4th largest short in the HK/China region and short selling has been growing in 2018 with an increase of 5.3 million shares, or +15%, since its January historical price high.
In the worldwide Internet Retail Sector, JD.Com is the 4th largest short as well, and the largest non-U.S. short in the league table. While shorting the retail sector was primarily a losing bet in 2018, JD.Com is one of only four profitable short plays with a mark-to-market P/L over $50 million for the year. The four most profitably shorted internet retail stocks are Overstock.Com (OSTK), JD.Com (JD), Rakuten Inc (4755 JP) and Nutrisystem (NTRI).
There is ample stock borrow availability in JD.Com and rates are trading at General Collateral levels, the cheapest cost to borrow on the easiest to borrow stocks. Short selling has been trending upwards since early February and if JD.com continues its 14 straight years of losses we may see the exuberance in this stock continue to wane and short sellers consider it another short beta hedge proxy for the Hong Kong/Chinese market similar to Alibaba, in addition to an outright short alpha trade and increase short interest substantially.
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Managing Director Predictive Analytics, S3 Partners, LLC
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