Traders betting on diverging stock performances by Chinese e-commerce giants Alibaba Group Holding Ltd. and PDD Holdings Inc. could have racked up a 95% gain so far this year.
That’s the return on a pair-trade strategy with a long position in PDD while shorting Alibaba, excluding dividends and execution costs. The trade’s profitability gained momentum in recent months, with PDD overtaking Alibaba to become China’s most valuable e-commerce firm as consumers flock to the former’s low-priced platforms.
A pair trade strategy typically involves two correlated securities — shorting one and going long on the other. The bigger the performance gap, the more profitable the trade is. PDD has surged more than 80% so far this year while Alibaba has dropped 15% in US trading. And the trade may have further to go as some see the industry reshuffle as having just begun.
Some Wall Street banks are starting to favor PDD over Alibaba too. Morgan Stanley cut its rating on Alibaba’s American depositary receipts to equal-weight from overweight, while naming PDD its top pick in China’s online-shopping sector, saying it’s “best placed amid the increasingly entrenched trait of consumer price sensitivity.”
“PDD is the best positioned amid value-for-money consumption trends in China and will benefit from strong long-term growth at Temu,” said Chelsey Tam, an analyst at Morningstar Inc. The firm’s order of preference is PDD, JD.com Inc. and Alibaba, she added.
