Background
Jumei has been frustrating over the past few weeks. I have spent the past few months discussing how Chinese equities had suffered from a structural portfolio shift as fund managers transferred funds over to buy Alibaba stock. But as Chinese equities have begun their recovery, Jumei is still hovering around its low. There has been some discussion, particularly from day traders, that there has been some naked shorting, which of course is an issue because the short selling ban doesn’t expire until November 12. I’m naturally skeptical about message board discussions, because the vast majority of participants are long, and hence the opinions are biased, but it does raise the issue of how the share price will react when the short sell ban expires.
Irrespective of whether it’s naked selling or not, the fact remains that there continues to be selling pressure on Jumei and I fear that it doesn’t bode well for the share price come the short sell ban expiration. However, the extra element to this risk is the November 11 Single’s Day online shopping festival in China, in which Jumei will likely boast incredibly impressive sales. Whilst there has been no announcement about when their Single’s Day sales figures will be released, Alibaba announces their sales figures constantly throughout the day, and this will likely put pressure on other firms to do the same. In addition, I expect that all Chinese online retail equities will rally on November 10 and 11. I’ve previously discussed why I like Jumei, and why I believe that its strong fundamentals and competitive advantages will see the firm succeed in its niche corner of China’s online retail market. Wall Street’s estimate for third quarter revenue is $161.35m, which would represent year on year growth of 30.9%. EPS estimates of $0.14 represent year on year growth of 38.6%, adjusting for the large increase in share count after May’s IPO. In the third quarter conference call, I will be looking for commentary on the growth of mobile, and the growth of exclusive and private label products as a percentage of total GMV. It is also worth knowing that the first and fourth quarters are seasonally much stronger for Jumei.
Management and risk description
The two key events for the trade view are the expiration of the short selling ban on November 12 and the earnings release which is expected at the end of November. Whilst I have discussed my views on the earnings release, the short selling ban expiration has the potential to be an unknown quantity. On the one hand, Jumei’s share price is still relatively cheap because it has yet to recover from the Alibaba IPO-related sell off. Yet on the other hand, the selling pressure that has been seen by traders could be a sign that there is still downside in this trade. It would perhaps be wise for traders to hedge their positions around the short sell ban expiration, buy purchasing weekly puts at the $20 strike. Should earnings disappoint, then I will almost certainly end the trade view and take a loss.
Parameters
Entry: $25
Stop: $20
Target: $32
Time horizon: Two months
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