Alibaba Group Holding Ltd. (NYSE: BABA) edged lower on April 2021, after delivering fiscal results with adjusted EPS that topped consensus, while revenue was in line with analysts’ estimates. The solid results report was issued in the shadow of the blocked IPO for Ant Group, Alibaba’s giant FinTech division that owns the Alipay digital payments platform.
Alipay serves over 80 million merchants and has more than one billion users. News of the blocked IPO came on 11/3/20, causing the BABA ADSs to fall by 8%. Alibaba’s course forward for launching Ant Group in an IPO is uncertain, although we expect the deal to go forward at some point.
During fiscal 2Q21 (calendar 3Q20), Alibaba benefited from continued strong demand for at-home goods, even though China has moved past its initial COVID-19 wave and avoided a major new flare-up. Alibaba continues to add users, both for its total platform and mobile users.
China has developed several large online commerce platforms that are in competition with Alibaba. Even amid heightened competition, we believe that Alibaba is well positioned for continued growth and market share gains based on the breadth and depth of its product offerings, its multitude of services for in-China and cross-border commerce, and its invaluable first-mover and brand awareness advantage. Finally, Alibaba continues to successfully leverage data analytics from the ‘feedback loop’ of its active customer base.
More broadly, Chinese online commerce should benefit from favorable demographics in both major and mid-tier cities and from the paucity of physical retail infrastructure in many regions.
RECENT DEVELOPMENTS
BABA’s American Depositary Shares (ADSs) declined 21% in 2018, compared to a drop of 3% for peers. Many analysts think that BABA could be one of the best stocks to invest in, with April being a favorable moment for the purchase.
For fiscal 2Q21 (calendar 3Q20), Alibaba reported revenue of RMB 155.1 billion. Revenue on an RMB basis about matched the consensus estimate. For the ADSs, which did not split 8-for-1, non-GAAP earnings totaled RMB 17.97 per diluted share. For the ordinary shares, non-GAAP earnings totaled RMB 2.25 per diluted share, up 37% from a year earlier (based on net income attributable to ordinary shareholders).
The yuan/dollar exchange rate was $1/RMB 6.79 in calendar 3Q20, versus $1/RMB 7.02 in calendar 3Q19. Revenue on a U.S. dollar basis of $22.84 billion was up 37% year-over-year. Non-GAAP earnings per ADS of $2.65 rose 50% annually and exceeded the $2.07 consensus call.
The BABA results release for fiscal 2Q21 was overshadowed by news that China had blocked the planned IP of Ant Group. Operating as the world’s largest FinTech company, Ant Group operates the Alipay digital platform that works with over 80 million merchants and serves more than one billion consumers. Alipay handled an estimated $16 trillion in online payments in 2019. Ant Group is also a major lender with a size and scale equivalent to those of the world’s largest banks.
The IPO had been slated for Thursday 11/5/20 as a dual listing on the Shanghai and Hong Kong stock exchanges. The IPO was expected to raise over $35 billion, resulting in a market value for Ant exceeding $300 billion. On Tuesday 11/3/20, regulators on the Shanghai Stock Exchange suspended the offering, citing Ant’s failure to fully meet information disclosure agreements. The Hong Kong exchange also suspended the public launch.
Late in October, Alibaba founder Jack Ma made comments at a financial conference in Shanghai that were regarded as caustic and inflammatory. Among other comments, he called Chinese banks ‘pawnshops’ and referred to Chinese financial leaders and regulators as ‘paper pushers.’ His comments implied that China did not really have a formal financial system, creating risk to the Chinese economy. It may be difficult for Alibaba’s chairman to walk back those comments.
Commenting on the Ant Group situation, the CEO noted that as of 10/30/20, the IPO had been heavily oversubscribed by retail and institutional investors.
For the long term, it is in China’s best interests to promote a strong and quasi-independent Ant Group, which can in time rise to the scale and prestige of the major global banks. Alibaba’s course forward for launching Ant Group in an IPO is uncertain, although we expect the deal to go forward at some point.
Meanwhile, China continues to move on from COVID-19, and has so far avoided the kind of major flare-ups bedeviling the U.S. and parts of Europe. In China as in the rest of the world, shelter-at-home mandates accelerated digital transformation via remote work & learn, media & video game streaming, virtual social interactions, and other elements of the digital economy. Although pandemic-related shutdowns have receded in China as elsewhere, these digital transformations have left a permanent imprint on Chinese society.
Although Alibaba competes with numerous online merchants, the company has been able to continue adding users. During fiscal 2Q21 (calendar 3Q20), mobile active users (MAU) reached 881 million, up 12% annually and 1% sequentially from calendar 2Q20. Daily active users (DAU) are also growing rapidly, signaling strong unit engagement and buying frequency. Active annual consumers on Alibaba’s China retail marketplaces totaled 757 million as of the end of fiscal 2Q21, up 9% year-over-year and 2% sequentially from calendar 2Q20.
These rates of growth have slowed in percentage terms based on the law of large numbers. In absolute numbers, growth remains robust. Alibaba added 96 million mobile MAUs year-over-year from fiscal 2Q20 to fiscal 2Q21, and also added 64 million active annual consumers over that span.
The continued above-consensus performance in fiscal 2Q21 was reflected in multiple metrics. Overall Tmall physical-goods gross merchandise volumes (GMV) rose by 21% in fiscal 2Q21, maintaining the 20%-plus growth rate of fiscal 1Q21. Affluent Chinese have been world travelers, but that venue has been shut down by the pandemic. We believe Chinese consumers, in line with consumers worldwide, are replacing experiences and travel with physical goods purchases. Moreover, although China has largely reopened physical retail and other spaces, the fears implanted during the early pandemic continue to keep many Chinese consumers mainly at home.
As a result, FMGC (food, medical and consumer goods) remains the fastest-growing category on Tmall, with food and healthcare products generating annual sales growth of 38% and 50%, respectively. Apparel sales have picked up as employees return to work sites, while electronics sales eased sequentially. CEO Danny Zhang noted that Apple’s iPhone launch had been pushed out of calendar 3Q20. In October, mobile phone sales surged 50%, led by iPhone and other autumn 2020 handset launches.
For fiscal 2Q21, total core commerce (which includes China commerce along with logistics, international operations, and consumer services) was up 29% annually and represented 84% of revenue; total core commerce edged down 2% sequentially. Core commerce profits were up 19% annually, resulting in a 35% margin vs. 38% a year earlier.
Within core commerce, China commerce revenue (62% of total) was up 26% year-over-year. After growth in China Wholesale and International Retail slowed to the single digits because of pandemic effects, both businesses bounced back with double-digit growth in fiscal 2Q21. Outside of traditional retail, Alibaba Cloud grew revenue 60% in 2Q21. Alibaba Cloud is forecast to turn profitable by the end of fiscal 2021.
We look for Alibaba to have an extremely strong calendar 2020 year-end into early 2021, driven by two main events. First is Global Shopping Festival, Alibaba’s major shopping bonanza that typically takes place on November 11 and was formerly called Single’s Day. For 2020, Global Shopping Festival has been split into a three-day pre-launch period (11/1/20 to 11/3/20) and Single’s Day itself on 11/11/20. Shoppers can use the interim period to cue up their purchases on the main day. In 2019, Singles GMV surpassed 213.5 trillion yuan ($30.5 billion) in GMV; the expanded format in calendar 2020 will likely result in extremely strong growth in GMV vs. last year’s one-day event.
In February, China will get to celebrate Lunar New Year much as it has traditionally been celebrated with family meetings and gifts. Early in 2020, the pandemic hit China full force during Lunar New Year, resulting in stranded workers, cancelled celebrations, and muted gift-giving. We look for an exaggerated ‘make-up’ Lunar New Year celebration in China.
Commenting on the Ant Group situation, the CEO noted that as of 10/30/20, the IPO had been heavily oversubscribed by retail and institutional investors. As Ant Group’s major investor, according to the CEO, ‘Alibaba is evaluating the impact on our business in response to the recent proposed change in the FinTech regulatory environment and will take appropriate measures accordingly.’
RECENT DEVELOPMENTS
China has developed several large online commerce platforms that are in competition with Alibaba. Even amid heightened competition, we believe that Alibaba is well positioned for continued growth and market share gains based on the breadth and depth of its product offerings, its multitude of services for in-China and cross-border commerce, and its invaluable first-mover and brand awareness advantage. Finally, Alibaba continues to successfully leverage data analytics from the ‘feedback loop’ of its active customer base.
More broadly, Chinese online commerce should benefit from favorable demographics in both major and mid-tier cities and the paucity of physical retail infrastructure in many regions.
EARNINGS & GROWTH ANALYSIS
Revenue on an RMB basis about matched the consensus estimate. For the ADSs, which did not split 8-for-1, non-GAAP earnings totaled RMB 17.97 per diluted share, up 37% year-over-year. For the ordinary shares, non-GAAP earnings totaled RMB 2.25 per diluted share, up 37% from a year earlier (based on net income attributable to ordinary shareholders).
The yuan/dollar exchange rate was $1/RMB 6.79 in calendar 3Q20, versus $1/RMB 7.02 in calendar 3Q19. Revenue on a U.S. dollar basis of $22.84 billion was up 37% year-over-year. Non-GAAP earnings per ADS of $2.65 rose 50% annually and exceeded the $2.07 consensus call.
For the March 2020 fiscal year, Alibaba reported revenue of RMB 509.7 billion, up 35% from RMB 376.8 billion in FY19.
Note that Alibaba split its common stock 8-to-1 ahead of its listing on the Hong Kong exchange. On a post-split basis, FY20 non-GAAP EPS of RMB 6.31 rose 34% from RMB 4.80 in FY19.
For the common shares and reflecting the 8-for-1 split, our RMB-based adjusted estimate for FY21 is unchanged at RMB 9.70. For FY22, our RMB-based non-GAAP forecast is RMB 12.85, raised from 12.24.
The American Depositary shares (ADSs) were not split.
FINANCIAL STRENGTH & DIVIDEND
All figures are in RMB (Chinese yuan) unless otherwise noted. Although Alibaba has a strong net cash position and is expanding margins, the company operates in the low-margin retail sector.
Alibaba had cash & equivalents of RMB 405.9 billion.
Net cash was RMB 284.1 billion at 2Q21. Net cash was 233.6 billion at year-end FY20, RMB 58.9 billion.
Alibaba may repurchase stock opportunistically but does not prioritize capital returns to shareholders.
MANAGEMENT & RISKS
Alibaba was founded by Yun ‘Jack’ Ma and Joe Tsai and their associates in 1999. Joe Tsai is executive vice chairman. Daniel Yong Zhang is the CEO and executive chairman, taking that role from founder Jack Ma. Maggie Wu is the CFO. Simon Xie is also a co-founder.
Jack Ma is tightly identified with the company, much as Mark Zuckerberg is identified with Facebook. We believe that Alibaba has now developed a deep bench of talent and will carry on regardless of Mr. Ma’s role in the future.
The setback in the Ant IPO was a reminder from China that the government is in charge, not the country’s largest company. For the long term, it is in China’s best interests to promote a strong and quasi-independent Ant Group, which can in time rise to the scale and prestige of the major global banks. Alibaba’s course forward for launching Ant Group in an IPO is uncertain, although we expect the deal to go forward at some point.
E-commerce has inherently low barriers to entry. We believe that Alibaba is well-positioned relative to existing and new entrants in China based on the company’s strong brand and well-established operations.
Although Alibaba has also become a global brand and now operates internationally, the bulk of GMV, revenue and profit is recognized in China. We believe Alibaba’s risks related to a potential trade war are relatively low given this strong domestic base of business.
Alibaba operates in the controlled economy of the People’s Republic of China and is subject to numerous regulations. We believe the company has developed a good working relationship with the government.
COMPANY DESCRIPTION
Alibaba provides Chinese and international e-commerce platforms, logistics, and ancillary services. The company operates in four segments: Core Commerce; Cloud Computing; Digital Media & Entertainment; and Innovation Initiatives. Key marketplaces include Taobao, a consumer marketplace; Tmall, a third-party platform for brands and retailers; Juhuasuan, a platform for ‘flash’ sales; and Alibaba.com and 1688.com, which are online wholesale marketplaces. Additional platforms include Alitrip (online travel booking), Alipay (online payments), Lazada (online commerce in Southeast Asia), and multiple others.
