Reward and Risk in Alibaba's Q3 Earning

$Alibaba(BABA)$ announced its Q2 financial report for the fiscal year ending in September. The market had high expectations for this report, as the stock had risen nearly 4% the previous day. However, after the report was released, the stock plummeted more than 8%.

This does not necessarily mean that the current performance was poor. Investors may be more concerned about the suspension and postponement of the spin-off listings of certain business groups within Alibaba, as well as the "growth potential" ( $Pinduoduo Inc.(PDD)$ , Shein) after the start of dividend distribution. In addition, Jack Ma's reduction in holdings may have hit investors' sensitivity to the risk appetite for "Chinese assets".

Investment Highlight

• The Taotian Group, representing Chinese consumption, saw a 4% increase. However, maintaining this growth rate is not easy in the context of "consumption downgrading" and "deflation", as well as intense industry competition. But July to September is not a shopping season, and consumer activities are not strong. Sales of lower-margin products are strong, and the actual selling prices of some products have decreased, leading to further decline in profit margins. EBITA increased by 3% year-on-year, lower than the revenue growth rate. However, Alibaba achieved a share of over 62% in the recent "Double Eleven" shopping festival (through third-party channels), which is a good result.

• International e-commerce once again achieved breakthrough growth, recording the highest growth rate in history at 56%, with retail growth reaching 77%. This is more due to cooperation with countries along the "Belt and Road" initiative and progress made by Southeast Asian companies. Additionally, Alibaba has improved its logistics capabilities to enhance the consumer experience in overseas regions. The narrowing losses of Lazada also prove that Alibaba is in a more advantageous position in competition with Shopee, which is in contrast to Sea Ltd's recent financial report. The overall EBITA loss has narrowed to 384 million yuan, and a return to profitability is expected soon.

• In this quarter, the local services sector, led by Ele.me and Gaode, benefited from increased demand for commercial activities, with revenue reaching 15.56 billion yuan, a year-on-year increase of 16%. Adjusted EBITA loss was 2.5 billion yuan, narrowing compared to last year. The recovery of the industry as a whole has had a significant impact, as seen in Didi's financial report, and it is expected that Meituan-W will also improve.

• Cainiao has already submitted its application to the Hong Kong Stock Exchange. With increased international business, it achieved revenue of 22.8 billion yuan this quarter, a year-on-year growth of 70%. It has also been profitable for two consecutive quarters, with adjusted EBITA of 906 million yuan, which will enhance investor confidence. Considering the current recovery of Hong Kong IPOs, investors may show more interest in companies with excellent performance.

• The cloud business continues to focus on monetization, although chip sanctions may have some impact, the greater opportunities lie in artificial intelligence. This quarter, DingTalk was split again, so the revenue of the cloud intelligent business was 27.65 billion yuan, an increase of nearly 33% from the previous quarter. However, Alibaba Cloud has been caught in the anxiety of growth expansion and the recent epic failure has had a negative impact that has spread beyond the industry. If it is indeed a problem with the basic components, causing difficulties in recovery after a crash, it may really require more investment in infrastructure. The decision not to go public in the short term also indicates some issues.

• Local services and entertainment have benefited from the recovery in demand after the opening up, with revenue of 5.8 billion yuan this quarter, an increase of 11% year-on-year. Strong offline entertainment has helped increase profits for the entertainment sector after it turned around from losses in the previous quarter, reaching 200 million yuan. Damai.cn's growth rate has reached three digits, and the effect of "concert economy" is obvious. Some films from Alibaba Pictures also achieved good box office results during the summer season, while investment in short dramas may take some time to show results.

• Ant Group's contribution this quarter seems to be only 846 million yuan on the surface, but it actually includes a fine of 7 billion yuan. Since fines cannot be deducted from taxes, if this part is taken into account, the actual contribution may reach 3.2 billion yuan.

• Share buybacks are still ongoing, but investors may be concerned that this quarter's first dividend distribution of 2.5 billion yuan, equivalent to $1 per ADR, implies that the company has "left the growth circle" and become a symbol of a "mature company".

• In addition, there have been new developments in the separate listing of business segments that investors are concerned about. Apart from Alibaba Cloud's temporary suspension of its listing plan, there is also a temporary suspension of Hema's listing, mainly due to the unstable sentiment in the Hong Kong stock market. This still sends a negative signal to investors about the expectations for the consumer industry. Of course, continued financing for international business is also a strong signal.

  

Earnings Review

Revenue Side

The overall revenue was 224.79 billion yuan, a year-on-year increase of 9%, higher than the expected 224.1 billion yuan.

By segment, the revenue of the Chinese business segment, including Taotian Group, was 97.65 billion US dollars, a year-on-year increase of 4%;

The revenue of the international business segment, including Lazada, was 24.51 billion yuan, a year-on-year increase of 56%;

The revenue of local life services was 15.56 billion yuan, a year-on-year increase of 16%;

The revenue of Cainiao Logistics was 22.82 billion yuan, a year-on-year increase of 71%;

The revenue of cloud services was 27.65 billion yuan, a year-on-year increase of 33%;

The revenue of digital entertainment was 5.78 billion yuan, a year-on-year increase of 11%;

The revenue of other innovative businesses (DingTalk, Quark, Fliggy) was 48.05 billion yuan, a year-on-year increase of 0.2%.

Profit Side

Gross profit margin was 37.87%, basically flat compared to the expected 37.98%.

Adjusted EBIT was 49.24 billion yuan, a year-on-year increase of 14%, and the profit margin increased from 17% last year to 19%;

Non-GAAP adjusted EPS was 15.63 yuan, slightly lower than the market expectation of 15.66 yuan;

By segment, the core China retail contributed 47.01 billion yuan, a year-on-year increase of 3%;

The international business segment still had a loss of 380 million yuan, but the year-on-year decrease was 60%, higher than market expectations;

The loss of local life services decreased by 2.56 billion yuan, a year-on-year decrease of 22%;

Cainiao Network turned a profit of 910 million yuan, a year-on-year turnaround;

Cloud business profit was 1.41 billion yuan, a year-on-year increase of 224%;

The loss of digital entertainment decreased by 200 million yuan, a year-on-year decrease of 40%.