Alibaba Sales Better Than Feared Despite Economic Turmoil
Alibaba Group Holding Ltd. posted better results than many investors feared, avoiding a sharp sales contraction while signaling an improvement in Chinese consumer sentiment in recent months.
China’s e-commerce leader reported revenue of 205.6 billion yuan ($30.4 billion) in the June quarter, enough to beat projections for 204 billion yuan. Net income fell 50% to 22.7 billion yuan, though Alibaba trimmed losses at newer businesses like local services and the cloud.
Alibaba is still grappling with the economic fallout from nationwide Covid-related lockdowns and a near-economic contraction in China. Smaller rival JD.com Inc., which escaped the worst of the crackdown, is overtaking Alibaba in sales growth, while up-and-coming competitors such as ByteDance Ltd. to Pinduoduo Inc. are drawing more users away.
But consumption began recovering from June and quickened in July, Chief Executive Officer Daniel Zhang said. That outlook helped drive gains in Chinese internet peers from JD to Baidu Inc. and Pinduoduo that are heavily reliant on the health of the domestic consumer.
“Starting in July, we are seeing a gradual recovery of business performance compared to June, especially in the relatively more impacted categories in the past few months such as fashion and electronics,” he told analysts on a conference call.
Click here for a liveblog of the earnings.
Alibaba Jumps Amid Core Commerce Unit Profit Beat: Street Wrap
It’s also managing a series of run-ins with regulators. These range from antitrust fines to tax evasion probes, but have culminated in China’s largest recorded cybersecurity breach, which experts linked to Alibaba’s cloud business. That division grew sales 10% in the quarter, the slowest pace on record.
Abroad, the US added Alibaba to a growing roster of companies facing removal from US stock exchanges, because of Beijing’s refusal to permit American officials to review their auditors’ work. The company is seeking a primary listing in Hong Kong that would enable it to tap more mainland investors, while also maintaining its listing status on the New York Stock Exchange.
Once the most valuable company in China, Alibaba has seen its market value tumble after Beijing launched its sweeping crackdown on the private sector more than a year ago. The government forced Alibaba’s finance affiliate, Ant Group Co., to call off what would have been the world’s largest initial public offering in 2020, and then launched reforms that have undercut Alibaba’s business model.
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Following a ferocious crackdown on the country’s most prominent billionaires, Alibaba’s co-founder Jack Ma has made significant concessions to appease Beijing. Last week, Ant said in a filing that Ma will cede control over the fintech arm and reduce his Ant shareholding over time to a percentage that does not exceed 8.8%. He currently holds 50.52% voting rights in Ant.
The move, likely to reduce some of Alibaba and Ant’s regulatory headwinds, has weighed on Alibaba shares, on fears that a leadership change could further delay Ant’s initial public offering. Ma’s retreat also raises questions about his internet empire just as China enters a period of unprecedented uncertainty.
What Bloomberg Intelligence Says
“While the fall (in customer management revenue) could narrow sequentially in 2Q as fewer Covid curbs lifts sentiment among businesses and consumers in China, Alibaba will likely struggle to stem a margin decline as lingering concerns about the spread of Covid-19 and a slowing Chinese economy raise the need for more merchant support and shoppers’ incentives on Taobao and Tmall through September.”
– Catherine Lim and Tiffany Tam, analysts
Click here for the research.
Revenue from Alibaba’s core China commerce division slid 1% during the quarter — the first contraction on record.
In response to slowing growth, Alibaba said in May it will take a “more disciplined” approach to spending and scale back expenses in areas that aren’t generating long-term value. This shift — in line with Beijing’s incentives — marks a major shift from the aggressive and wide-ranging market-share grab that characterized the e-commerce giant in the past.
Adjusted earnings per ADS of 11.73 yuan beat estimates for 10.33 yuan, reflecting those efforts.
Alibaba has also turned increasingly outward, building Southeast Asian arm Lazada, Trendyol in Turkey and Daraz around South Asia into important units of the company. Alibaba has outlined a long-term goal of quintupling Lazada’s gross merchandise value, the sum of transactions across its platforms, to $100 billion.
“While Alibaba has indicated that it will be focusing on costs, I think the magnitude of its leverage still surprised the market,” said Vey-Sern Ling, an analyst with Union Bancaire Privée. “There will be positive read-through for the rest of China internet companies who will have similar cost focus, especially given the new regulatory environment.”