The sun is setting, Alibaba's road back is a "long march"

Despite thorough communication with the market and efforts to lower market expectations, Alibaba's stock price has dropped significantly. Does this mean that Alibaba's performance is really that poor compared to JD.com? Dolphin Research is here to highlight the key points:

1) Taotian: Poor, but within expectations.

As the most important focus of the market, Taotian's customer management revenue reached 68.7 billion, a YoY decrease of 3%, slightly lower than market expectations. The corresponding adjusted profit for this segment also decreased by 3% YoY to 47.1 billion. Both the revenue and profit fall within the reasonable margin of error expected by the market.

Since expectations for this segment had already been significantly lowered, the current accurate market expectations are mostly the result of sufficient information exchange between the company and the market. It can only be said that the performance is poor, but it is within expectations.

Considering that the company has clearly stated that Taotian's GMV for this quarter has experienced negative growth, but the monetization rate has increased (mainly due to the positive impact of Alibaba's recent launch of monetization tools such as Wanxiangtai), it also indicates a slow decline in Taotian's market share, at least in this quarter.

2) Little Brothers: Different Destinies Away from Home

Without the protection of the Taotian tree, Alibaba's little animals that have been searching for food on their own seem to have experienced different destinies after several quarters of verification:

1) Alibaba International, "The Wide Blue Sky": Alibaba's international business, mainly consisting of AliExpress, Lazada, and Trendyol, has become a star that has gained new vitality after separating from the Alibaba parent company.

This business segment achieved revenue of 24.5 billion, with a further accelerated growth rate of 53%. However, considering that there may be adjustments in revenue calculation due to changes in the business model, it is more meaningful to look at the growth rate of order volume, which increased by 28% this quarter, compared to 25% in the previous quarter.

What is even more commendable is that while revenue is accelerating, operating losses have further reduced. Adjusted EBITA only incurred a loss of 380 million, with a loss rate of 1.6%. At this rate, the profitability is expected to turn positive in the near future.

2) Riding on the Coattails, Cainiao: Alongside Alibaba International's rapid growth, Cainiao continues to benefit from its role as the infrastructure for international business expansion. Cainiao's revenue reached 22.8 billion RMB, a YoY increase of 25%. Although overall growth has slowed down due to the drag from weak domestic business, it still maintains a decent growth rate.

Moreover, Cainiao has achieved high growth while maintaining profitability. The adjusted EBITA profit margin improved slightly to 4% this quarter.

3) Average Performers:

This group includes the local services, entertainment, and "N" segments.

a) Local services have entered a normal YoY base period and achieved a 16% YoY growth. However, the growth rate of order volume is still in double digits. Considering the recent communication from Meituan, this may be due to the drag from the high base of high-value orders last year. Overall, it can be considered a passable performance, with the adjusted loss rate further reduced to 16%. Both in absolute value and loss rate, it is the highest among these segments. b) The entertainment sector did not perform well last quarter. With the help of offline Alibaba Pictures and Damai ticketing, it achieved a YoY growth of over 10%, but the loss rate was controlled at 2%. However, the overall revenue is relatively low, and as long as it doesn't incur losses, its presence is not significant.

c) Other businesses, such as Cainiao, Hema, Alibaba Health, and Intime, are mainly focused on offline operations. The revenue for this quarter was 48.1 billion, with a large scale, but the growth rate was zero, resulting in a total loss of 1.4 billion, with a loss rate of 3%.

In this sector, apart from Fliggy, which has recovered after the epidemic, only Hema and some growth in Cainiao can be seen, while Gaoxin is under greater pressure.

"Young but aged" Alibaba Cloud: The revenue was 27.6 billion, with a marginal YoY growth of 2%, which is further slowing down! The improvement in profit release is considerable, reaching 1.4 billion, with a profit margin of 5%. This is mainly due to the company's active reduction of low-profit project-based businesses, which may affect revenue but benefit profits.

Although there has been a considerable improvement in profit release, it is quite difficult for Alibaba Cloud, which has not shown significant growth, to achieve its valuation. Dolphin Research believes that Alibaba Cloud in this quarter is clearly not up to par.

After reviewing the performance, it can be concluded that Alibaba's overall performance this quarter is relatively weak, but it is within expectations after sufficient communication. Moreover, there is no significant profit exceeding expectations as in previous quarters, making everything appear ordinary.

4) The "chaotic" path to independent listing

Alibaba Cloud will no longer be completely separated, although this intention was previously revealed, the strategy is clearly wavering. The reason is somewhat strange: the uncertainty brought by the ban on chip sales to Alibaba Cloud makes complete separation unable to achieve the goal of increasing shareholder value.

Regardless of the reason itself, it is a very negative judgment, especially considering that Alibaba Cloud's growth rate is currently very weak, which will undoubtedly shake shareholder confidence.

In addition, Hema has also suspended its IPO. Of course, these decisions may be due to the unfavorable market conditions and difficulties in achieving desired valuations. However, these two pieces of news are accompanied by the fact that Jack Ma's family trust fund wants to sell Alibaba shares! This involves a market value of nearly 900 million US dollars.

Dolphin Research's viewpoint:

Overall, in terms of performance itself, Alibaba's previously communicated weak performance corresponds to a continued bottoming out and lack of visibility.

In addition, the third-generation management team has just formed, and Taotian's current strategy is mainly focused on activating the entire Alibaba ecosystem from the perspective of DAU, trying to avoid further erosion of its own territory. The requirements for GMV and profitability are not very high.

At the same time, Alibaba has provided financial support to its "little brother" businesses. In theory, Taotian Group should be able to enter the battlefield lightly and make a big impact. Therefore, having high expectations for Taotian and GMV is not very realistic.

In this situation, it is more important to focus on Taotian's progress in terms of DAU and the progress of other businesses after their independent survival and listing. Unfortunately, at present, Taotian's GMV and profitability have not been realized, and there is a lack of official information to verify its DAU. However, among the three segments that were planned to be spun off for listing, both Alibaba Cloud and Hema Xiansheng had a change of heart, and the story of releasing valuation through spin-offs is currently nothing more than a pipe dream. Coupled with the "brilliant move" of the founders selling their stocks before the release of the financial results, investors naturally vote with their feet.

From a valuation perspective, Alibaba is indeed cheap, but now among the Chinese e-commerce peers, besides Pinduoduo, who isn't cheap? Cheapness is not a reason for investment. We need to see improvements in the fundamentals to truly bring confidence to the capital.

Alibaba's new financial reporting standards

Since Alibaba made significant adjustments to its financial reporting standards last quarter, which differed greatly from before, let's briefly review the details of the changes so that everyone can better understand the current financial reporting standards.

Taotian Group: Taobao, Tmall, Tmall Supermarket + Import Direct Sales; Domestic Wholesale;

International Group: Corresponds to the previous AliExpress, Lazada, and other international retail and Alibaba International Station businesses.

Local Services Group: Ele.me and Gaode.

Cainiao Group: Same as before, but now the revenue calculation method treats other businesses within Alibaba Group as customers, and the revenue generated is included in Cainiao's revenue.

Intelligent Cloud Group: Alibaba Cloud + DingTalk. This quarter, DingTalk was also separated from the Intelligent Cloud Group and classified into other business categories.

Entertainment Group: Youku and Alibaba Pictures.

All others: Gaoxin, Hema, Alibaba Health, Intime (these three were originally in the domestic self-operated new retail sector); Lingxi Interactive, UC, and Quark (originally in the entertainment business); Fliggy (originally in the local services business). This part is mainly based on gross merchandise volume (GMV) revenue.

GMV still declined yoy

Let's first look at the core CMR (Customer Management Revenue) of the core Taotian Group in the domestic retail sector. This quarter, it reached 68.7 billion yuan, a YoY growth of nearly 3%. Although the company had previously lowered its guidance, the actual figure was slightly lower than the market's expectation of 1%. According to the explanation in the announcement, after the company launched the Wuxiangtai Unlimited Edition and numerous AI tools, the willingness of merchants to advertise and the company's monetization rate have improved. However, they were dragged down by the mild decline in GMV, resulting in a slightly lower-than-expected growth in CMR, which is the biggest flaw in this earnings report.

In terms of performance, although JD.com and Vipshop, which have already announced their results, have shown relatively weak growth in the third quarter, at least they still have positive GMV growth. According to our observations, the market also expected Alibaba's GMV to at least remain flat or slightly increase, but the actual negative growth is somewhat embarrassing. This indicates that as of the end of September, Alibaba's efforts in "pricing power," "content," and "private domain" have not been effective, and Taobao has lost the most market share.

Self-operated retail is also performing poorly

After adjusting its structure and financial reporting standards, the offline retail businesses that were acquired or developed under Alibaba's "new retail" strategy, such as Hema, Intime Department Store, and Gaoxin Retail, have all been removed from the self-operated retail segment under the Alibaba Group. Only core online self-operated businesses such as Tmall Supermarket and Tmall Global are retained. The growth rate this quarter also dropped significantly to 2.7%, slightly below expectations. It was disclosed that the sales of home appliances and 3C products in the self-operated business were still good, consistent with the previous quarter's standards. Dolphin Research speculates that the decline in growth rate is due to the overall slowdown in GMV growth.

However, the domestic online wholesale business, mainly 1688, has shown decent growth. It achieved revenue of 5.1 billion this quarter, which is on par with the previous quarter (peak season), significantly better than market expectations. According to the company's recent promotion, in addition to B2B, 1688 is also focusing on B2C business (such as 1688 Select channel), seizing market share in the white-label market, which should be a major boost.

International retail continues to grow rapidly, and going global becomes increasingly important.

Although the performance of Taobao in the domestic market is not good, the international e-commerce business has maintained strong growth this quarter. The scope of international business adjustment is not significant and can still be compared with historical data. This quarter, overseas retail revenue from platforms such as Lazada, Aliexpress, and Trendyol achieved an astonishing 73% YoY growth, 15% higher than already high expectations. It was disclosed that both Lazada and Trendyol achieved double-digit growth in order volume, and Lazada continued the trend of improving monetization. Considering the weaker growth of Sea, Dolphin Research believes that the competitive landscape of Lazada in Southeast Asia may improve. The recent ban on TikTok Shop in Indonesia is also a short-term positive development.

In addition, AliExpress Choice, a fully managed and cost-effective business similar to Temu, also achieved double-digit growth in orders this quarter. Choice is also cooperating with Cainiao to build local warehouses to improve logistics and user experience. In addition, Alibaba.com, which had experienced almost zero growth in its overseas wholesale business for three consecutive quarters, saw a 9% growth this quarter. Combined with the strong performance of Shein, Temu, Choice, and Tiktok shop overseas, the value and importance of international business have increased.

Cainiao: Continuous acquisitions in China and rapid growth overseas, is Cainiao going public?

After the restructuring, Cainiao's current revenue includes both internal and external customers, reaching 22.8 billion yuan this quarter, a year-on-year growth of about 25%, higher than expected. Due to the rapid growth of Alibaba's international business in recent times, Cainiao's international logistics has also taken off, compensating for the sluggish growth of domestic e-commerce business.

In addition, following the announcement of an increase in its stake in Shentong, there have been rumors that Cainiao will acquire Best Express and its international business, further expanding its scale through mergers and acquisitions while reducing excess competitors.

Alibaba Cloud is still struggling

The second pillar, Alibaba Cloud Group, also includes revenue generated internally in its revenue calculation after the restructuring. This quarter, Alibaba Cloud Group achieved a revenue of 27.6 billion yuan, with a year-on-year growth rate of only 2.3%. The growth is still very weak, but market expectations are even more pessimistic (negative growth), which is barely acceptable.

According to disclosures, the company is reducing the volume of project-based businesses with low-profit margins, which may have an impact on revenue. In addition, it also shows that in the current environment of cost reduction, there is a lack of incremental government and enterprise businesses, making it difficult for cloud business to break through in the short term.

Local services: Good growth in order volume, but dragged down by average order value

Alibaba's local revenue growth in the third quarter slowed down to 16% from the high base of last year. However, it was disclosed that the order growth rate for non-food delivery and food delivery was actually in double digits, higher than the revenue growth. Combined with recent communication from Meituan regarding food delivery, it is likely that the higher average order value last year has dragged down revenue growth.

As for the ride-hailing business, the company disclosed that the order volume has grown rapidly year-on-year, and considering Didi's underperformance in the second quarter in terms of order growth rate, Amap Taxi should have increased its market share.

The entertainment sector is still the "weakest".

In this quarter, although the summer is the peak season for cultural and sports consumption, with popular films such as "All In", "You Disappeared", and "Thirty Thousand Miles of Chang'an" being released, the revenue of Alibaba Entertainment only increased by 400 million MoM, and the YoY growth rate slowed down to 11%, which is clearly below expectations. According to the company's explanation, this is mainly due to the decline in advertising revenue from Youku.

The overall reduction in losses and increase in profits of "subsidiary" businesses compensates for the decline in Taotian.

From a revenue perspective, the core Taotian did perform slightly below expectations, but it is not a major flaw. Among the other "N" sub-groups, except for the relatively neglected entertainment sector, the performance of the others is still good. So how did they perform in terms of profit? Let's take a closer look:

The adjusted EBITA of Taotian Group increased by 3% this quarter, slightly lower than the 4% growth in revenue. This is mainly due to the weak contribution of CMR revenue. However, it is still in line with expectations.

Outside of Taotian, in other sectors, the adjusted EBITA of international e-commerce, Cainiao Logistics, and Alibaba Cloud all reduced losses or increased profits MoM, and performed better than expected. The first two sectors are mainly due to revenue growth exceeding expectations. As mentioned earlier, Alibaba Cloud mainly reduced low-profit project-based businesses, so although the growth was poor, it improved profit margins.

In addition, the EBITA losses of local life, Alibaba Entertainment, and other businesses have expanded and are lower than expected, but the magnitude is not significant. Taking Hema's recent widespread promotion of a discount-led transformation as an example, Dolphin Research believes that this may be due to increased investment in these sectors to stimulate growth after the "spin-off".

In summary, Alibaba Group achieved a total adjusted EBITA of 42.8 billion, a YoY growth of 16.3%, higher than the revenue growth rate. Therefore, although the profit margin of the Taotian sector still declined YoY, it was offset by the reduction in losses and increased efficiency of other businesses, resulting in an overall increase in profit.

How did expenses change?

After looking at the revenue and profit, let's examine the changes in costs and expenses. First, in this quarter, Alibaba's non-GAAP gross margin was 38%, a slight decrease of 1 percentage point. However, based on historical data, this small change generally aligns with seasonal influences. Cost-wise, in terms of the proportion of revenue, there were no significant changes in R&D, sales, and internal management expenses compared to the previous quarter. Although there were slight increases or decreases in each category, after offsetting each other, the overall adjusted EBITA profit margin of the group remained stable at 19% MoM, with no significant changes. Therefore, after completing the major restructuring, both costs and expenses in this quarter remained relatively stable.

Although the Non-GAAP net profit appears to have decreased by about 4 billion MoM, this is mainly due to asset impairment losses and the decline in investment equity income. Excluding these non-operational impacts, the operating profit remained relatively stable, indicating no major flaws.