Is Alibaba still far from "taking off" after the "squatting" stage?

After-hours, on the evening of February 23rd, Beijing time, Longbridge published its Q3 financial results for the 2023 fiscal year ending in 2022. This quarter, Alibaba's revenue was 247.8 billion yuan, a year-on-year increase of 2%, slightly exceeding the market's expected 245.9 billion.

Profit continues its consistent trend of far exceeding market expectations seen in the last two to three quarters. The profit indicator that the market is genuinely concerned about--profit after deducting stock rights and amortization expenses--reached 52 billion yuan, significantly surpassing the market's expected 47 billion.

However, there are several key positives and negatives to note:

1. The same old problem, but expectations are now more important

• Taobao/Tmall is still Alibaba's biggest problem area, with GMV declining by around 5% this quarter and corresponding customer management revenue falling to around 9%. This GMV growth is lower than the industry norm of 10%+ and monetization rates are slower than GMV growth.

But, Dolphin Analyst believes that the market will not nitpick this data as much. Firstly, this result is due to the severe operating environment in Q4--strict control over the first half due to the pandemic, and mass infections leading to a severe impact on optional consumer spending such as clothing during the second half. In addition, Alibaba has fully communicated this situation to the capital market and the market already has a full understanding of this matter.

Moreover, we can expect that as the weather warms up after the National People's Congress, there will be a gradual recovery in optional consumer spending such as clothing and cosmetics. Compared with peers in the same industry, Alibaba may have greater room for marginal improvement in its GMV and monetization rate.

• Alibaba Cloud is still facing challenges and needs the efforts of Aliwangwang to turn things around. In Q3, Alibaba Cloud's revenue growth rate was only 3%, which is no different from Q2's 4% and Baidu's intelligent cloud's 4%. However, there is a positive aspect--the base effect of losing Tiktok's business is gradually declining. The contraction rate of cloud revenue in the internet industry has started to shrink, and the further return of internet customers after the epidemic is almost a certainty. The key is how Aliwangwang will personally take charge to restart Alibaba Cloud's growth.

2. Ali Zoo's "perseverance and hard work"

• Anyone who follows Alibaba should know that within the Ali Zoo family, there has always been a group of severely loss-making animals under the protection of Taobao and Tmall. In the current situation where Taobao and Tmall's revenue and profitability are both weakening, every loss-making unit must answer one core question--how to be self-sufficient. In the latest quarter, based on their responses, Dolphin has divided them into two categories:

• Truly self-sufficient: While growing revenue, business losses have decreased

  • Hema: Under the leadership of Hema, the self-operated retail industry has returned to a growth rate of 10%. Hema's growth itself is close to 20%, and according to management's statement, Hema is on the verge of turning a profit.
  • Cainiao: As a crucial part of Alibaba's efforts to improve customer experience, Cainiao's revenue growth rate was 27% this quarter and cash flow has become positive.

Translated with the help of OpenAI GPT-3.5 Turbo. 2) Only reduced losses and didn't cause trouble for the group

a. Alibaba Entertainment: There are basically no assets in this area that can compete in the market. If we use Amazon Prime Video as a reference and only provide as a service within the Alibaba e-commerce ecosystem without causing trouble for the group, then Alibaba Entertainment has achieved its goals this quarter. Although its revenue decreased by 6% YoY, it only lost 25 million yuan, which is not considered a loss in the history of Alibaba Entertainment's losses.

b. Local Services: This is an important part of Alibaba's core e-commerce business and cannot be abandoned. If it cannot gain market share, it cannot keep losing money indefinitely. This is the bottom line. Due to the impact of the epidemic, the revenue of local services was affected this quarter, but the per unit economy of Ele.me has continued to turn positive, and the loss rate has also narrowed slightly under extremely difficult business conditions.

Dolphin Analyst's Opinion:

The financial report shows that there are still no changes in Alibaba's core assets: the growth rate of Taobao and Tmall's GMV is poor, with even worse monetization, which is due to the impact of the epidemic and competition from peers. Furthermore, Alibaba Cloud, a star business, has dropped from growth to value. These are the key reasons why Alibaba's stock price cannot sustain at $120.

But these are already visible problems. In my opinion, for Douyin to become a sustainable competitor, it needs a desire to shop on Douyin, as well as successful commercialized business, i.e. malls that can have a "tap water" flow of traffic. From current experience, it is not easy for Douyin.

In addition, this year's optional recovery of fashion and beauty categories have already been repeatedly mentioned, and the stabilization of the gap between GMV and monetization rate also requires the return of these high-margin categories. I will not elaborate further on this issue.

Against the background of consumption recovery, when Alibaba's stock price drops to a relatively safe price point, such as over $90, stock repurchasing will become more and more important for supporting the stock price. Currently, Alibaba still has $21 billion of repurchase quota that can be used up to the end of 2025, representing nearly 8% of its market value.

The real marginal increment signal in this financial report is that when Taobao and Tmall, as the bloodline of the Alibaba Empire, are finding it increasingly difficult to support the losses of their little brothers within the Alibaba system, the remaining businesses have begun to slowly pick up the revenue and simultaneously release profits.

Furthermore, in terms of capital operations, Alibaba also has a plan to make Hong Kong its main listing location that is waiting to reboot, bringing imagination space for Alibaba to enter the Hong Kong stock market.

Considering these visible positive factors, using Maotai's "investing in Alibaba is one of my biggest mistakes" and JD's 10-billion-yuan subsidy as an excuse to drag Alibaba's share price to $90, which is equivalent to only valuing its core platform e-commerce and directly ignoring its cash and other assets, especially when the chances of independent listing of these assets are becoming increasingly promising, this valuation method seems to be overly conservative. Regarding the value judgement of Alibaba, one can refer to the recent analysis by Dolphin Analyst: "Ant goes ashore, Zhang Yong goes to the cloud, how far is Alibaba from re-evaluation?", and "The Final Battle of E-commerce, can Taobao beat Douyin?".

Dolphin Analyst will share the summary of the conference call with Longbridge App's user group and Dolphin Research Group. Interested users can add WeChat ID "dolphinR123" to join Dolphin Research Group and get the summary of the conference call as soon as possible.

Special reminder: Starting from October 2022, the Almighty Supermarket (less than CNY 400 million) has been transferred from China's 1P retail to the local life service, which has little impact. The main purpose is to account for the performance of independent business more clearly. In addition, Alibaba adjusted its financial reporting base from the quarter beginning in December 2021.

Dolphin Analyst has classified Alibaba's latest business for everyone's easy access. The red items are the latest ones.

The detailed analysis is as follows:

I. The Darkness Before Dawn

1) Taobao Tmall, is it over?

Without users, the market's attention has been focused entirely on Taobao Tmall's revenue items -- China retail customer management revenue (CMR) and its corresponding GMV. They are Alibaba's revenue and profit cornerstone.

However, competition with Douyin and Pinduoduo, as well as the impact of the pandemic, have led to the shrinkage of its GMV, growth below the domestic online physical retail benchmark, and advertising budget being diverted to Douyin, Xiaohongshu, etc. The decline in advertising monetization rate has become Alibaba's burden, but observing the difference in GMV and CMR growth trends itself is a must-check item for the market to observe Alibaba's turning point.

However, as far as this year's fourth quarter (Alibaba's 3Q23 earnings season) is concerned, the performance of Alibaba's core platform e-commerce in China can be said to be "weak to the extreme". In the domestic online retail sector, the year-on-year growth rate is approximately +10%, while the customer management revenue (CMR) growth rate of Alibaba's Taobao and Tmall is -9%. The income from high-margin business has fallen below 100 billion again. The contraction of GMV (excluding unpaid orders) of Taobao and Tmall in the same period has slightly widened the monetization gap. The income trend itself is still declining in the September quarter, with a decline of 6.5%, which is still expanding. In other words, due to the loss of orders caused by the severe epidemic prevention measures before October and November, and the logistics shortage caused by concentrated infection after full opening. In the fourth quarter with twists and turns, the delivery of orders was seriously delayed, affecting the optional consumption of clothing accessories and other products with high proportion in Alibaba's GMV.

The reason why Dolphin Analyst said "weak until there is no weaker" is: first, from the category structure, the gradual recovery of high-margin categories such as clothing accessories and cosmetics after the epidemic is an almost certain event. The return of Alibaba's strong categories will make a significant contribution to both GMV and profit space. A decline of -9% should be the worst situation for Taobao and Tmall. Second, from the perspective of expectation, Alibaba has privately had sufficient communication about this "thunder", including the low growth of Aliyun, so the market has basically known about the customer management revenue and Aliyun.

2) When Taobao and Tmall are weak, everything else has to rely on self-reliance

Adjusted EBITA in the domestic e-commerce sector reached 58.6 billion, far exceeding the market's expected 54.5 billion, not considering option incentives and amortization expenses. Despite the significant increase in the proportion of low-margin self-operated retail revenue, the profit margin is still at the same level as the same period last year, reaching 34%.

However, if you take a closer look, the key here is that when the platform e-commerce monetization rate (AKA profitability) continues to decline, all other previously loss-making businesses must gradually reduce losses or even turn losses into profits, including Taocaicai and downsizing platform Tao Te. In particular, Taocaicai gradually reduced its losses only after January last year, and from the current situation, Taote and Taocaicai should still have a quarter of loss reduction space.

Moreover, in the core business, except for the reduction of losses in some self-operated retail businesses such as Taote and Taocaicai, other assets have performed very well. This time, in addition to reducing losses, Cainiao and international business have maintained their growth, and the growth rate has even further recovered:

a. In the extreme test, Cainiao's income remained at nearly 30% growth and basically maintained the break-even point. Currently, it is one of the two major assets that tend to go public independently. b. International business under the drive of Trendyol, the e-commerce platform in Turkey, not only rebounded in revenue growth, with retail high growth rate of over 25%, but also further reduced losses to 760 million yuan;

c. The growth rate of local life income slowed down to single digits due to the severe impact of the takeaway business, while the average profit of Ele.me continued to turn positive. The major impact in the fourth quarter was the in-store business dominated by Gaode, resulting in serious losses.

II. Self-operated business: HEMA is still the biggest highlight

China's heavy asset retail business mainly includes HEMA, Gaoxin Retail, Yintai, self-operated pet stores, Tmall self-operated/Kaola, and Alibaba Health's self-operated business.

In this quarter, the revenue of the heavy asset retail business reached 74.4 billion yuan, with a year-on-year growth of more than 10%, exceeding the market expectation of 73 billion yuan.

According to the revenue growth rate of about 20% for HEMA (same-store sales above 20%), it can be inferred that the growth rate of Alibaba's self-operated e-commerce (Yintai, self-operated pet stores, Tmall self-operated, Kaola) is also very good, with a year-on-year growth of at least 10%, mainly due to the flagship Alibaba Health and the relative sales of self-operated pet stores.

III. Belt-tightening is underway, even R&D cannot escape

The target of each loss-making business line is to be responsible for its own profit and loss. In the situation where the main source of blood-making, Taobao/Tmall, is lagging behind, Alibaba still achieved a fairly good gross profit performance while maintaining its own growth.

In this quarter, the company's overall gross profit was 99.4 billion yuan, a year-on-year increase of 1%; while the gross profit margin remained at the level of the same period last year, reaching 40%, despite the increasing proportion of low-margin self-operated revenue.

In terms of expenses, Alibaba is still trying its best to save costs. The year-on-year and quarter-on-quarter decline in R&D expenses is particularly eye-catching:

1. Sales and marketing expenses were 29.5 billion yuan, a year-on-year decrease of 17%. The decline was basically the same as that of the previous quarter, which was in a state of high growth of 46% in the same period last year. The unexpected decline should be related to the interference of epidemic-related expenses in the fourth quarter.

2. R&D expenses were 9.8 billion yuan, the first year-on-year decline, directly reaching 15%. The expense ratio dropped to 3.9%, which is very surprising. If we take into account the further widening of the reduction in employee numbers in this quarter, it is reasonable to speculate that there have been a considerable number of R&D personnel laid off.

3. Administrative expenses are still growing at a high rate. This quarter, it was 8.6 billion yuan, a year-on-year increase of 26%. In the past three quarters, Alibaba has been on the same growth trend: nearly 10,000 employees were laid off in June, nearly 2,000 at the end of September, and nearly 4,200 at the end of December (with nearly 240,000 employees at the end of the month), and the scale of layoffs has been further enlarged.

Under the situation of bleeding revenue and profit loss in platform e-commerce, relying on the gradual self-reliance of various sideline brothers, we have improved the degree of loss while ensuring the income, and finally reached 52 billion in the most concerned profit indicator in the market-adjusted EBITA profit, which far exceeded the market expectation of 47 billion.

The adjusted net profit was 49.9 billion, also greatly exceeding the market expectation of 44.5 billion. With a revenue growth rate of only 2%, through various cost-cutting and efficiency-raising measures, we achieved a profit growth rate of 12% and a profit margin of 20% in the fourth quarter, exceeding last year's level of 18% in an extreme operating environment.

After looking at retail and the company as a whole, let's look at the performance of Ali's other high-profile businesses:

1. Alibaba Cloud: The bottom of the growth rate has arrived

The growth of Alibaba Cloud is still in decline, but it is likely that the bottom of the growth rate has been confirmed this quarter. This quarter's revenue was 20.2 billion, a YoY increase of 3%, one percentage point lower than last quarter.

In detail, the YoY growth of non-Internet businesses quickly slowed down from 28% last quarter to 9%, contributing 53% of cloud revenue, mainly due to the significant decline in cloud revenue growth in the public service industry under the epidemic in the fourth quarter.

The contraction of revenue from Internet industry slowed down from 18% last quarter to 4% this quarter. The impact of TikTok abandoning Alibaba Cloud has gradually weakened, and the trend of internet customers reducing cloud services should have bottomed out.

During the conference call, we can focus on how Zhang Yong personally led the team and brought back the growth of Alibaba Cloud. Especially in the case that cloud business of telecom operators are growing rapidly, how to compete with peers for customers.

In addition, cloud business maintained a situation of micro-profit and no loss from the perspective of cash flow this quarter.

2. Bad in-store sales and rapid slowdown in local life services

The revenue of local life services (At-home: Ele.me, At-shop: Gaode, Fliggy) was 13.2 billion, a YoY increase of 6%. The transaction volume of Ele.me's at-home business is still growing, mainly due to the serious impact of Gaode's at-shop business, and transactions on both Fliggy and Koubei were severely affected.

In addition, from the perspective of the YoY base number, the period of Ele.me's reduced subsidies has passed (user subsidies are a deduction in revenue, and reducing subsidies may increase YoY revenue), and the growth of future takeaway is expected to mainly rely on the growth of orders.

3. Alibaba's Big Entertainment is close to breaking even

Alibaba's revenue for this quarter has shrunk again, to only 7.6 billion yuan. Due to the epidemic, Alibaba Pictures may have had no box office revenue, and Youku had no decent TV dramas in the fourth quarter, resulting in a direct decline in revenue by -6%.

However, fortunately, losses continue to narrow. This quarter's loss, after kicking out equity incentives and amortization, was only 25 million yuan, almost at the break-even point. Although it is not profitable, it is not a huge drag on the Group.

4. Ant's profit plummeted

This quarter, Alibaba's equity income from Ant Financial only amounted to 1 billion yuan, a serious decline. According to a 33% equity stake, Ant's profit should only be 3 billion yuan, a year-on-year decline of 80%, indicating that Ant's situation is still very poor.

Summary: Be Bolder

In this rebound following the epidemic, Alibaba was one of the stocks that rebounded and fell quite quickly. During this period, accompanied by changes in overseas macro influences on valuation, the stock market sentiment also included Munger's frank admission that investing in Alibaba was his biggest investment mistake, and with Liu Qiangdong's return, JD.com also began to release its "injure a thousand enemies and self-harm" tactics—billions in subsidies, once again involving the e-commerce market in unlimited competition.

However, from the current risk-return ratio, at around $90 per share, Alibaba has $21 billion in repurchases to support its share price, and there are stories of spin-offs for Hema, Cainiao, etc. Additionally, the return of strong projects such as clothing and cosmetics, plus Alibaba Cloud at the bottom.

Moreover, this financial report has released a key signal: as Taobao and Tmall, the blood-making pillar of the Alibaba Empire, continue to find it increasingly difficult to support the little brothers within the Alibaba system who are losing money, the remaining businesses have begun to slowly shoulder the task of maintaining income and releasing profits. Blindly valuing Alibaba only via its core platform e-commerce + net cash, without considering its other businesses, has gradually become too conservative.

2022 Q3 Financial Earnings Call "Alibaba prepares for the end of the pandemic"

2022 Q2 Financial Earnings Analysis "Alibaba sacrifices to survive: going all-out for money"

2022 Q2 Financial Earnings Call "Alibaba without user growth: focusing on wallet share, demanding quality and efficiency (call summary)"

2022 Q1 Earnings Call "Recovery requires sustainable management, and expectation for users"

2022 Q1 Financial Earnings Review "After a 70% drop, Alibaba finally sees the dawn?"

2022 Q4 Earnings Call "6000-word summary: Alibaba has underestimated itself, and will consider buybacks, spin-offs besides sheer competition"

2022 Q4 Financial Earnings Analysis "Alibaba is still in the midst of adversity? Don’t nitpick such a good bargain."

Q3 2021 Financial Earnings Review "Has the Mobile Internet Era of Alibaba Come to an End?"

Q3 2021 Earnings Call "Behind the deep drop, Alibaba struggles to explain its grand vision (summary)"

Q2 2021 Earnings Call ["After listening to Alibaba’s conference, perhaps e-commerce needs to adjust for a while"](https://longbridgeapp.com/topics/999650? invite-code=032064)》

On August 3, 2021, Dolphin Analyst commented on Alibaba's financial report: "Alibaba: Still Powerful, but the Results are Unimpressive".

On May 13, 2021, Dolphin Analyst commented on Alibaba's financial report: "The New Alibaba After Heavy Regulatory Hammer Blows: Fully Armed and Ready to Go".

On February 3, 2021, Dolphin Analyst participated in the conference call: "Understanding the Core Content of Alibaba's Conference Call in One Article" and commented on the financial report: "Dolphin Research | Alibaba's Q4 E-commerce Performance Is Not as Fragile as Imagined".

On May 12, 2021, Dolphin Analyst wrote a financial report preview: "Reflections After the Regulatory Storm: Is Alibaba Too Stingy with Strategic Investments, and Can It Turn the Tide in the Next Five Years?".

In-Depth Analysis:

On January 19, 2023, "Ant is Finally Listed, Zhang Yong Goes to the Cloud, How Far is Alibaba from Re-evaluation?".

On January 18, 2023, "The Final Battle of E-commerce, Can Taobao Defeat Douyin?" and "The Tide Turns: Alibaba, Ctrip, and Didi are Ready to Counterattack".

On September 30, 2022, "Pinduoduo & Vipshop: Your Poor Days Are Actually Good".

On September 22, 2022, "Alibaba, Meituan, Pinduoduo, Have Accepted Their Fates? They Still Have a Chance". 2022 年 4 月 27 日"Alibaba vs Pinduoduo: After the bloody battle, only coexistence left?"

2022 年 4 月 13 日"As the cycle "decays", how much value is left for Alibaba, Tencent, etc.? "

September 22, 2021 "Has the crazy Alibaba, Meituan, and Pinduoduo left any real barriers after the e-commerce traffic melee? "

April 16, 2021 "2021, the 'total war' of internet e-commerce "

Hot Topic:

August 12, 2022 "Has the SoftBank-Alibaba relationship come to an end, leaving only each to go their own way? "

February 16, 2022 "After the B and C businesses switch hands, the new Alibaba finally takes the 'difficult but correct' step "

January 17, 2022 "Is retail 'winter' particularly cold? "

November 29, 2021 "Pay attention to this quiet change about Alibaba! "

December 15, 2021 "The peak season in the peak month, online retail is 'just okay' "

November 12, 2021 "Another Double Eleven, with a different outcome"

October 18, 2021 "August was too poor due to the epidemic, and online retail was 'passable' in September " On September 22, 2021, "Taobao Live's true aggregation entrance has arrived."

On September 16, 2021, "Updating the recent situation of community group buying with the help of Taocaicai."

On August 9, 2021, "Talking about the organizational vitality of the Internet giants."

On April 12, 2021, "After the sky-high fine, Alibaba's stock price soared. What did Alibaba say to investors?"

On April 10, 2021, "With the landing of the sky-high fine, will Alibaba rise from the ground?"

Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure