BABA-SWR: Can the rotten meat be scraped off and the white bones exposed? Can it survive after a major operation?

After the large-scale strategy u-turns in the previous quarter, BABA-SWR took the lead this time and opened the earnings report unveiling period for the fourth quarter of 2023. Without further ado, let's get straight to the point:

1) Taotian: "Course correction and repayment of past wrongdoings"

As an item that is always observed by the market under a magnifying glass, Taotian's customer management revenue reached 92.1 billion, a YoY growth of 0.5%. The final result barely met the market's already lowered expectations.

Taotian's elimination of unpaid GMV is a "healthy growth" with fast order growth and negative ASP growth. In the strategy of prioritizing DAU, it is expected that for some time, order growth will be faster than GMV growth, GMV growth will be higher than CMR growth, and CMR growth will be in the single digits. This process is also a way to repay the debt of past growth that focused solely on GMV and revenue.

2) Others businesses: Focus on consolidation and profit squeezing

After the new management team clarified which businesses to invest in, which businesses to consolidate, and which businesses to sell, it is now being reflected in various little animals:

1) BABA-SWR AIDC: the "vast ocean of stars": The international group, mainly consisting of AliExpress, Lazada, and Trendyol, achieved a growth of 44% despite the high base from last year. However, compared to the past, while maintaining high growth, the loss rate of the international group has soared this quarter, from almost breaking even to a loss of over 3 billion.

Clearly, facing a track that does not require domestic competition and has been proven by TEMU to have scarce growth space, BABA-SWR is also making efforts. 2024 will be a year of surging overseas expansion. At the time when Choice orders quickly surpassed 50% of AliExpress' total orders, Dolphin Research is not too demanding on the current high upfront investment. What is more important is whether AliExpress can achieve higher growth in the next three to four quarters and whether the loss rate can narrow as planned after UE optimization.

2) Cainiao, enjoying the tailwind of overseas expansion: Cainiao achieved a revenue of 28.5 billion RMB, a YoY growth of 24% on top of a high base from last year. It maintained a steady growth rate and remained profitable, with adjusted EBITA approaching 1 billion, making it the only business that held the line from start to finish this quarter.

3) BABA-SWR Cloud Intelligence, "purifying" revenue: With a revenue of 28.1 billion, it achieved a positive growth of nearly 3% YoY, which is not disappointing. However, it has lost its position as the second-largest revenue contributor to the international group. But due to revenue purification, actively cutting low-profit local deployment and project-based businesses, while revenue growth has slowed down, profit release is very evident. The Adj EBITA margin for this quarter has reached 8%, making it the business that contributes the most to the group's profit, apart from Taotian.

Currently, with low demand and difficulties in overseas expansion, it will be difficult for BABA-SWR Cloud to show growth in 2024 unless there is a breakthrough in government and enterprise business. 4) All other businesses, whether it's the struggling entertainment sector or various offline heavy-asset businesses, have been categorized as non-core businesses. Their performance this quarter has been weak, and there's not much to say about it.

Looking at the overall revenue, Taotian's focus on traffic from Taobao and small and medium-sized merchants has resulted in Taotian's revenue and profits barely meeting low expectations. After reevaluating and reentering the investment phase, other businesses have essentially reached the end of the profit-squeezing period. With a focus on international business and large-scale investments, the previously exceeded profit expectations have also entered a mediocre state this quarter.

In the end, as the leading Chinese concept stock in the 2023 e-commerce peak season, BABA-SWR delivered only average revenue and average profits within expectations. If there's anything positive, it's that there were no surprises after thorough communication.

Dolphin Research's view:

After the unexpected turn of events with BABA-SWR, including the decision not to spin off Alibaba Cloud and the restart of overseas online retail investments, BABA-SWR's stock price plummeted from around 80-90 RMB to below $70. Recently, BABA-SWR lowered its performance expectations again, emphasizing reentering an investment cycle, indicating a series of setbacks.

Looking at the actual performance in the fourth quarter, although it was unremarkable, it reveals the underlying logic for evaluating the value of BABA-SWR during this cycle. Based on this earnings report, Dolphin Research has two key insights for BABA-SWR in 2024:

1) A leaner and more focused BABA-SWR

a. By tilting the supply side of Taotian's business towards small and medium-sized merchants and using down-to-earth product pricing to regain user mindshare, the growth trend of BABA-SWR's vital business is likely to be: user DAU and order volume growth > GMV growth > Taotian customer management revenue growth. Even if DAU continues to return, the growth in customer management revenue reflected in the financial performance may be weak.

b. The cloud business is currently in a period of refining, where low-margin garbage revenue is eliminated and high-margin AI revenue is nurtured, but it has not yet achieved significant growth.

c. International e-commerce (AIDC) is a rare and valuable growth asset, but it will enter a cultivation period in 2024. High growth will correspond to high investment, especially in the first half of the year, which may lead to a collapse in profits. Logically, it is an upward option-type business.

d. Other non-strategic core businesses within the company, such as offline retail assets like Hema, Intime, and Gaoxin, as well as strategic equity investments in non-retail sectors like Xiaopeng, Kuaidou, Weibo, and Focus Media, are likely to undergo asset cleaning and divestment.

In this context, Dolphin Research's overall assessment of BABA-SWR is a challenging bottoming-out period with very little probability of reversal.

2) So, how should we evaluate the investment value of BABA-SWR during this period of healing? Dolphin Research believes that the logic has become simpler and clearer:

a) First of all, from the perspective of the group, BABA-SWR is still a cash cow company with a net cash of over $50 billion and an annual positive operating cash flow of around $25 billion (around RMB 200 billion).

b) Based on this, if we consider that it still faces significant fundamental pressure and it is difficult to say that the PE ratio of 7 times the core Taotian profit is low, perhaps using the repurchase income to determine the bottom of BABA-SWR is more certain:

According to the addition of $25 billion in cash by BABA-SWR this time (as of March 2027) and expanding the repurchase ammunition to $35.3 billion, combined with the previous statement that the repurchase balance period was until March 2025.

So by March 2025, which is one year later, BABA-SWR will repurchase at least $10.3 billion, corresponding to a repurchase return rate of 5.2% based on the current market value; the current risk-free return rate of US Treasury bonds in the short term is basically 5.3%.

Therefore, in the background of the downward risk-free return rate, corresponding to an appropriate return premium, Dolphin Research believes that when the repurchase return rate of BABA-SWR exceeds 6% and approaches 7%, it will correspond to a very obvious bottom certainty of the stock price.

In other words, even if BABA-SWR is still undergoing performance bottoming out in 2024, with the support of repurchases, its valuation bottom is already very clear.

The following is a detailed analysis:

I. BABA-SWR's New Financial Reporting Standards

Starting from June 2023, BABA-SWR made significant adjustments to its financial reporting standards. To facilitate everyone's understanding, Dolphin Research will first remind everyone of BABA-SWR's new financial reporting standards:

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

International Group: Cross-border Retail AliExpress, Cross-border Wholesale International Station, Overseas Local Retail Lazada, Trendyol, etc.;

Local Services: Ele.me and Amap;

Cainiao Group: Same as before, but now the revenue calculation method treats other businesses within the BABA-SWR group as customers, and the revenue they generate is included in Cainiao's revenue;

Alibaba Cloud Group: BABA-SWR Cloud, DingTalk, which was stripped from other businesses in the September 2023 quarter;

Entertainment Group: Youku and Alibaba Pictures;

All others: Gaoxin, Hema, BABA-SWR Health, Intime (these three are self-operated new retail formats with offline presence, originally in the domestic commercial business); Lingxi Interactive, UC, Quark (originally in the entertainment business), Fliggy (originally in the local services business), DingTalk (originally in the cloud business).

Dolphin Research will provide a previous calculation method for easy comparison:

2. Taotian: Healing the Wounds

In the article "BABA-SWR: Big Drop, Reduction, Reversal, Money Spent? Here's What I Think," Dolphin Research mentioned that the reversal of BABA-SWR is to break free from the short-term performance constraints and gradually rebuild the core competitiveness of Taobao.

The underlying meaning of this statement is that we should not expect Taotian's business to look good in the financial statements in the short term. And this quarter is actually a confirmation of this judgment.

The pillar of BABA-SWR, Taotian's domestic retail customer management revenue (CMR), was 92.1 billion yuan this quarter, a YoY increase of 0.5%, barely meeting the average expectation after the downward adjustment by Dolphin Research. It just passed the test by a narrow margin.

Behind the almost zero growth in CMR is the qualitative growth of Taotian's GMV, which BABA-SWR considers "healthy": the growth of active users and order volume is good (the order volume on Double Eleven can only indicate a double-digit increase), but the average price per order has dropped too much. This description also reflects the current strategic adjustment of Taotian:

Not being held hostage by short-term revenue and profit, and re-establishing the process of "looking at Taobao whenever there is something, and making a purchase if something catches your eye." Compared to relying on high-priced products to achieve high GMV, what matters more is the daily active users (DAU) and the frequency of placing orders. On the supply side, it is necessary to re-absorb small and medium-sized merchants (double-digit growth in the number of merchants).

From this perspective, Taotian's growth has indeed become healthier. However, it is only reflected in the operational level, not in terms of revenue, profit, or even GMV. Moreover, in the process of shifting back to Taobao merchants, Taobao merchants do not pay commissions, resulting in a lower monetization rate for Taotian despite the same GMV. The corresponding business performance is that the order volume is greater than the GMV growth rate, the GMV growth rate is greater than the CMR growth rate, and ultimately the revenue growth rate is the slowest. This process is likely to take at least a year, and in the next few quarters of 2024, Taotian may continue to face such a situation. It is unlikely that Taotian's revenue and profits will exceed expectations.

3. Don't expect much from online self-operated retail in the short term

After the adjustment of the structure and financial reporting standards, the offline retail businesses such as Hema, Intime Department Store, and Gaoxin Retail, which were acquired or developed under the BABA-SWR "New Retail" strategy, have all been removed from the self-operated retail sector under Taotian Group. Only core online self-operated businesses such as Tmall Supermarket and Tmall Global are retained.

In this quarter, the growth rate of Tmall Supermarket, Tmall Global, and other self-operated online retail businesses under Taotian was only 2%. This trend may soon return to zero or even negative growth. The logic behind this is that the new management team clearly holds a conservative attitude towards the self-operated heavy-asset model. This can be seen from the revision of the Tmall APP. Currently, Tmall Supermarket is still on the homepage, but Tmall Global can no longer be found.

Moreover, in this quarter, BABA-SWR also made a RMB 2.8 billion impairment of intangible assets for a cross-border e-commerce platform, which is estimated to be the previously acquired Netease Kaola. It is obvious that although BABA-SWR has entered a new investment cycle, the investments are all in light-asset businesses, and the investment and withdrawal of self-operated heavy-asset businesses will decrease.

The third business of Taotian, 1688.com, is also a "fresh and trendy" business identified by the new management team. After repositioning and gradually engaging in B2C business, its growth rate continues to rise. This quarter, the revenue of 1688.com accelerated to a growth rate of 23%, which is quite good.

4. Expanding overseas? Investing first

For the current BABA-SWR, compared to the domestic competition, the overseas market is the real vast ocean. Therefore, after three consecutive quarters of high growth in international business, BABA-SWR seems to be aggressively expanding overseas.

In terms of growth, the international group is still the shining star of the BABA-SWR group. The growth of international business started last year, and even with a higher base, the international group still achieved a high growth rate of 44%. Among them, the year-on-year growth rate of international retail, where AliExpress is located, is 56%, which can be described as extremely impressive.

The order growth rate of AliExpress business reached 60%, and in the AliExpress business, AliExpress Choice (full-service and semi-service models) has already reached 50% in January this year. Obviously, the previous goal of 50% was too conservative, and it is highly likely to exceed 50% in the future.

The Turkish e-commerce platform Trendyol is also performing well, with double-digit order growth, while the optimization of the Southeast Asian local e-commerce platform Lazada is still ongoing.

Alibaba.com, the oldest business of BABA-SWR - wholesale exports, had a mediocre growth this quarter, with a YoY increase of only 8%. In Dolphin Research's opinion, without significant transformation, this business will struggle to generate new growth.

The international group's operating loss (Adj. EBITA) from stock incentive expenses and amortization expenses skyrocketed to nearly 3.2 billion, with a loss rate of 11%. Compared to the previous state of teetering on the brink of breakeven, this quarter can be considered a "huge loss".

However, in Dolphin Research's view, this is not a problem. TEMU, as a newcomer in the international market, has clearly shown everyone the opportunities in this field. In this rare opportunity to export deflation, the current focus should be on accelerating customer acquisition and seizing the market.

The Choice model's share continues to rise, requiring investment in warehousing and logistics, as well as new investments for international business expansion. The key to international business is growth. Therefore, compared to the current period of upfront investment, where revenue growth is not significant and investment leads to increased losses, Dolphin Research is more concerned about whether Tmall Global can also create a "stunning performance" like TEMU in the next three to four quarters.

Fifth, Cainiao: Continuing to ride the wave of international expansion

After the restructuring, Cainiao's current revenue includes both internal and external customers, reaching 28.5 billion this quarter, a YoY growth of approximately 24%, significantly higher than market expectations.

Cainiao is closely tied to the logic of international expansion. Tmall Global requires procurement, warehousing, and logistics service providers for its international expansion, and Cainiao, as a sibling company, is the most suitable candidate. The rapid growth of Tmall Global essentially confirms the high-speed growth of Cainiao.

The key for Cainiao is that during the process of riding the wave of international expansion, its profit performance has been very stable. In the fourth quarter, Cainiao achieved an adjusted EBITA of 1 billion, making it a rare profitable business at present.

Sixth, Discarding Unprofitable Projects, BABA-SWR Cloud Finally Unleashes Scalable Profits

The second pillar, BABA-SWR Cloud Group, also includes revenue generated internally in its revenue calculation after the restructuring. This quarter, BABA-SWR Cloud Group achieved a revenue of 28.1 billion, with a YoY growth rate of only 2.6%. The market had expected a revenue contraction as BABA-SWR actively abandoned low-quality local deployment projects, so the revenue performance was slightly better than the pessimistic expectations.

Compared to the modest revenue growth, the profit of BABA-SWR Cloud, which has adjusted its strategy, has been released quite well: it is now the second-largest profit-contributing business after Tmall. In this quarter, the adjusted EBITA profit reached 2.4 billion, with a profit margin of 8%.

Seventh, Local Services: Decent growth in order volume, but dragged down by average order value.

In the fourth quarter, BABA-SWR's local revenue and loss reduction performance were relatively good, with revenue growth of 13% and order growth of over 20% YoY. The adjusted EBITA loss was 2.1 billion, and the loss rate narrowed from 16% to 14% after the summer campaign.

An interesting observation in this business is that BABA-SWR adjusted the order of revenue reporting: Taotian is still in the forefront, BABA-SWR Cloud moved from the third to the second, and Local Services moved from the second to the third. From the order of appearance in the financial report, it can be seen that the new management attaches less importance to the competitive business of Ele.me.

Considering the persistent rumors of the acquisition of Douyin, if Ele.me continues to stay within BABA-SWR, it will need to continue to prove its self-generating ability. Local Services has been losing billions of RMB every quarter, which may be difficult for BABA-SWR, which focuses on ROI, to tolerate.

Eighth, Entertainment is still struggling, other "N" revenues shrink, and losses widen:

Under the drag of Youku, the pressure on the entertainment sector remains high. The revenue was 5 billion, 800 million less than the previous quarter, and the loss increased to 500 million, higher than the previous quarter. While Youku's revenue declined, the loss was relatively large.

As for other businesses, the revenue shrank due to the high base caused by abnormal conditions in Gaoxin Retail last year, and the loss was also caused by the reduction of specific businesses in Gaoxin Retail.

Ninth, BABA-SWR in operation: average revenue, average profit.

From the perspective of revenue, Taotian's business barely passed the line, and the profit performance is only slightly better than the revenue: the pre-amortization operating profit (adj. EBITA) before deducting stock incentive expenses was 59.9 billion, a YoY increase of 1.1%, which is slightly better than CMR's 0.5% growth, with a profit margin of 46%, without losing control due to competition.

However, in order to increase DAU and orders, Taotian had to sacrifice revenue, and with weak revenue, there will be no surprises in terms of profit.

In terms of other sectors, with the explanation of the previous business segmentation and the following chart, it is very clear that the first three businesses, BABA-SWR Cloud, International Business, and Cainiao, are basically presentable in the domestic retail track, while the others are mostly mediocre businesses waiting to be sold at a good price:

a. The profit margin of the cloud business is steadily increasing;

b. The loss rate of the international group, which has re-entered the investment period, is widening;

c. The profit margin of Cainiao remains stable during the process of increasing revenue;

d. The local life business is making efforts to reduce losses and prove its survival capability;

e. Youku, in the entertainment sector, still faces significant pressure;

f. The remaining businesses, except for DingTalk and Quark, are mostly unattractive businesses waiting to be sold.

Overall, the adjusted EBITA of the BABA-SWR Group for this quarter is 52.8 billion, which is reasonably close to the market expectation of 52.9 billion. It has increased by 1.5% compared to the same period last year, barely qualifying as positive growth.

In summary, the flat period of Taotiao's income and profit is offset by the profits squeezed out by Cainiao and BABA-SWR Cloud, which are in turn offset by the losses of the international group. The final result is that Taotiao's income and profit are average, and the other businesses, after neutralizing each other, also have average income and profit.

10. How did the expenses change?

After reviewing the revenue and profit at the beginning and end, let's take a look at the changes in costs and expenses. First of all, in this quarter, the gross profit margin of BABA-SWR, excluding stock-based compensation, is 40.5%, which is slightly higher than the same period last year by 0.4 percentage points. Considering the decrease in revenue from heavy asset income, this is considered normal.

In terms of expenses, looking at the three expenses excluding stock-based compensation, there is a clear upward trend after BABA-SWR announced re-entering the investment period: under the condition of a meager 5% increase in revenue, the sales expenses increased by 12% YoY, and the expense ratio increased by 0.7 percentage points YoY; administrative expenses increased by 22% YoY, and research and development expenses increased by 9%.

Conclusion:

After dissecting and examining each aspect, Dolphin Research has a feeling that during the long and arduous process of "cutting off rotten flesh and exposing white bones," BABA-SWR may not have any surprises in terms of revenue and profit for a period of time.

For Dolphin Research's previous related articles, please refer to:

Earnings Season:

November 17, 2023 Analysis "BABA-SWR in Twilight: The Road Ahead is a Long March" Summary of November 17, 2023 BABA-SWR: No split listing, focus on investing in organic growth

Interpretation on August 11, 2023 Quit the "big pot meal", BABA-SWR "turn the tide"

Summary on August 11, 2023 BABA-SWR: Expanding user base is the top priority, continuous investment

Interpretation on May 19, 2023 Always grinding at the bottom? BABA-SWR is really going all out this time!

Summary on May 19, 2023 [After restructuring, BABA-SWR is ready to go big for another three years](After restructuring, BABA-SWR is ready to go big for another three years (summary of conference call))

Conference call on February 24, 2023 BABA-SWR conference call summary: "There are always people offering subsidies, but no one has seen anyone changing the situation"

Financial report review on February 24, 2023 BABA-SWR "squatting" has arrived, is the "jump" far away? In-depth Analysis:

On January 10, 2024, Dolphin Research published an article titled "After years of turmoil, what has BABA-SWR achieved?" Link

On December 28, 2023, Dolphin Research published an article titled "Who killed BABA-SWR, Meituan, JD, and Tencent?" Link

On October 10, 2023, Dolphin Research published an article titled "Can BABA-SWR, JD, and Meituan make a comeback against the headwinds?" Link

On April 12, 2023, Dolphin Research published an article titled "When will the fierce competition between BABA-SWR, JD, and Pinduoduo end?" Link

On January 19, 2023, Dolphin Research published an article titled "Ant Group's IPO, Zhang Yong's cloud ambitions, how far is BABA-SWR from revaluation?" Link

On January 18, 2023, Dolphin Research published an article titled "The final battle of e-commerce, can Taobao compete with Douyin?" Link January 18, 2023 A major reversal in the offensive and defensive situation: "BABA-SWR, Ctrip, Didi" are ready to counterattack

Highlights:

November 17, 2023 BABA-SWR: Big drop, reduction, reversal, and spending money? Here's what I think

November 7, 2023 1688 Strict Selection: Will it be the "ultimate downgrade" for the "smart" new middle class?

September 20, 2023 Taotian: Getting rid of burdens, where is it heading?

April 14, 2023 BABA-SWR faces another SoftBank-style reduction, is it all negative news or is the negativity fading?

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