BABA-SWR Summary: Focus on investing in Taobao, overseas markets, and cloud services. Buying BABA-SWR is a stable way to outperform US bonds.
Here is a summary of Alibaba's Q3 2024 earnings conference call. For an interpretation of the earnings report, please refer to the article "BABA-SWR: Can it survive after the major surgery of scraping off rotten flesh and exposing white bones?"
1. Review of Key Financial Information:
After dissecting and examining the report, Dolphin Research has the impression that during the long and arduous process of "scraping off rotten flesh and exposing white bones," BABA-SWR may not have had any pleasant surprises in terms of revenue and profit for a period of time.
In simple terms, the performance was weak, but fortunately there were share repurchases to boost it.
2. Detailed Content of the Earnings Conference Call
2.1. Management highlights:
1) Competitive Strategy: The company is enhancing its core capabilities and adopting an active strategy to maintain its competitive advantage. E-commerce and cloud computing are seen as core areas, with the goal of revitalizing growth.
Core Business: In terms of e-commerce, growth in GMV and active buyers has been achieved through user-oriented and competitive pricing strategies. In cloud computing, priority is given to developing public cloud business, optimizing business structure, reducing reliance on project contract revenue, and increasing investment in public cloud products. These structural adjustments have led to improved profitability and expanded market share.
Taotian: 2024 is a year of comprehensive capability upgrade and large-scale investment, with priority given to areas such as product supply, competitive pricing and efficiency, and high-quality services. By increasing investment, the aim is to increase purchase frequency and improve user growth efficiency.
AIDC Performance and Growth: Total orders increased by 24% YoY; AliExpress achieved a 60% YoY increase in orders through the AE Choice model.
Overall Financial Performance: Total revenue increased by 5% to RMB 260.3 billion. Adjusted EBITDA increased by 2% to RMB 52.8 billion. Non-GAAP net profit decreased by 4% to RMB 48 billion. GAAP net profit decreased significantly by RMB 35 billion, mainly due to changes in investment value and impairment losses. Excluding specific businesses, group revenue grew by approximately 8%. The group's adjusted total profit margin for the quarter increased by about 4 percentage points to approximately 24%.
Reasons for Decline in Net Profit: Changes in the equity investment market amounted to approximately RMB 19 billion. Impairment of intangible assets amounted to RMB 14.6 billion, of which RMB 12.1 billion was related to Suning.com. Impairment related to Youku amounted to RMB 8.5 billion.
Cash Flow Situation: As of December 31, 2023, the net cash position was RMB 487 billion. Free cash flow for the quarter was RMB 56.5 billion, a decrease of 31%, mainly due to the timing of tax payments and increased capital expenditures.
Share Repurchases and Shareholder Returns: The company repurchased $9.5 billion worth of shares within the 12 months starting from December 31, 2023, reducing the share capital by 3.5%. According to the employee share ownership plan, the repurchased shares are equivalent to 3.3% of the issued shares. Shares worth $1.4 billion were repurchased in this quarter. The board of directors approved an expansion of the share repurchase program to $25 billion until March 2027. After the expansion, the company has $35.3 billion available for share repurchases. The expansion of the program will reduce the number of shares and increase earnings per share and cash flow per share.
Targets under Market Conditions: The plan is to achieve at least a 3% reduction in total share capital annually over the next three fiscal years, based on market conditions.
2.1 Analyst Q&A
Q: When will the Take Rate, GMV, and CMR stabilize for Taotian? How do you consider long-term potential?
A: The Take Rate for Taotian has slightly decreased due to a focus on cost-effective products and a tilt towards Taobao merchants in terms of traffic. This is a reflection of our strategy, which prioritizes user needs and establishes a supply of low-priced products.
We are not concerned about the slight decrease in the overall Take Rate. The monetization rate of Taobao merchants is increasing, and there is still room for improvement in the overall Take Rate in the future. The company will improve its platform operation efficiency and empower merchants to enhance their operational efficiency, which will ultimately be reflected in our monetization rate.
Currently, our focus is on increasing consumer frequency to achieve GMV growth. Once GMV has increased, we will then enhance our advertising products and optimize them for small and medium-sized merchants. We are not concerned about the alignment of GMV and monetization rate, as the company has a clear plan in place.
Q: Will the EBITA margin for Taotian improve as it returns to a light asset model? What is the difference in value for merchants compared to other platforms, and do you have plans for customer acquisition and traffic generation?
A: Taotian's revenue comes from CMR rather than being purely platform-driven. Currently, CMR is the main source of revenue, and the platform-driven approach is a means to acquire and retain customers and gain a competitive advantage in specific categories.
Compared to other platforms, Taotian has the strongest overall capabilities. It has the ability to quickly scale through live streaming and daily shelf tools, and mainstream searches are conducted through Taobao. In terms of private domain tools for brand merchants, Taotian provides stronger capabilities compared to its competitors. Taotian's platform has the most comprehensive and complete service capabilities for product marketing at various stages for merchants.
Q: Regarding the company's share repurchases, how much cash does the company have overseas? What methods are available to expedite this process? What is the latest progress on the IPOs of HeMa and Cainiao?
A: Regarding share repurchases:
Firstly, the company currently has sufficient cash reserves, including a significant proportion of cash overseas, which can be used for executing share repurchases.
Secondly, the company has established channels to transfer cash overseas through dividend distributions. This cash can be used for investment in existing businesses as well as for executing share repurchases.
Thirdly, the company currently has a low leverage ratio, meaning a low level of debt. The company can increase its financial leverage to obtain more cash. The company's goal is to reduce the number of outstanding shares by 3% annually over the next three years. Updates on the IPO of Hema and Cainiao: The goal announced in 2023 is to realize the true value of each business, including the possibility of separate listings and financing for certain businesses. However, the current market conditions have not yet reflected the true intrinsic value of the business.
Current focus of the company's strategy: Promoting synergy among different businesses within the group is the best way to reflect the true value of the group's different businesses in the current environment. The company has established a dedicated team to promote business synergy. The company will continue to consider separate financing for different businesses, but will not rush into it.
Q: Which businesses can improve the capital return rate to double digits? What is the pace? What is the plan for divesting non-core assets?
A: The company is committed to improving the ROIC from single digits to double digits in the coming years. This improvement is not in conflict with the company's investment strategy, as investments are made for growth, and the future returns from growth will ultimately help improve the ROIC.
The biggest difference is the focus on core businesses, including domestic and cross-border e-commerce, followed by cloud computing.
The company has made good progress in divesting non-core assets: in the current fiscal year, the company has exited non-core investments worth $1.7 billion. The company is actively looking at some listed companies and has established a special team to execute capital market sales transactions to exit these listed securities.
In addition, the company still has some traditional physical retail businesses on its balance sheet, which are not the core focus. While exiting these businesses will take time given challenging market conditions, the company will continue to try.
Q: After increasing the repurchase, can the annual repurchase amount reach $12 billion? What is the expected return rate for repurchases and dividends combined?
A: We are very serious and committed to increasing the scale of repurchases and completing them ahead of schedule. Taking into account multiple factors such as cash generation capability, fund transfer, and company leverage, a repurchase amount of $12 billion is appropriate.
In the 2023 fiscal year, we have repurchased $9.8 billion and distributed $2.5 billion in dividends, totaling more than $12 billion returned to shareholders. Considering the company's current cash generation capability, we can continue to use it to reward shareholders.
In the next three years, the company plans to reduce its share capital by 3% through repurchases. At the current stock price, we may be able to buy even more shares. Even if the stock price rises in the next three years, we can still achieve a 3% appreciation, in addition to dividends, which corresponds to an annual dividend yield of approximately 1.4%. The combination of the two should reach around 4.4%-4.5%, which is very close to the yield of the US 10-year Treasury bond, while also enjoying the opportunity for stock price growth.
Q: Which markets are the focus for international business? How do you consider the potential geopolitical risks in the US? In terms of future investments, how much will be external financing and how much will be provided by the group?
International business is divided into cross-border and local businesses:
A: The company's local business has seen rapid improvement in efficiency and a narrowing of losses in the past few quarters, and this trend is expected to continue. The cross-border business, on the other hand, targets all global markets and follows a universal business model. When deciding how to allocate future investments, the company primarily looks at the return on investment in different markets and considers the efficiency of existing projects. We conduct dynamic evaluations based on the investment efficiency performance over time.
Strategy for the US market: The company has a solid foundation in the US market, including both 2C and 2B businesses, and many customers from the international market also come from the US. Therefore, the company attaches great importance to the US market and determines whether to increase investment based on its value and return, taking into account various risks including geopolitical factors.
Financing arrangement for AIDC: Regarding the financing arrangement for AIDC, the company will find the right timing for financing based on market conditions. Prior to that, the company will use its abundant offshore cash to support business growth. This indicates that the company is not in a hurry to raise funds and will adjust flexibly according to market conditions.
Q: Regarding cloud business, Eddie manages two businesses simultaneously. Will there be more coordination? Will AI drive CMR revenue? The profit margin in December is good, how do you see it in the long term?
A: There is synergy potential, especially through AI technology. The company has developed its own large-scale language model called Aito, and is currently testing how to use this model to improve the effectiveness of search and advertising. This AI-driven project is still in the early testing stage, but there is hope that it will significantly improve search conversion rates and increase monetization.
Q: The international division of AIDC has expanded its losses to approximately RMB 3 billion this quarter, considering key growth markets such as AE Choice, hybrid models, and Trendyol, which are still in the early stages of development. What is the expected investment pace in the future? How will the economic benefits and competitive environment of these projects be evaluated?
A: The losses in the AIDC business this quarter mainly come from three aspects:
a. The significant increase in the proportion of AliExpress Choice mode in cross-border, which needs to be scaled up in the early stage before pursuing long-term convergence of losses.
b. During the peak promotion season, marketing investment will be higher.
c. Some early investments have been made in emerging markets such as the Middle East.
In the next period of time, there will be a large-scale investment phase, especially for Choice. We will see better user experience and retention compared to before, and there will be good returns in the long term. It will be the top priority for future growth.
Q: What is the management's evaluation of the rumors about the sale of Ele.me?
A: We have already denied the rumors, so there is no need to elaborate further. Ele.me is a very important asset for us in the local market.
Q: In terms of the AIDC business, how much does the Indian market contribute to Lazada? What is the impact of the cooperation with TikTok and Tokopedia, as well as the Indonesian government's restrictions on cross-border e-commerce, on Lazada? How do we respond to this challenge?
A: The Southeast Asian market is a very important market with great potential for penetration. In the future, we will balance scale and efficiency, currently converging losses rapidly while maintaining growth. Southeast Asia will continue to invest in an appropriate scale to drive growth. The impact of the restrictions imposed by the Indonesian authorities on the company is relatively limited, as the company always complies with regulatory requirements.
Risk Disclosure and Statement for this article: Dolphin Research Disclaimer and General Disclosure
