Intense investment + intense streamlining, Alibaba, really come back to life?

These days, the market has finally begun to sense hope for Alibaba. The company's stock price has risen from $65 to $85. Now, Alibaba has finally handed in its paper. How did it actually perform? Let's take a look at the good and bad aspects:

1) Hoping for a Double Primary Listing Finally Comes True

Alibaba announced that by the end of August 2024, it will complete the conversion of its primary listing in Hong Kong, becoming a company with dual primary listings on the NYSE and HKEX. This is something the market has been anticipating since Alibaba's return to Hong Kong at the end of 2019. Hong Kong's main role as the primary listing venue is that Alibaba can enter the Stock Connect program, allowing funds more familiar with this business to invest, which should help improve Alibaba's persistently undervalued situation.

2) Share Repurchase is Serious!

During the last earnings report, the company expanded its share repurchase authorization to $35.3 billion (valid until March 2027). Alibaba had previously announced a $4.8 billion repurchase in March, with repurchases totaling $12.5 billion last year, leaving $30 billion for repurchases. This means that over the next three years, there will be an average annual repurchase amount of $10 billion.

In terms of dividends, the company distributed a total of $4 billion in dividends for the fiscal year ending in March, with regular dividends at $2.4 billion and special dividends at $1.6 billion. Based on this standard, even without special dividends in the future, the dividend distribution for the next three years is estimated to be at least $2.5 billion annually.

In a past earnings report, Alibaba's dividend + repurchase amounted to $12.5 billion plus $4 billion in one year, with a return rate of up to 8%; and in the following three years, even if it is not as high as the previous year, with $10 billion in repurchases + $2.5 billion in dividends as a baseline, and Alibaba's current market value is less than $210 billion, the corresponding return rate has already reached 6%, significantly exceeding the yield of U.S. Treasury bonds. With such a return rate, waiting for Alibaba to enter the Stock Connect program, there is a good chance of attracting long-term funds such as domestic insurance assets for allocation.

3) Key Answer 1: Alibaba Cloud's Revenue and Profit are Doing Well

This time, the only bright spot from start to finish is Alibaba Cloud. With the pruning of low-profit private cloud projects coming to an end, Alibaba Cloud has started to show improvement. The $25.6 billion in revenue corresponds to a 3.4% year-on-year growth, slightly exceeding market expectations. Moreover, the core public cloud has double-digit year-on-year growth, while AI-related aspects have triple-digit year-on-year growth, indicating signs of a bottoming out for Alibaba Cloud.

More importantly, while achieving this growth, Alibaba Cloud's profit release has improved. After removing low-quality projects, even with significant price reductions for Alibaba Cloud's public cloud products, the adjusted profit still reached $1.4 billion, a 6% year-on-year growth.

4) Key Answer 2: Taobao Can Barely Make It

As Alibaba is still the size of an elephant overall, undergoing treatment on the operating table, the struggling Taobao business can be considered a slight improvement:

In March, Taobao's GMV and order volume for the quarter both achieved double-digit growth. The Dolphin estimates that GMV is in the low double digits and order volume is in the high double digits. Even considering the issue of a lower base in the previous year, double-digit growth is a sign of "coming to life" for TaobaoHowever, due to the re-entry investment period of Taotian, the realization rate has decreased, and the actual customer management revenue of Taotian has only increased by 5%. This investment not only reduces fees for merchants but also increases subsidies for users. As a result, Taotian's adjusted EBITA declined by 1.4% year-on-year.

Releasing these numbers that fall short of expectations is indeed an improvement for Taotian, which has been in a sustained slump. However, this positive news has already been fully priced in by the market after fermentation, and the market has already raised its expectations.

The real incremental information in this financial report lies in the profit side: what cost did Alibaba incur to achieve these revenue and operational goals? However, the answer provided by Alibaba's financial report is disappointing overall in the eyes of Dolphin. The Taotian business has not stopped declining in profitability as Dolphin had expected.

V. Alibaba International: One step forward in revenue, one step back in losses

As one of Alibaba's three key focuses (domestic retail, international retail, and Alibaba Cloud), Alibaba International did not fall behind this quarter with a high base, achieving a 45% year-on-year growth in revenue. The revenue volume has exceeded that of the cloud business, slightly higher than the market's expectations of 35-40%. However, the rapid growth of this business is accompanied by a model adjustment: the contribution of Choice orders under the consignment model in April has accounted for 70% of the overall AliExpress. AliExpress has started to fully tilt towards the consignment model, driving a 56% year-on-year growth in international retail revenue.

Moreover, the order volume that truly reflects organic growth within the business increased by 20% year-on-year, with consignment orders accounting for 70%. After reducing the space for revenue growth through model changes, the focus going forward will be on the speed of order volume growth driven by investments.

However, due to increased investment, losses have also increased, with adjusted losses reaching 4.1 billion RMB, slightly exceeding market expectations. By signing Tang Wei, a Saudi Arabian football star, and even sponsoring the Olympics, the European Cup, and potentially more globally renowned endorsers in the future, AliExpress's losses are likely to increase further.

Nevertheless, in the current situation, as one of the few businesses in Alibaba's layout race with red dividends, Dolphin does not overly criticize such forward-looking investments. What Dolphin is more concerned about is whether Alibaba International can have a new life within one or two years after these investments are made.

VI. Cainiao: Infrastructure business follows Alibaba International's high growth, but incurs losses

As Cainiao, which is on the verge of continuous positive profit, increased its overseas investment with the international business, revenue accelerated by 30% with the support of the 5-day delivery service. However, losses also increased — from an adjusted profit of over 1 billion RMB in the previous quarter to a loss of over 1.3 billion RMB, significantly deviating from the market's expected profit of 330 million RMB. The losses behind Cainiao's current situation stem from the investment in the international business, and similarly, no harsh criticism is made.

VII. Local Services: Increased revenue, reduced losses

Local Services achieved a 19% year-on-year growth in revenue this quarter, with an accelerated growth rate. As the second largest loss-making business outside the international business, unlike the international business, the trend of reducing losses in this business is still ongoing. The 22% loss rate, compared to last year's 33%, is improving, but the loss rate has actually increased compared to the previous three quarters, exceeding market expectations8) Others: Pan-entertainment and a bunch of other businesses are completely lackluster in terms of total revenue. Especially in pan-entertainment, the revenue is declining year-on-year, and the losses are increasing. In addition, based on the profit sharing data from Alibaba, Ant Group's profit in the fourth quarter of last year doesn't seem to be good either, with profits declining by over 20% year-on-year.

9) From the unexpected gross profit margin and lower-than-expected operating profit margin: Behind this high and low lies a very clear trend. After Taobao returned to the internet, the pace of asset lightening exceeded expectations, but despite the shift to a lighter model, the market competition remains fierce. As a result, a large amount of marketing expenses have been invested, leading to an operating profit margin that is still below market expectations.

From observing Alibaba until now, a very obvious feeling arises: Alibaba's investment and output cycle is basically every five years. The previous cycle from 2015 to 2016 focused mainly on heavy assets, while starting from 2024, the next cycle should involve shedding burdens and lightening assets. Currently, Alibaba is still in the process of asset lightening and investment, making the profit side of the financial statements very challenging.

Dolphin Research's viewpoint:

Initially, Alibaba's reinvestment scared off investors, as historically, whenever Alibaba mentioned reinvestment, it usually ended up with no tangible results. However, this time around, although reinvestment has started again, it has only been a few quarters, and a significant difference is noticeable: Alibaba is changing again, and this time might be different.

Also, with signs of recovery in the core Taobao business, Alibaba's stock price has risen from a low of $65 to $85, indicating that some signs of recovery in the Taobao business have already been priced in by investors.

The real concern in this financial report is how much cost Alibaba incurred to achieve these results and whether it was a result of highly efficient operations. This is the true marginal incremental information, but unfortunately, Alibaba did not provide a satisfactory answer in terms of profits this time.

However, to some extent, this issue also reflects some hopes from the market, including Dolphin, for Alibaba to improve further. From a rational perspective, as Taobao is still repairing the foundation of the building, and the international business is in an investment mode with Cainiao, it should not be overly optimistic.

In the upcoming period, both international business and domestic retail business will continue to increase investment in this early stage of investment. With so many areas that Alibaba needs to address, the recovery process is likely to be very slow. In summary, Alibaba's overall fundamentals are still relatively weak, with buybacks and the dual primary listing story as the main focus. In this scenario, Dolphin's view on Alibaba's investment value at the current stage remains unchanged:

a) Alibaba still holds close to $50 billion in net cash;

b) At $85 per share ($210 billion market cap), the minimum annual dividend buyback volume of over $12 billion corresponds to a 6% dividend buyback yield, which comfortably exceeds the U.S. Treasury yieldAs always, even if Alibaba's performance is still at the bottom in 2024, with the support of buybacks, its valuation bottom is actually very clear - every time Alibaba drops to between 65-70, when the buyback yield has exceeded 7%, the safety margin has become extremely clear.

Of course, some people may worry that after increasing investment, Alibaba's operating cash flow will weaken (this quarter is the off-season with 23.3 billion, a 26% decrease year-on-year, if this decline continues for the next fiscal year, Alibaba's annual cash flow will be reduced to 140 billion), but even if the cash flow weakens, an annual operating cash flow of 140 billion is still very exaggerated. Correspondingly, with a dividend buyback of 12.5 billion US dollars per year, the dividend buyback ratio is only 65% (of course, most of the operating cash flow is generated domestically, so it is difficult to transfer it out for dividend buybacks).

In short, with a net cash of 50 billion US dollars and an annual operating cash flow of around 20 billion US dollars, a dividend buyback of 12.5 billion US dollars per year corresponds to a shareholder return rate of 6%. And fundamentally, after gradually scraping off the decay, there are signs of revival. Alibaba's investment logic is quietly reversing, and for Alibaba this year, Dolphin focuses on the value reversal.

The following is a detailed analysis of the performance:

I. Alibaba's New Financial Reporting Criteria

Starting from June 2023, Alibaba made significant adjustments to its financial reporting disclosure criteria. To facilitate understanding, let's first review Alibaba's new financial reporting criteria:

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 Life: Ele.me and Amap

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

Intelligent Cloud Group: Alibaba Cloud, DingTalk, separated from other businesses in the September 2023 quarter;

Entertainment Group: Youku and Alibaba Pictures;

All others: High Xin, Hema, Alibaba Health, Intime (these three are self-operated new retail formats with offline formats, originally part of the domestic business), Lingxi Interactive, UC, Quark (originally part of the entertainment business), Fliggy (originally part of the local life business), DingTalk (originally part of the cloud business).

II. Returning to Users, Taotian, the Results and Costs are Not Low

After setting the top-level strategy of returning users to Taobao and Tmall, under the measures of traffic tilt towards small businesses and consumer benefits, the order growth rate > GMV growth rate > revenue growth rate > profit growth rate, it is a common consensus on the performance trend of Taotian Group in the following period.This quarter, the company stated that GMV grew at a double-digit rate and hinted at an increase in Alibaba's market share. Therefore, it should be slightly higher than the industry's growth rate of 11.6%. Taotian's domestic retail customer management revenue (CMR) increased by 5% year-on-year, showing a significant acceleration compared to the previous quarter, slightly higher than the expected growth rate of sellers by about 3%. However, according to Dolphin Research, the performance of the previous buyers regarding CMR expectations should also have been aligned to 5%. There are signs of improvement in the trend, but from the perspective of expectation difference, it is not considered surprising.

From this perspective, after a series of reforms, it should indeed make Taotian's growth healthier - merchants/users returning, users placing more frequent orders, and stronger user stickiness. However, the shift towards benefiting Taobao merchants and consumers has led to a decrease in take rate, and the full GMV growth cannot be fully reflected in revenue.

On the other hand, the increase in subsidies/investment further eroded profit growth. Taotian Group's adjusted EBITA for this quarter decreased by about 1.4% year-on-year. Despite CMR slightly exceeding expectations, the decline in profit is completely consistent with expectations, indicating that the erosion of profit by investment is slightly more severe than expected.

Due to the high probability that the period of bottoming out and adjustment cannot end in a few quarters, Taotian's performance is likely to not look good in the short to medium term. The key point lies in whether Taotian can maintain strong growth after reducing investment and traffic support in the future.

Thirdly, heavy asset self-operated businesses continue to shrink and improve efficiency, while 1688.com sees a revival.

After adjusting the structure and financial reporting standards, the current self-operated retail business of Taotian only retains core online self-operated businesses such as Tmall Supermarket and Tmall International. This quarter, including Tmall Supermarket and Tmall International, Taotian's self-operated retail revenue decreased by 2.1% year-on-year. As previously expected, the new management team is not very enthusiastic about heavy asset businesses during the phase of streamlining high-quality assets, so heavy asset self-operated businesses are also in a phase of contraction and efficiency improvement.

As for the oldest 1688.com business, as a major focus of Taotian's "cost-effective" strategy, it is slowly transitioning to a 2C model and has some linkage with Temu in terms of sources. This quarter, its revenue increased by 19.8% year-on-year, maintaining a decent growth rate

4. Overseas Expansion Shows Higher Revenue and Loss Than Expected

Compared to the internal competition in domestic e-commerce, expanding overseas to drive growth has been one of the consensus among domestic internet companies since 2023. During the last quarter's earnings call, the company had already made it clear that they would aggressively invest, even if it meant significantly increasing losses to achieve growth.

In reality, both the growth and the extent of losses were larger than expected. Despite the already high base, the overall revenue from international business still achieved a 45% high growth this quarter, which is 7% higher than expected. Of particular note, the international retail business saw a year-on-year growth rate of 56%. It is reported that the Choice model, whether fully or semi-managed, has accounted for 70% of the orders on AliExpress, demonstrating the determination and progress of the full transformation.

Among other segmented businesses, the Turkish e-commerce Trendyol maintained a double-digit growth rate in orders. As for the Southeast Asian local e-commerce Lazada, the focus is currently on improving profitability, significantly reducing the average loss per order.

On the other hand, the main B2B cross-border wholesale business Alibaba.com saw a relatively slower growth rate of 11% year-on-year this quarter. Currently, the focus of the international group is on the C2C and fully/semi-managed businesses, leading to a shift in traffic from B2B to B2C. Furthermore, compared to the efficient fulfillment of fully/semi-managed models, Alibaba.com's self-fulfillment by merchants lacks competitiveness in the rapidly evolving cross-border e-commerce environment.

However, after adjusting for the impact of transitioning to fully managed models on revenue, the actual overall order growth rate for international business this quarter was 20%, showing a slight decline as the base increases.

From a profitability perspective, the international business group's adjusted EBITA surged to 4.1 billion in operating losses, with a loss rate increasing by 4 percentage points to 15% compared to the previous quarter, higher than the expected 3.8 billion loss.

Nevertheless, in the stage of accelerating customer acquisition and market expansion, we believe that temporary losses are acceptable. On one hand, branding and customer acquisition require significant investment, and on the other hand, to achieve fully/semi-managed models and efficient fulfillment, substantial investments in warehousing and equipment are necessary. Therefore, as long as the growth rate remains stable, the expansion of losses should not be a major concern. The key point is whether, after several quarters of investment, the international group can quickly narrow down losses and even turn them into profits.

5. Cainiao Continues to Expand Overseas, but Turns Losses Under High InvestmentsAfter the reorganization, Cainiao's current revenue includes internal group revenue and external customer revenue, totaling 24.6 billion yuan this quarter, with a year-on-year growth rate further increasing to nearly 30%, nearly 11% higher than market expectations. The current logic of Cainiao is almost inseparable from the overseas business. The warehousing and logistics services required behind the rapid growth of cross-border business directly benefit Cainiao, a brother unit. With the international business exceeding expectations, Cainiao is also the same.

However, because Alibaba is increasingly emphasizing delivery timeliness in cross-border operations (5 days, 10 days delivery, etc.), it has also put significant pressure on Cainiao's operating costs and capital. This quarter, Cainiao's loss (adj. EBITA) reached 1.34 billion. Although the latest expectations from the sell-side also believe that Cainiao will turn losses, the actual magnitude is higher than expected.

Sixth, discarding garbage projects, Alibaba Cloud accelerates growth in revenue and profit

The second pillar of Alibaba Group's market value, Alibaba Cloud business, also includes revenue generated internally in the revenue calculation after the reorganization. This quarter, Alibaba Cloud Group achieved revenue of 25.6 billion, with a year-on-year growth rate continuing to slightly improve to 3.4%, with actual revenue about 2% higher than expected.

Although the absolute growth rate is still not high, the growth rate can still improve as Alibaba actively abandons low-quality private/hybrid cloud businesses. In contrast, the revenue growth rate of public cloud products has reached double digits.

At the same time, the adjusted EBITA profit for this quarter reached 1.4 billion, 3.4% higher than expected. After getting rid of low-quality projects, both growth rate and profit have improved, showing a good medium-term outlook.

Seventh, local service losses also expanded

In the relatively low-tech environment that just emerged from the epidemic last year, Alibaba's local service revenue grew by 18.5%, showing some acceleration, which is considered a good performance. However, the quarterly loss expanded to 3.2 billion, nearly 11% more than expected.

Eighth, entertainment is indeed a "balance", other "N" companies also saw expanded losses

If the losses of the high-quality core business mentioned above can be seen as a way to regain growth and must increase investment, then large entertainment and other "N" companies, which are not high on the priority list within Alibaba Group, should divest more "ineffective" assets to reduce costs and increase efficiency. However, the performance this quarter is not satisfactory, with actual EBITA losses higher than expectedThe entertainment sector saw a 1% decline in revenue compared to the same period last year, while losses continued to expand to 900 million. Both revenue and profit were significantly below expectations.

Nine, Alibaba in transformation, the cost of improving growth is a comprehensive deterioration in losses

Looking at the overall group, although Taotian's business revenue was not surprising, the CMR growth accelerated after all. At the same time, the strong growth of international commerce + Cainiao's "cross-border twin stars," along with the slightly better-than-expected growth of the cloud group and local life, resulted in the group's overall revenue for the quarter exceeding expectations by nearly 2 billion. The acceleration on the revenue side is commendable.

However, in terms of profit, the significant portion of Taotian Group's adj.EBITA showed negative growth, essentially setting the tone for the overall group's unimpressive profit. In other sectors, except for the improving profit margin of the Intelligent Cloud Group, the profits of all other sub-groups are basically in a state of comprehensive deterioration (as clearly seen in the graph below with profit margins generally declining at a 45-degree angle).

In terms of actual loss amounts, excluding Taotian and the improving Alibaba Cloud, the combined EBITA loss of all other sectors increased from 9.5 billion last year to 12.3 billion, a nearly 30% increase in losses.

Overall, Alibaba's adjusted EBITA for the quarter is around 24 billion, nearly 2 billion less than market expectations, significantly below expectations. It is evident that Alibaba's various business groups have paid a considerable price in order to regain market share and growth.

Ten, how did expenses change—spend where necessary, save where possible

After looking at the revenue and profit figures, how did costs and expenses change? Firstly, this quarter Alibaba's gross profit margin, excluding stock incentives, was 33.7%. In the situation where Alibaba is gradually marginalizing itself and abandoning low-quality assets/businesses, the gross profit margin decreased by about 0.3 percentage points compared to the same period last year. This can only be attributed to Alibaba reducing prices and increasing investments.

Cost-wise, looking at the three expenses of equity incentive removal, after Alibaba announced its re-entry into the investment period, marketing expenses increased by nearly 4 billion compared to the previous year, and research and development expenditures also increased by about 1.1 billion. It is evident that Alibaba is indeed generous in promoting growth through expenses. On the other hand, internal management expenses only increased by 0.2 billion, showing that Alibaba is still frugal in internal spending. The significant positive correlation between the increase in expenses and their impact on revenue clearly demonstrates the company's strategic allocation of funds.

For previous analyses on Alibaba, please refer to:

Financial Reports:

February 8, 2024 Summary - Alibaba Summary: Focus on Taobao, Overseas, Cloud Investment, Buying Alibaba to Beat U.S. Bonds

February 8, 2024 Analysis - Alibaba: Scraping Off the Rotten Flesh, Exposing the White Bones, Can It Survive After the Major Surgery?

November 17, 2023 Analysis - "Twilight" Alibaba: Is the Road Back the "Long March"?

November 17, 2023 Summary - Alibaba: Not Playing the Split Listing "Stunt", Focusing on Investing in Internal Growth

August 11, 2023 Analysis - Giving Up the "Communal Pot", Alibaba "Turns the Ship Around"Minutes of August 11, 2023 Alibaba: The primary goal is to expand the user base and continue to invest

Interpretation of May 19, 2023 Always grinding in the dark? Alibaba is really going all out this time!

Minutes of May 19, 2023 [After restructuring, Alibaba is ready to make big moves for the next three years](file:///D:\BaiduNetdiskWorkspace\海豚投研\泛零售\1.阿里巴巴\阿里财报\4QF24\After restructuring the organization, Alibaba is ready to make big moves for the next three years (minutes of the conference call))

Conference call on February 24, 2023 Alibaba conference call minutes: "There are always people subsidizing, but no one has seen anyone turn the tide"

Financial report review on February 24, 2023 Alibaba's "deep squat" has arrived, is the "takeoff" still far away?

In-depth analysis:

December 28, 2023 The fall of the internet giants, who killed Alibaba, Meituan, JD, and Tencent?

October 10, 2023 Against the wind "roaring", can Alibaba, JD, Meituan turn the tables?

January 19, 2023 Ant Group goes ashore, Daniel Zhang goes to the cloud, how far is Alibaba from revaluation?2023年1月18日《 The final battle of e-commerce, can Taobao compete with Douyin? 》

2023年1月18日《 The tide of offense and defense has reversed, can "Alibaba, Ctrip, Didi" counterattack?

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