The "big brother" fell short of expectations, the little ones doing their best

Although the stock price performance has been lukewarm, it has always been the focus of the market's attention and a key target recommended by sellers. Today, Alibaba Group announced its first quarterly report for the 25th fiscal year. How is the performance? Here is Dolphin Research's view:

I. Shareholder Returns Increase Again

According to the company's disclosure, Alibaba repurchased a total of $5.8 billion worth of shares in the quarter ending in June, an increase from the $4.8 billion in the previous quarter. If the repurchase intensity in the second half of the year does not decrease, the annualized total repurchase amount will exceed $21 billion. Assuming that the company will distribute at least $2.5 billion in dividends this fiscal year, corresponding to Alibaba's current market value of less than $190 billion, the direct shareholder return rate will be over 12%. Even within the realm of dividend stocks, the return rate that can surpass Alibaba's is very limited. However, we also note that Alibaba's net cash on hand has decreased to approximately RMB 300 billion, and considering the current year-on-year decrease of 25% in operating cash flow, which is slightly below $140 billion on an annualized basis, taking into account the need for AI capex. Even if there is a repurchase and dividend amount of over $20 billion annually, it is likely to be a one-time event.

II. Key Answer: Taobao, the pillar, has turned from supporting to the only drag

The market's original expectations for Alibaba's core business, Taobao, were already conservative. Due to the overall online physical retail sales declining by -1.4% year-on-year in June, the entire second quarter only grew by 6.4% year-on-year. In a weaker consumption environment, the market's growth rate expectations for CMR this quarter have fallen to a low single-digit of 2.7%, with EBITA still expected to decline year-on-year.

In actual performance, Taobao's GMV and order volume both achieved mid to high single-digit and double-digit growth this quarter, which is still decent. However, Taobao's Customer Management Revenue (CMR) only grew by 0.6%, severely lagging even under low expectations. This also implies that the situation where Taobao's take rate is declining due to the skew towards small and medium-sized merchants is still relatively serious, and it cannot be ruled out that in a weaker overall environment, merchants have reduced their advertising budgets.

On the profit side, Taobao Group's adjusted EBITA for this quarter still decreased by about 1% year-on-year, not a miss but also not a surprise. Although the double-digit growth in the number of 88VIP members reflects that Taobao's most important user experience may have indeed improved, which is good news from a medium to long-term and business ecosystem perspective. However, from the perspective of performance that the market is concerned about, revenue growth has stalled again, and profits continue to decline year-on-year, which is undoubtedly not good news. In the short term, the market's choice as a voting machine rather than a weighing machine, and the inability to criticize the market's "voting with their feet," cannot be ignored.

III. Key Answer: Alibaba Cloud's Increased Revenue and Profit, Can It Hold Up

Alibaba Cloud, the group's second most important segment, has been hovering at single-digit revenue growth for the past two fiscal years. The fact that as the second growth engine, it has not grown is the biggest problem for this business. However, after nearly completing the reduction of inefficient projects and overcoming the adjustment period of a major customer's lease termination, the management claimed loudly last quarter that the cloud business's growth rate in the second half of the year would return to double digits and above In reality, this quarter, Alibaba Cloud Group achieved a revenue of 26.5 billion, with a year-on-year growth rate continuing to rise to 5.7%, approximately 1% higher than expected. The continuously increasing revenue growth rate over the past few quarters can be seen as a shot in the arm for investors who doubted whether the company could actually deliver on management's guidance.

At the same time, this quarter, Alibaba Cloud's adjusted EBITA profit also reached 2.3 billion, with a sequential growth of over 60%, exceeding market expectations by over 60% as well. The market originally expected that while Alibaba Cloud's growth would improve, the point at which AI-related investments would improve profitability might be delayed. However, with the current recovery in cloud business growth and a significant improvement in profits, almost a "perfect performance," it is very likely to prompt the market to recognize and price in the valuation of this second-largest segment of the group reaching hundreds of billions of RMB.

IV. Key Answer: International e-commerce slows down but reduces losses, entering refined operations

With a revenue volume ranking second in the group, the international e-commerce sector has seen continuous expansion of losses due to the previously high-speed growth of international business, leading to some market criticisms and concerns about when international business will turn profitable. This quarter, the international business shifted its strategy from high growth to more refined operations.

The revenue this quarter grew by 32.4% year-on-year, a decrease of nearly 13 percentage points sequentially. However, the market had anticipated this, and the actual growth rate was close to expectations. The main reason for this was that the year-on-year growth rate of international retail business decreased from 56% to 38%. The growth rate of international wholesale business remained at 12% without slowing down. Corresponding to the slowdown in growth, the losses in the international segment also narrowed. This quarter, the operating losses (Adj. EBITA) from equity incentive expenses and amortization expenses shrank by about 9% to 3.7 billion sequentially, lower than the expected 3.9 billion loss.

The sequential contraction of the loss amount this quarter (EBITA loss rate decreased by 2.2 percentage points) marks the entry of overseas business into the stage of refined operations, with a significant improvement in UE. If the point at which the international business turns losses into profits arrives earlier, the market will also have more incentive to value this segment separately. Looking ahead, Dolphin Research believes that maintaining a good growth rate while balancing investment and loss intensity will be the core issue for the international group in the future.

V. Under refined operations, Cainiao directly turns losses into profits

Cainiao, closely tied to the development of overseas business, saw its revenue growth rate slow significantly by about 14% to 15.7% year-on-year this quarter, a slowdown similar to the AIDC segment. However, what is surprising is that Cainiao's adj. EBITA this quarter directly turned from a loss of 1.3 billion in the previous quarter to a profit of 620 million, significantly better than the market's expected loss of 250 million. This also reflects a significant improvement in UE in the logistics sector after shifting to refined operations.

VI. Local services significantly reduce losses, is profitability on the horizon?

Alibaba's local service revenue grew by 12.3% this quarter, although it slowed significantly from the previous quarter, it is in line with market expectations and not considered bad news. Furthermore, the local services' adj. EBITA losses this quarter also significantly narrowed to 390 million, far below the market's expected 2 billion loss, approaching breakeven.

VII. Pan-entertainment and "N" companies also focus on reducing losses: Among them, the loss in the major entertainment sector has narrowed to nearly 100 million, significantly lower than the expected 400 million loss. However, historically, the entertainment sector has also seen significant reductions in losses or even profits on multiple occasions, and whether this is sustainable remains to be seen. The combined losses (adj.EBITA) of "N" companies this quarter have also narrowed to 12.6 billion, significantly lower than the expected 16 billion loss.

VIII. Intense investment in expenses, group profits decline year-on-year: With the company's efforts to reduce costs, improve efficiency, and gradually divest heavy asset businesses, Alibaba's gross profit margin after deducting stock incentives has increased by 0.9pct compared to the same period last year. However, due to the total increase of over 9 billion yuan in three operating expenses (after deducting stock incentives) compared to last year, the group's overall adj.EBITA margin has declined by 0.85pct. Although the total profit is 2.5 billion higher than expected, it is still slightly lower by about 300 million year-on-year.

Dolphin Research's viewpoint:

Looking at Alibaba's overall performance this quarter, the biggest responsibility clearly lies in the fact that both revenue and profits have declined year-on-year, falling below the already conservative market expectations, which is less than ideal for Taotian Group. Bluntly speaking, it involves making investments, sacrificing profits, but not achieving significant growth. We do not deny that Taotian's investments may have brought considerable improvements in user activity and experience, but for investors, these qualitative proofs and pricing are intangible.

However, despite the slip-up by the group leader Taotian, an equally significant and far-reaching good news is: since the completion of the split of 1+6+N, other subsidiaries outside of Taotian are rapidly moving towards reducing losses and even turning losses into profits. With the end of cross-subsidization, where Taotian, as the only two and the largest profitable business, no longer provides financial support to other businesses, the pressure for survival and self-reliance has driven most subsidiaries to achieve greater-than-expected reductions in losses this quarter, with Alibaba Cloud and Cainiao already achieving decent profits. The significance of all subsidiaries approaching a turnaround is that most investors previously only valued Taotian separately, or valued other businesses' losses as part of the group's valuation (i.e., other businesses had a negative valuation). As other businesses gradually stabilize and become profitable, investors will be more willing and have more basis to value all of Alibaba's subsidiaries positively, either through SOTP or through the overall method.

Therefore, at the current stage, Dolphin Research's assessment of Alibaba's investment value is:

Looking ahead, with an annualized repurchase and dividend amount of over 20 billion, corresponding to a market value of less than 2 trillion US dollars, providing shareholders with a direct return of over 10%, even if Alibaba's core Taotian business does not see the expected substantial improvement due to macro factors or competition in the future, the shareholder returns in the top tier of all Chinese assets will be sufficient to provide very solid support for Alibaba

Looking up, on the technical side, the upcoming entry into the market and the subsequent increase in southbound funds are expected to be a visible positive catalyst in the short term, even though we cannot predict the extent of the bullish impact in advance. Fundamentally, Taotian previously announced a 0.6% technical service fee for all merchants, which, according to our calculations, is expected to bring Taotian several billion in additional revenue and profit on an annualized basis. Furthermore, according to the company's statement, with the promotion of site-wide recommendations and some AI ad tools, the declining trend in Taotian's take rate in the second half of the year is expected to reverse. Although we cannot predict whether consumer spending will improve in the second half of the year, the expected increase in the take rate at least has the potential to bring CMR growth closer to GMV growth in the mid to high single digits.

Moreover, even if Taotian fails to show significant improvement, other businesses such as Alibaba Cloud are expected to return to double-digit growth rates in terms of both revenue and profit, while international e-commerce business, maintaining high growth, may also see unexpected narrowing of losses through refined operations. As mentioned above, the valuation released by other businesses will also bring some incremental value to the overall group valuation.

Even looking at the trend of Alibaba's stock price over the past few months, the market has not bought into or anticipated these potential improvements in advance. However, if Alibaba can present actual results in the second half of the year, the anticipated upward revaluation will eventually occur.

Below is a detailed performance analysis:

I. Alibaba's New Financial Reporting Standards

Starting from June 2023, Alibaba Group made significant adjustments to its financial reporting standards. The following are the latest financial reporting standards for better understanding of the subsequent analysis:

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

2) International Group: Cross-border retail AliExpress, Cross-border wholesale International Station, Overseas local retail Lazada, Trendyol, etc.;

3) Local Services: Ele.me and Amap;

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

5) Alibaba Cloud Group: Alibaba Cloud, DingTalk was separated from the rest of the business in the quarter ending September 2023;

6) Entertainment Group: Youku and Alibaba Pictures;

7) All Others: Gaoxin, Hema, Alibaba Health, Intime (these three are self-operated new retail formats with offline presence, originally part of the domestic commerce business); Lingxi Interactive, UC, Quark (originally part of the entertainment business), Fliggy (originally part of the local services business), DingTalk (originally part of the cloud business).

II. Big Brother Taotian, Turning into the Biggest Burden

After the new management team set the strategic direction for Taobao and Tmall to return to user-centric focus, with measures to tilt traffic towards small merchants and offer discounts to consumers, the order growth rate > GMV growth rate > Revenue growth rate > Profit growth rate, in the past few quarters, can be seen as a summary of Taotian Group's business situation.

Due to weaker social retail data this quarter, the market's expectations for Taotian's growth are quite conservative, with many sellers expecting CMR growth to be around 3%. However, the actual situation is that the company disclosed a double-digit increase in order volume this quarter, with GMV growth in the high single digits, both of which are considered decent . The issue lies in the domestic retail customer management revenue (CMR) for this quarter only grew by 0.6% year-on-year, lower than the already conservative expectation of less than 3%, which is undoubtedly a significant miss.

While order volume and GMV growth are still decent, the revenue significantly missed expectations, indicating that the decrease in take rate due to the flow towards small and medium-sized merchants is more severe than expected, and there is also the possibility of a decline in merchants' own advertising budgets.

Furthermore, despite the noticeable revenue shortfall, Taotian Group's adj.EBITA for this quarter still decreased by about 1% year-on-year, which is roughly in line with expectations, not bringing any surprises. Although the double-digit growth in 88VIP numbers reflects an improvement in Taotian's focus on user experience, which is undoubtedly a good thing from a medium to long-term and business ecosystem perspective. However, in terms of market performance, it signifies another halt in revenue growth and a year-on-year decline in profit. In the short term, the market's choice of "voting with their feet" belongs to a voting machine rather than a weighing machine, and criticism is inevitable.

III. Is the heavy asset self-operated business on the verge of extinction?

After adjusting the structure and financial reporting standards, only core online self-operated businesses such as Tmall Supermarket and Tmall International remain in the self-operated retail sector . Self-operated retail revenue for this quarter decreased by 9.5% year-on-year to 27.3 billion, a whole 16% lower than market expectations. Such a significant narrowing of revenue cannot be solely explained by weak macro consumption, indicating that there must be company-initiated contraction factors. According to the company's explanation, part of the reason is the company's active withdrawal from some consumer electronics and home appliance self-operated businesses, shifting focus to daily necessities and groceries. After the new management took over, they did show a tendency to clean up heavy asset self-operated businesses, but the side effects of this proactive contraction may have been somewhat excessive.

As for the oldest 1688.com business, a major cornerstone of Taotian's "cost-effective" strategy, in its attempt to transition to a B2C model and its certain linkage to cross-border e-commerce sources, revenue grew by 16.1% this quarter, which is still respectable.

Overall, due to the more severe than expected CMR growth and anti-skid, as well as a significant decline in self-operated retail revenue, Taotian Group's overall revenue in this quarter decreased by 1.4% year-on-year, which was 3.6% lower than market expectations.

IV. Overseas growth slows down, but losses narrow, achieving more balanced growth

Compared to the internal competition in domestic e-commerce, expanding overseas to increase increment has been one of the consensus among domestic internet companies since 2023. However, the previously high-speed growth in international business has also led to continuously expanding losses, causing some market criticisms and concerns about when the international business can turn profitable.

This quarter, the international business has shifted its strategy from high-profile to more refined operations. International e-commerce revenue grew by 32.4% year-on-year this quarter, a decrease of nearly 13 percentage points from the previous quarter. However, the market had anticipated this, with the expected growth rate being only 33.4%. Mainly, the year-on-year growth rate of international retail business decreased from 56% to 38%. The growth rate of international wholesale business remained at 12% without slowing down. However, the company did not disclose the growth rate of international business volume officially this time, indicating a significant slowdown compared to before.

Along with the slowdown in growth, the losses in the international segment also narrowed. This quarter, the international business group's operating loss (Adj. EBITA) excluding stock incentive expenses and amortization expenses shrank by about 9% to 3.7 billion. Although the market also expected the loss to narrow, it was actually lower than the expected 3.9 billion loss. While revenue continued to grow by over 30%, the losses started to narrow (EBITA loss rate decreased by 2.2 percentage points), indicating a significant improvement in UE in the overseas business. If the international business can turn losses into profits earlier, the market will be more willing to give this business a separate valuation.

V. Symbiosis with AIDC, Cainiao also sees a slowdown in growth but turns losses into profits

With the hot trend of cross-border business, Cainiao is currently almost inseparable from the logic of overseas business. Cainiao is a direct beneficiary of the warehousing and logistics services required behind the high-speed growth of cross-border business. Due to the slowing growth of the international e-commerce segment, Cainiao's total revenue this quarter was 24.6 billion, with a year-on-year growth rate also significantly slowing down by about 14% to 15.7%, a slowdown similar to the AIDC segment.

However, in the same vein, Cainiao's adj. EBITA this quarter directly turned from a loss of 1.3 billion in the previous quarter to a profit of 620 million, significantly better than the market's expected loss of 250 million. Similarly, it reflects a significant improvement in UE in the logistics segment after shifting to refined operations.

VI. Alibaba Cloud's Increased Revenue and Profit, Can the Group's Second Pillar Hold Up the Sky

Alibaba Group's second pillar of market value, Alibaba Cloud business, also includes internal revenue in the revenue calculation after the restructuring. This quarter, Alibaba Cloud Group achieved a revenue of 26.5 billion, with a year-on-year growth rate continuing to rise to 5.7%, which is about 1% higher than expected. The management had previously stated that in the second half of the 24th year, the growth rate of cloud business would return to double digits, and the significantly increased growth rate this quarter can be seen as a strong reassurance to the market on whether to believe the management's guidance.

This marks that Alibaba Cloud is on the path to recovery as Alibaba actively abandons low-quality private/hybrid cloud business and after the impact cycle of a certain major customer. In addition, according to the company, the number of users using Alibaba's AI platform, Bai Lian, has grown by a whopping 200% month-on-month, and the development of AI is expected to bring considerable incremental value to Alibaba Cloud.

At the same time, Alibaba Cloud's adjusted EBITA profit for this quarter reached 2.3 billion, an increase of over 60% compared to the previous quarter, also exceeding market expectations by over 60%. The market originally expected that although the growth of Alibaba Cloud would improve, the point at which AI-related investments would improve profits might be delayed. The significant profit improvement this quarter may also reflect the profit space released by reducing low-quality projects in the past, and it is worth paying attention to whether this profit level can be sustained in the future.

VII. Local Services Significantly Reduce Losses, Approaching Break-even

Alibaba's local services revenue grew by 12.3% this quarter, although it slowed significantly from the previous quarter, it is within market expectations and not considered bad news. At the same time, the loss (adj.EBITA) of local life this quarter narrowed significantly to 390 million, far below the market's expected loss of 2 billion, approaching break-even.

The significant reduction in losses in the local life sector this quarter can be said to be much better than expected, and if it can continue, it may also release the separate valuation of this sector. As a result, the significant improvement in the profit situation of Alibaba's local sector, it remains to be seen whether it can extend to the performance of Meituan and Didi this quarter.

VIII. Entertainment and Other Businesses Also Significantly Reduce Losses

The losses of the above high-quality core businesses expanded, while the relatively marginal entertainment and other "N" companies also had significant reductions in losses this quarter. The loss in the entertainment sector narrowed to nearly 100 million, significantly lower than the expected loss of 400 million. However, the entertainment sector has also experienced significant reductions in losses or even profitability in history, and whether it is sustainable remains to be seen.

As for the combined loss (adj.EBITA) of other "N" companies this quarter, it also narrowed to 1.26 billion, significantly lower than the expected loss of 1.6 billion. Under the pressure to be self-sufficient and the possibility of being split and sold, the "N" companies naturally have an urgent need to make money for the group

IX. No longer relying on Taotian for blood transfusion, each subsidiary strives towards self-sufficiency

Due to Taotian Group's negative growth, and the obvious slowdown in the growth of Alibaba Group as a whole this quarter to 3.9%, due to the slowing down of international + Cainiao + local life either due to base or active optimization, actual revenue fell 2.6% below expectations.

However, in terms of profit, although the majority of Taotian Group's adj.EBITA declined by 1% year-on-year, among all other segments, the profit margin of Alibaba Cloud Group has significantly improved, Cainiao has turned losses into profits, international e-commerce, local life, major entertainment, and "N" company have all significantly reduced losses, resulting in the group's overall adj.EBITA reaching 45 billion, exceeding expectations by a full 25 billion. After Alibaba's restructuring into 1+6+N, the goal of each subsidiary being self-sufficient in profit and loss has taken a solid step forward.

X. The intensity of expense investment is indeed high, although the group's overall profit exceeds expectations, it is declining year-on-year

How have costs and expenses changed? Firstly, this quarter, Alibaba's gross profit margin after deducting stock incentives was 40.2%, an increase of 0.9 percentage points compared to the same period last year. As Alibaba gradually abandons low-quality assets/businesses and each subsidiary reduces losses and improves efficiency, the group's overall gross profit margin should show a continuous improvement in the medium term.

In terms of expenses, looking at the three expenses after deducting stock incentives, after Alibaba announced re-entering the investment period, marketing expenses increased by nearly 5 billion year-on-year, research and development expenses increased by about 900 million, and management expenses increased by 3.6 billion year-on-year, indicating that Alibaba's current investment intensity is indeed quite objective. Due to the significant increase in expenses, although the gross profit margin has improved significantly, and the profit for this quarter is significantly better than expected due to the difference from expectations. However, year-on-year, the group's overall adj.EBITA margin still declined by 0.85 percentage points, leading to a slight decrease in total profit by about 300 million year-on-year

Dolphin's previous analysis on Alibaba, please refer to:

Financial Report Season:

Interpretation on May 15, 2024: "Aggressive Investment + Aggressive Downsizing, Has Alibaba Truly Recovered from the 'Major Surgery'?"

Summary on May 15, 2024: Alibaba: Initial Results of Investment Are Visible, Subsequent Profits Will Gradually Catch Up

Interpretation on February 8, 2024: Alibaba Summary: Focus on Taobao, Overseas Expansion, and Cloud Investment, Buying Alibaba is Safer than US Treasury Bonds

Interpretation on February 8, 2024: "Alibaba: Scraping off the Rotten Flesh, Exposing the White Bones, Can It Survive after the Major Surgery?"

Interpretation on November 17, 2023: "Alibaba in Decline: The Road to Recovery is a 'Long March'"

Summary on November 17, 2023: Alibaba: Avoiding Splitting for IPO, Focusing on Investing in Internal Growth

Interpretation on August 11, 2023: "Giving Up the 'Communal Pot', Alibaba 'Returns to Shore'" app_id=longbridge&channel=t8934914&invite-code=276530&utm_source=longbridge_app_share) 》

Minutes of August 11, 2023: "Alibaba: Expanding user scale is the top priority, continue to invest"

Interpretation on 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 another three years"

In-depth:

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

October 10, 2023 "Against the wind, 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?" 》 January 18, 2023 The final battle of e-commerce, can Taobao compete with Douyin?

January 18, 2023 The tide of offense and defense has reversed, "Alibaba, Ctrip, Didi" are ready to counterattack

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