Alibaba: "Actively preparing for the end of the epidemic" (Telephone meeting summary)

Here is the summary of the conference call Q2 FY2Q23 (CY3Q22) for Alibaba.US. Check out the financial report interpretation in this link: Alibaba: The Losses are Just on Paper, the Competitive Deadlock is Fatal.

Q: If the epidemic and macro stability improve, will we see GMV and Take Rate turn positive in the next few quarters on a YoY basis?

Our GMV has been greatly affected by the epidemic and changes in sales methods, especially with the rapid development of live sales. This affects the return rate on the platform, so when discussing the development of CMR, we usually consider both CMR and Take Rate together.
These two factors are slightly different. Regarding Take Rate, a part of it in CMR is actually related to the actual seller's GMV based on returns and his or her sales commission, which is highly related to the return rate. Another factor is the performance of advertising revenue in CMR, which is mainly affected by macroeconomic conditions, as the advertising investment willingness of advertisers and the overall business situation of sellers are interrelated.
As for Alibaba, we are still actively looking to improve CMR income performance. The most important thing is to provide sellers with a means to operate their users on the platform, whether it's through paid search, recommendations, live sales, or other activities. The growth of our CMR ultimately comes from the successful operation of these businesses, and our path and prospects are very clear.

Q: During this quarter in December, how do the impacts of the epidemic on logistics, the increase in return rate brought about by live streaming, and changes in consumer sentiment affect CMR or GMV, and how much would it impact EBITA if CMR is affected by these different macro factors?

If we were to put it in order of importance, consumer confidence would be the most significant factor. This is the most basic impact. I think not only Alibaba, but all consumer behaviors, both online and offline, the whole of society's consumption, this is the first;
The second is the impact on logistics after the introduction of the 20 anti-epidemic policies. After changes in epidemic policy, logistics security will have a positive impact. We have also seen progress, although in some areas logistics are still not completely normal, and even interrupted. We will continue to improve this.
The third factor is the impact of live streaming sales on return rates. Compared with the e-commerce platforms that primarily sell through live streaming, our impact is much smaller, because live streaming accounts for a relatively small proportion of our sales. During major events, the proportion of live streaming may be higher, but normally, this is just one of the ways sellers can sell their products. So we are still trying to balance multiple sales methods and choose the most acceptable ways for sellers and consumers while keeping operating costs under control.
Regarding the overall decline in CMR revenue, it will indeed have an impact on profits. However, as you often see, our EBITA in the Chinese commercial retail sector has actually increased in the past quarter compared to last year. The main reason for this is still the control of investment in all businesses, including the improvement of investment efficiency, the increase in profitability of profitable businesses, the decrease in losses of loss-making businesses, and ultimately achieving an overall 6% increase in the sector's tower.

Q: If we assume there are some major adjustments in epidemic control, how do management think the different product types will be affected?

We all hope the epidemic will end soon, which is good news not only for Alibaba but also for everyone. Of course, for Alibaba, since we are a group composed of multiple businesses, the situation regarding the epidemic varies for each business.
For our consumer sector, I believe that after the epidemic is alleviated, there will be more employment opportunities and increased consumer confidence. This is good for the Chinese economy and for companies like Alibaba. If there is an improvement in the epidemic, it will definitely have a positive effect on consumers' psychological expectations and confidence, promoting consumption.
Of course, there will be some changes in the consumption structure. We can see that under the uncertainty of the epidemic, the rigid demand still remains, such as for food and some dry groceries and daily necessities. There is even some demand for hoarding due to concerns about life interruptions. However, if the epidemic is alleviated, I believe this worry will be released, but on the other hand, I think it will also bring more demand for non-essential products, such as clothing and fashion.
For To B businesses such as cloud computing, all companies now see the prospects of digitalization, but it is also based on corporate expectations for the future and whether the company's business is normal, which will greatly determine their investment in digitalization. If more companies can operate more normally after the epidemic is alleviated, they will also increase their investment in digitalization, which is good news for cloud computing.
For Alibaba, facing the anticipation after the epidemic ends, we need to make active preparations. For example, in the category of consumer goods, because the consumer goods category is very complete, we are actively preparing for post-epidemic consumption categories and consumption patterns, not only including goods but also services and tourism; in cloud computing, I think we are still actively focusing on the process of industrial digitization, forming products and solutions for different industries and increasing customers' ability to use data.

Q: In the current regulatory environment, what do you think the direction of China's digitalization process will be in the next five years? What can Alibaba do in this big process? What about financial returns? Q: Later in the next few quarters, are there any adjustments to the traffic monetization strategy?

For the monetization and commercialization process of traffic, this is a question that everyone has been asking for many years, but for Alibaba, we have never seen it as a separate monetization issue. As with all commercialized products, we still need to be able to help merchants manage their consumers, manage their business, and provide value. Only when they can create value and obtain good ROI, can we get good profit sharing. This is our basic principle.
Secondly, throughout the entire process, we also see that with the diversification of consumer behavior on consumption platforms represented by Mobile Taobao, there are now multiple consumer behavior lines that intersect, including the search behavior under the original purposeful consumer needs, the highly developed recommendation flow in recent years, and the content of live streaming and short videos today. This forms such a way of consumption. We will still follow this consumption scene, and with the increase in the concentration, frequency, and traffic of consumers in this scene, we will plan and step-by-step commercialize a part of it.
Of course, this commercialization process also hopes to provide merchants with the ability to manage consumers in this field, whether it is in search, recommendation, or video content.
With our continuous efforts in the discovery field, we can also see structural growth in consumer habits in the discovery area. We will better grasp such changes and observe the entire commercialization process.

Q: Compared with before the epidemic, what changes have occurred in the advertising budget allocation between big brands and long-tail merchants on the platform?

Regardless of the size of the merchants, we see that their marketing investments are more cautious in uncertain epidemic environments. I believe that there is no distinction between big, medium, and small businesses, because they will all be more cautious overall.
The marketing budget expenditures of all merchants are always a percentage of their expected income, whether quarterly or annually.
The biggest change I think is the pursuit of effectiveness and marketing by merchants. This pure brand investment and pure exposure investment we see will be more cautious. The pursuit of ROI for effective advertising will be higher, which is consistent with the merchant's pursuit of better certainty in management.
For Alibaba, we are both a consumer media and a business operation platform. This combination has formed a complete and sustained business operation approach and profit model for merchants. Therefore, in the epidemic environment, merchants may explore any new platforms or channels, because everyone wants to pursue incremental growth. It is the merchants' judgment angle that all businesses will do more cautiously.

Q: Is the take rate of live streaming lower than that of search and recommended content?

We have two types of live streaming: one is a shop that originally operates in our online store. His employees or third-party hosts that he hired will carry out live broadcasts in the store as a store identity.
The second type is our unique method called KOL. As a pure promoter, he will help different stores conduct live broadcasts.
Live broadcast in your own live room, live broadcast in the KOL's own live room, so under these two methods, we have different commercial agreements to share revenue.
Therefore, from this perspective, the proportion of live broadcast in our overall business and our platform's business revenue are not directly related.

Q: Can you talk about the reasons for Cainiao's good growth performance this quarter?

The growth in this is mainly two parts, one is a relatively large growth in domestic consumer services, and the other is the growth of cross-border logistics. The most important reason is an improvement in the entire service model. The previous model can be understood as a 3P model, and now it has been upgraded to a 4P model. We not only connect service providers to the end customers, but now we are more in this process, we directly serve the end customer by purchasing the service provider's service. In this process, we will take on more responsibilities, including many service experiences given to our customers. So this is the improvement of the entire model, so there will be more income in this regard.

Q: 70% of Cainiao's revenue comes from external sources, so what are the potential prospects for accelerated growth in the future?

Since Cainiao was established, from its establishment in 2013 to now, it has always been an independent subsidiary under Alibaba Group's control, which is very clear.
It is not only because it has external customers, but more importantly, it also has external shareholders. Now, as disclosed in our annual report, Alibaba holds about 67% of Cainiao's shares, so our team has been actively exploring the entire logistics supply chain around Cainiao for many years, from the end of contact with consumers in cities to rural areas, from community post stations, campus post stations, to rural post stations. We hope that Cainiao can grow better independently, and we believe that Cainiao's better growth will definitely contribute to the other digital commercial businesses of Alibaba Group, whether domestic or international, whether retail commercial or B2B commercial. I think this is a synergistic effect between different businesses of Alibaba Group, but Cainiao is definitely facing the market independently and better developing to serve the market's customers.

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