Alibaba phone meeting summary: "There are always people giving subsidies, but I haven't seen anyone turning the situation around by offering subsidies."

The following is the content of Alibaba's 3Q23 conference call, for financial report interpretation please refer to 《Ali's "Deep Squat" has come, is "Jumping" far away?"》

1. Key points addressed by management:

IMF expects China's GDP growth rate to be 5.2%, and "progress" is the keyword for Alibaba. In the company's three main areas of focus: consumer, cloud computing, and globalization.

1.1 Consumer Business:

1. GMV in the fourth quarter: In December, the non-market domestic demand was impacted by the year-end epidemic, and Tmall's GMV declined slightly compared to the same period last year; apparel was weaker, but health and wellness showed strong growth.

2. Progress in the first quarter: After the epidemic and travel restrictions during January and February, online physical goods remained weak and e-commerce business continued to be impacted. However, following the recovery of daily life in February, categories such as apparel, sports, and outdoor-entertainment showed good progress.

3. Alibaba's focus in 2023 is to improve user experience and customer value. The main methods are to improve the richness of content consumption (video and live streaming), focus on product value-for-money, and provide local logistics for daily necessities and high-frequency demand through Taobao Live Fresh.

4. Ele.me: After efficiency improvements, marketing and logistics costs dropped, and the unit economics (UE) improved. Additionally, offline orders far outpaced food delivery orders, and the average selling price (ASP) also continued to increase.

5. Fliggy: The performance of the airline and hotel businesses was better than the overall market situation announced by the National Tourism Administration following the epidemic. Moreover, it was also better than the same period in 2019.

1.2 Globalization:

Overall: Deepening ties in Southeast Asia, combining localization with globalization, and making sustainable investments across cycles; Trendyol's overall growth rate this quarter was 50%, and local life grew even faster; under order optimization, Lazada's orders grew positively and each order's profit loss reduced by 30%; AliExpress: the impact of value-added tax and exchange rate in Spain and France continued to ease, with positive growth in order volumes.

1.3 Alibaba Cloud (Aliyun):

Performance: Public cloud maintained double-digit growth, but hybrid cloud declined year on year due to the epidemic.

Focus areas after Zhang Yong took over as Alibaba Cloud's head: ① technology breakthroughs to ensure safety and cost optimization; ② flourishing ecology; ③ providing industry solutions with partners; ④ platformization, integrating cloud and DingTalk; ⑤ training large-scale models to provide better computational power for the market.

2. Analyst Questions

Q: What major opportunities, tracks, and industries are there for the next three to five years?

A: We focus on digital e-commerce, computing, and logistics, which are our strategic areas of "consumption, cloud computing, and globalization". We will continue to move forward in these three broad strategic areas in the future. In the future, we will continue to adhere to these three strategies instead of seeking other paths because we believe that the ceilings of these three strategies are high enough, the markets are large enough, and there are still huge opportunities in technological evolution.

Consumer: IMF expects China's GDP to grow at a speed of 5%. If we continue for 10 years, China's GDP will be very high and the proportion of consumption will be very large. Currently, the 40+ trillion social retail sales in China accounts for a ratio of 110+ trillion GDP. The proportion of the latter will be even higher in the future.

Digitization: Today we see that ecommerce from 20 years ago and 10 years ago are completely different. Especially after the epidemic, retail digitization has been achieved.

For the future, the application of generative AI will inevitably bring about digital forms and operational concepts. Change is not only on the consumption side, but digital supply chain transformation driven by digitization has just begun.

Cloud Computing: Cloud computing in China is just getting started. China's IT expenditure accounts for only 1% of GDP, while in the US it is 5%, and cloud computing accounts for 15% in China’s IT proportion, while in the US it is 21%. The change in these two proportions alone will bring huge market opportunities.

The demand for ChatGPT, VR and other technologies for computing power has just begun, and we believe that this is not only a trend in China, but also globally. For consumer and cloud computing, we are the leaders in China and among the top tier globally. We are confident in the future.

We will adhere to the existing three major strategies without wavering, firmly move forward, embrace new technologies, combine technological breakthroughs with business, and continue to create new prospects for the future.

Q: Short-term measures such as ChatGPT and JD's billions of subsidies, how do we develop our core competitiveness?

A: "Enter" was proposed in 2023. With the emergence of new technologies and new market trends, we still need to pursue the progress of business and technology. We will actively invest in new technological fields and create new results through the combination of technology and business. Use new technology to create new business opportunities and lead the future with new technology.

Alibaba's development over the past 20 years was not achieved through low-price subsidies and low-level competition to gain a leading position in the market. We believe that technology can bring possibilities to businesses that were previously impossible. We insist on technological breakthroughs to create innovative business and a new future.

Q: In 2022, the goal is to reduce costs and increase efficiency. In 2023, are you seeing a recovery in GMV and when will CMR turn positive? After the growth, how do you balance growth and investment?

A: We are paying close attention to changes in consumption. Overall, "January to the Spring Festival is still quite challenging" due to the impact of the epidemic and population mobility, "but after the Lantern Festival when work resumes normally," we saw "significant changes in the mood of consumption and active consumption behavior of users."

Changes in categories: We see that clothing, sports, outdoor and health categories are very popular.

Merchants' willingness to operate: motivation has also increased. Everyone wants to do a big job and wants to make up for the past three years. However, at the moment, it has only been a brief observation for half a month, but overall we remain optimistic about the recovery and improvement this year.

Views on market competition: price subsidies are not new. Every once in a while, someone hopes to gain an advantage by turning the tables through price subsidies.

But if we look at history, no one has been able to change the situation through price subsidies alone. We believe that only technological and commercial innovation can truly change the situation, truly allow merchants to provide consumers with the best products and prices, and consumers are willing to pay for them. Merchants are willing to pay for consumers, and this investment has long-term sustainable commercial returns, which is a positive cycle.

For Alibaba, we have experience in this area. Price is also a very important customer experience. We have platform mechanisms, market resources, and a net cash of $55 billion, but it's not about money, it's about business and technical capabilities. We hope to use technology to create value for users while maintaining a leading market position.

Q: We see that the UE of Ele.me is continuously improving, and short video platforms are entering local life services, changing the competitive landscape. What are some good ways for us to compete in local life?

A: Local life is divided into two parts - to the store and to the home. Going to the store is essentially advertising, and the performance still has to rely on going to the store, so if it's media, there's an opportunity.

To the store: Our progress at Gaode is very smooth and has successfully transformed from a map search tool to a service performance platform that reaches the destination. Our taxi, hotel reservations, and related categories such as refueling and charging piles are popular, and it's difficult for other media platforms to use the same methods.

To the home: Ele.me's UE is good, and the order volume, number of users, and user stickiness are continuously improving. Going home is essentially local e-commerce, food delivery, catering, and e-commerce. In the end, it's the complete combination of local supply, demand, and performance at a specific time.

In this matter, media attributes do not play any leading role. We believe that whether it's Ele.me or other players, they must integrate local supply, demand, and performance capabilities. These cannot be achieved by simply promoting media, and this is also our main confidence.

We have made good progress in our main operating cities, and we are still focused on our key cities, doing things well, gaining the trust of users, and achieving long-term business growth.

Q: Our quarterly free cash flow exceeded US$11 billion, and the company bought back US$3.3 billion in the previous quarter. When the company is adding shareholder value,

have you considered other methods, such as dividends and increasing buybacks?

A: 1) We will make some strategic investments and exit at the appropriate time. Our overall investment and strategic settings are related. 2) We also repurchased US$3.3 billion last quarter, and we have a limit of US$21 billion. Now, it's not so much about whether to increase the limit, but about using the US$21 billion given by the board of directors well and doing buybacks at the appropriate time, which is currently the main task. Q: Follow up, previously mentioned to invest more energy in technical innovation, introducing new business models. Which businesses will have significant improvements this year, and how will these improvements be quantified in specific businesses?

A: The driving force of technology for business has always been happening, and looking to the future, we mainly see several major opportunities.

Firstly, the development of emerging AI has become a global trend. People need more than just a conversational robot, but also how to integrate it into other business scenarios.

For Alibaba, we can achieve huge benefits from AI in improving user experience, content generation and understanding, and advertising efficiency. This is also the direction we are focusing on. In this process, we can not only improve the efficiency of supply and demand matching, but also improve the efficiency of merchants and customer service experience.

Secondly, in terms of cloud computing and big data, Alibaba Cloud has already built models of PAAS and IAAS. In recent years, we have also been investing heavily in pre-training models. We are happy to see that our judgment is consistent with the world's major trends.

Thirdly, regarding the benefits of advertising, the matching and scheduling of supply chain and demand, user supply and fulfillment capabilities have brought up new scenarios for AI, and we are actively working on these aspects.

Q: How do we understand the continuous expansion of CMR and realization rate?

A: The difference is mainly due to a high return rate. We announced the payment GMV. When logistics are affected, consumers will return the goods, leading to an increase in return GMV, which will cause the payment GMV to be higher and the realization rate to be lower.

Looking at YoY, the recovery of the entire logistics will lead to a decrease in the return rate, and the difference between our paid GMV and CMR is narrowing.

Q: If Zhang Yong advises on Alibaba Cloud, will the cloud business be adjusted?

A: Alibaba Cloud has been developing for more than a decade and has become a top-tier cloud computing vendor worldwide with a recognized market position and foundation. Based on this foundation, we still need to get back to the basics of cloud computing:

1. Emphasize high availability and security.

2. Technological breakthrough: From the IAAS layer to the core product technology breakthrough of the PAAS layer, we need to achieve not only leading in China but also globally in terms of performance and cost-effectiveness. Cloud computing is an economy of scale, and the core of scale is technological breakthrough.

3. Emphasize public clouds: We need to pay more attention to the development of public clouds. Public clouds have the benefit of scale. Combining the "cloud edge" well, we can achieve the development of the industrial Internet.

4. High-performance computing: I think new technologies emerge in endlessly. Grasping the calculation power based on high performance computing, deployment, and solution is the actual growth result we hope to achieve.

Risk disclosure and statement of this article: Dolphin Analyst Disclaimer and General Disclosure