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Alibaba Group (BABA US)

Weak Retail Sales Numbers Weigh On Share Price

BABA share price has plunged to US$145.08 ytd in Sep 21 following weak retail sales numbers. We estimate BABA’s 2QFY22 revenue to grow by 32% whereas non-GAAP net profit is estimated to decline 25% yoy due to the shift in product mix and continued investment towards the New Retail segment. We maintain BUY with a slightly lower target price of US$220.00 (HK$214.00).

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WHAT’S NEW

  • Subdued macro retail sales may hinder BABA’s core commerce growth. China’s ecommerce gross merchandise value (GMV) grew a moderate 11.0%/6.2% yoy in July/Aug vs 14.6% during Jun 21. In view of the sluggish NBS data, we expect Alibaba Group’s (BABA) China commerce retail segment revenue growth to slow down to 9% yoy to Rmb74t, compared to 14% in 1QFY22. Core commerce EBITA margin is estimated to contract by 11ppt yoy and 1ppt qoq to Rmb41.8b with Rmb18b loss due to the increased investment in new initiatives.
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  • Strong growth momentum from new initiative but with limited revenue contribution. Per management, Taobao Deal ( ) was the major reason for BABA’s user base maintaining the strong growth momentum in 3Q21, with a well-defined value proposition in offering value-for-money products. With the latest tightening regulations over community group purchase (CGP) platforms, all players have stepped down their expansion pace. BABA remains disciplined and committed to digitalising CGB to provide incremental value-add to consumers. During 1QFY22, Baba’s new retail GMV grew by 200% yoy and was the fastest growing retail segment. We think businesses equipped with ample cash coupled with cutting edge logistic services will stand a higher chance of survival among the competition. We believe the growth of Taobao Deal will continue to serve as one of the major drivers for BABA to achieve the 1b annual active customers (AAC) goal by the end of FY22.
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  • Internationalisation to be another commerce growth driver. BABA recorded c.265m AAC in its international retail marketplaces as of 1QFY22, with a robust growth of 54% yoy in international commerce retail revenue. For 2QFY22, the strong growth is still well on track as per management, supported by the strong performance of Lazada in Southeast Asia and sustained momentum for AliExpress in EU, leveraging the improved cross-border logistics solutions in partnership with Cainiao. However, management foresees a relatively softer performance in AliExpress in 2QFY22, due to the negative impact from the less favourable tax policy in EU which came into effect on 1 Jul 21. We expect international commerce retail revenue to grow at 40% in 2QFY22.
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  • Cloud growth well on track. For 2QFY22, the company expects a similar growth rate to 1QFY22 (29% yoy). Despite the slowing growth from the Internet sector and the impact from TikTok, the demand and digitalisation process in multi-verticals such as manufacturing and government cloud is strong and well on track. We estimate 29% yoy growth in cloud revenue, with EBITA margin stable at 2%.