Entering the sustainable growth stage

■ Alibaba Group held its 2021 Investor Day on 16–17 Dec, emphasizing its overall strategy for China consumption, globalization and technology.
■ Management reiterated its long-term vision of achieving 2bn consumers, creating 100m jobs and helping 10m SMEs become profitable by FY3/36F.
■ Reiterate Add with a DCF-based TP of HK$207.

China retail marketplace to maintain sustainable growth

Alibaba aims to gain new users, especially in lower-tier cities, and maintains its guidance of domestic AAC reaching 1bn in the next two quarters. At end-Sep, ARPU reached Rmb8,400. Alibaba will leverage Taobao Deal to attract older consumers. Alibaba is enriching its product categories. The online penetration rate for groceries, tourism, healthcare and home decor is still low. Alibaba has different strategies for different product categories, focusing on leading consumption trends to encourage new products and brands, providing a better shopping experience through technology features, and developing advanced technology to eliminate consumption pain points and raise the online penetration rate. Alibaba will leverage its multi-app strategy to grow consumer scale and demand. It will continue to support the sustainable growth of its merchants.

New retail and local retail continue to unlock growth potential

As at end-Sep, Taobao Deal and Tao Caicai had 270m AAC. Tao Caicai had 560k pick-up points that are individual operated stores and over 45k Cainiao Posts, and its penetration rate reached 40% nationwide in 200 cities. Alibaba will continue to empower smart factories, digitalized agriculture and direct marketing, and to upgrade its warehouse and delivery infrastructure. According to iResearch, China’s local consumer service market size is expected to grow by a 13% CAGR to Rmb35tr in 2025F, and the penetration is expected to improve to 31% from 24% in 2020. The market is still in the early expansion stage with scale expansion the priority focus. The market will enter the second stage of profitability improvement when one player’s DAU reaches 300m. Currently, Alibaba and its major competitor have about 100m DAU.

Globalization becoming an important strategy

Globalization has become an important growth driver for Alibaba, and it recently adjusted its corporate structure to assign Jiang Fan to be responsible for its international business. In SEA, the e-commerce market size is expected to grow at a CAGR of 27% in 2021– 2025F, and e-commerce penetration is expected to increase from 8% in 2020 to 20% in 2025F. Lazada will focus on improving quality and the user experience via a multi-app matrix, diverse user acquisition channels, and rich content and product offerings.

Cloud business still has great potential

According to CAICT, China’s Cloud Market is expected to grow at a 37% CAGR, reaching US$154bn in 2025F, compared to a 21% CAGR in the US. According to Gartner’s latest report, Alibaba Cloud ranked in the top three in IaaS + PaaS capacity in the world and fell in the Leaders quadrant in the cloud database market. The internet sector is Alibaba Cloud’s largest customer pool, contributing 51% of revenue. The digitalization transformation of traditional industries in China will become the next big opportunity for Alibaba Cloud. It will focus on the Middle East market and introduce localization in overseas markets. At end-Sep, Alibaba Cloud had 4m paying customers.

ESG strategy and goals

Alibaba expects its governance structure to be more transparent and set clear targets for carbon neutrality. It plans to achieve carbon neutrality in scope 1 and 2 by 2030; to halve carbon intensity and achieve Alibaba Cloud carbon neutrality in scope 3 by 2030; and facilitate 1.5 gigatons of ecosystem decarbonization in scope 3+ by 2035.