Absence Of Catalyst In The Near Term

We had a pre-blackout call with Alibaba and we remain cautiously optimistic on the company given the slowing macroeconomic environment and continued merchant support initiatives. However, we think the current valuation offers attractive risk-reward opportunities as we favour tech giants to smaller investee companies like JD, PDD and Meituan over divestment risk. Maintain BUY with a lower target price of HK$167.00 (US$162.00).

WHAT’S NEW

  • China’s ecommerce GMV remained weak. China’s e-commerce tangible goods GMV growth fell to the single digits (+8.7% yoy) in 3Q21 (the last single-digit growth was 1Q20) to Rmb2,478b. Historically, November is a strong season for China’s physical goods sales given the 11.11 sales; however, the Nov 21 figure contradicted this fact as Oct 21 online physical goods sales (+10.3% yoy) triumphed over November’s growth (+4.9% yoy). We expect a challenging macro environment, regulatory environment and competitive landscape to continue to weigh on 2022 online retail sales.
  • Alibaba’s China retail segment growth to slow to low teens. According to management, the gap between customer management revenue (CMR) and GMV growth should be even larger than in 2QFY22, due to the continued merchant support initiatives (offering waiver and rebates for merchants). Alibaba Group (Alibaba) cited that the online advertising budget spending for brand ads (non-transaction related) has been declining whereas demand for search-related (transaction-related) ads remain robust. In terms of the new retail segment, the impact of the slowing macro environment is expected to have a larger impact on the offline retail sales; as such management expects SunArt to record a yoy decline in revenue during the Dec 21 quarter. We estimate a 2.5% CMR revenue growth in 3QFY22(vs 3% in 2QFY22) and the China retail segment revenue to grow at 12% yoy with EBITA margin of 20% in 3QFY22.
  • Alicloud growth to slow sequentially. The loss of collaboration with TikTok (estimated yearly contract worth US$800m, representing <9% of FY21 cloud revenue) continue to affect Alicloud’s revenue for 3QFY22. On top of that, management also blamed the overall challenging regulatory landscape among the internet sector as merchants had reduced their IT budget spending. As Alicloud has a larger proportion of clients from the internet sector, revenue will be negatively impacted. We lower our forecast for cloud revenue growth of 25% yoy in 3QFY22 from 30% and forecast of 2% EBITA margin for Alicloud.
  • Local consumer services saw sequential improvement. Management expects sequential improvement for local consumer services revenue growth due to lower subsidy and food order volume to also meet management’s expectation. We forecast a 4% qoq decline in GMV growth, but a 1% qoq and 15% yoy rise in revenue growth for local consumer services.