From growth of scale to optimizing efficiency
? Alibaba reported 3Q FY3/22 revenue of Rmb243bn, up 9.7% yoy, slightly below our expectation, mainly because of a yoy decline in CMR in the China commerce retail segment due to low single-digit GMV growth and more support to merchants.
? We expect Alibaba to meet its goal of 1bn China AACs in the next quarter; management guided that international AACs would double in the next few years.
? The losses of Taobao Deals and Taocaicai are expected to gradually narrow in the next few quarters, owing to improving order density and supply chain performance.
? AliCloud will focus on converting hybrid cloud customers to public cloud and adding customers in new industries, such as financial services, telecom, new energy vehicles and healthcare.
? Reiterate Add with a new DCF-based TP of HK$170.
3Q FY3/22 results missed as revenue growth slowed down
3Q FY3/22 revenue growth for China commerce, international commerce, Cainiao, local consumer services, cloud computing, media and entertainment, and innovation initiatives was 7%, 18%, 15%, 27%, 20%, 0% and 63% yoy, respectively (2Q FY3/22 estimated: 32%, 34%, 20%, 23%, 33%, 0% and 37% yoy). The revenue growth slowdown was mainly due to weak macro, more intense competition and various types of support to merchants. Its gross margin was 39.5%, down 6% pts, due to a higher contribution of direct sales business and the growth of Taocaicai, Freshippo and Tmall Supermarket, which led to an increase in logistics costs. Alibaba spent more on user acquisition and engagement; as a result, its sales and marketing expenses ratio increased from 11.5% in 3Q FY3/21 to 15.1% in 3Q FY3/22. Non-GAAP net profit was Rmb44.6bn, down 25% yoy, below our expectation, because of slower-than-expected revenue growth and higher-than-expected sales and marketing expenses. Alibaba will continue its share repurchases while maintaining a strong cash position for business investment.
Robust AAC growth but slower GMV growth
The overall number of annual active consumers (AACs) in 3Q FY3/22 reached 1.28bn; the number in overseas markets was up 6% qoq to 301m, and in the China market, it was up 2.7% qoq to 979m, with AACs in local consumer services up 4.8% qoq to 372m. Taobao Deal was the major contributor of AAC growth, with 13.9% qoq growth to 280m. We expect Alibaba to fulfill its goal of 1bn China AACs in the next quarter, and management guided that international AACs would double in the next few years. Overall GMV growth in the quarter was in the low single-digits because of the weak macro environment and the high base last year. GMV growth in all product categories was positive yoy; FMCG and home furnishing had the highest GMV growth, while growth of apparel and accessories, and consumer electronics was lower. Management said Jan GMV growth remained resilient, at a positive low single-digit level. We expect GMV growth to return to a healthy level when the overall consumption environment improves and the penetration increases in more product categories.
Driving penetration across more product categories
Alibaba’s Taobao Deals and Taocaicai made an important contribution in attracting new consumers and transactions in low-penetration product categories, such as home goods and groceries. Paid orders of Taobao Deals grew over 100% yoy in the quarter and Taocaicai’s GMV grew by 30% qoq. Taocaicai’s UE improved, with higher order density and a more efficient supply chain and delivery network. As the business scale has increased, the focus of these two businesses is changing to optimizing efficiency. With
further improvements in supply chain efficiency, the losses of these two businesses are expected to gradually narrow in the next few quarters.