1QFY23 Results Preview: Pending More Clarity
The company is seeing better-than-expected consumer spending post 618 shopping festival. We remain cautiously optimistic on Alibaba due to relatively weak guidance amid continued merchant support initiatives and ongoing geopolitical tensions weighing on 1QFY23 performance. Alibaba still offers an attractive risk-reward opportunity given the encouraging regulatory tone pending recovery of domestic
consumption post-COVID-19. Maintain BUY. Target price increased to HK$131.00 (US$134.00).
WHAT’S NEW
• Expect trough level in 1QFY23. During a pre-blackout call with Alibaba Group’s (Alibaba) management, the Customer Management Revenue (CMR) segment continuing to outperform the slower commission revenue growth in 1QFY23, due to better demand from merchant branding, weaker GMV growth and delayed logistics due the lockdown from Apr-May 22. However, on hindsight, Alibaba Group (Baba) saw better-than-expected growth, narrowing the gap with JD.com (single digit yoy increase vs 10.3% of JD.com) during the 618 shopping festival. The company did not see a significant decrease in consumer spending post 618 as historical data suggests, given the unfulfilled demand, although the data still points at negative yoy growth. The company did not provide guidance on when the merchant support initiative will end but expects the impact on CMR growth to be minimal. All in all, we expect CMR revenue to decline 8% yoy and a 27% EBITA margin in 1QFY23. The revenue split between commission fees and online ads was 67%/33% prior to the preCOVID-19 period as the company had stopped providing breakdowns for the CMR segment during 1QFY21.
• International business segment continues to drag. The international commerce segment is expected to see negative yoy growth in 1QFY23 due to the supply chain disruption for cross-border e-commerce business (ie AliExpress). This is because the key route to the European market faced sanctions due to the geopolitical tensions between Russia and Ukraine. The management commented that the impact in Jun 22 was worse than in Mar 22. The impact from the geopolitical tensions is also expected to impact Cainiao’s revenue as its international business accounts for >50% of its revenue. Thus, we forecast revenue for international commerce and Cainiao to grow by +2%/+2% respectively.
• We expect the LCS segment to achieve revenue of Rmb10.9b, as the company guided that the local consumer services (LCS) segment may suffer more significantly from slower top-line growth compared to Meituan, given that Ele.me’s core business was mostly located in the Tier-1 cities which had been badly affected by the lockdown measures. In contrast, Meituan had guided 2Q22 revenue growth of 9-10% yoy with operating margin to grow 1ppt yoy as the company scales down user subsidies.
ESSENTIALS
• Still a solid performance from Alicloud. We estimate Alicloud’s revenue at Rmb18b, representing 13% yoy growth in 1QFY23 (vs 1QFY22: +29%). The slower growth guidance was attributed to the: a) slowing growth from China’s internet sector, b) delays in project execution and project signing, and c) Alicloud undertaking business restructuring to shift its customer base from the internet sector to retail and financial services. The company will also streamline its non-profitable business offerings such as content delivery network (CDN) while emphasising more on higher margin products such as AI solutions. We forecast Alicloud’s adjusted EBITA at Rmb238m for 1QFY23, with adjusted EBITA margin of 1%.
• Concern on livestreaming segment. Taobao Live’s GMV was Rmb500b (as at Mar 21, 2022 data has not been disclosed), representing 6.7% of the company’s total GMV of Rmb7,494b as at Mar 21. We reckon that the crackdown on tax evasion against some of the top-ranked livestreamers has meaningful impact against the company’s livestreaming GMV growth as well as user time spent. According to DO News, Viya and Austin Li account for 30% of Taobao Live’s total GMV, and this should translate to 2% of the group’s total GMV. Management mentioned that the overall impact should be limited given the insignificant
GMV contribution by the top-ranked livestreamers. However, it guided that Alibaba will continue to provide support to the mid-rank livestreamers while diversifying its content offerings to mitigate the above impact.
EARNINGS REVISION/RISK
• We keep our 1QFY23 estimates unchanged but lower the subsequent revenue estimate for 2Q/3Q/4QFY23 and full-year FY23 by 2%/1%/1%/1% respectively, pending clearer recovery details from the NBS. We lowered our FY23 net profit forecast by 1%, representing nonGAAP net margin of 13%, down from 16% in FY22.
• Risks: a) Increasing e-commerce competition with PDD and JD.com, and newcomers such as Douyin, and b) increasing merchants’ acquisition channels.
VALUATION/RECOMMENDATION
• Maintain BUY with a higher target price of HK$131.00 (US$134.00), as we roll forward our valuation to FY23. Our target price implies 18x FY23F forward PE against 21% EPS CAGR from FY23-26. The company is currently trading at 16x 12-month forward PE, 1.3SD lower than its historical mean of 22x.
SHARE PRICE CATALYST
• a) Successful listing of Ant Group, b) continued improvement in profitability of its cloud business, and c) continued growth from business expansion, particularly in the Southeast Asia market/lower tier cities.
