GMV growth has improved since June
- Alibaba announced that revenue growth remained flattish yoy at Rmb205.6bn in 1Q23, showing its fairly resilient business profile even with the serious Covid impact.
- Non-GAAP net profit dropped by 30% yoy to Rmb30.3bn in 1Q23, in line with our expectation.
- Management said (in the investor conference) overall GMV growth started to improve in June, with better recovery in July. We expect total revenue growth of 4% yoy in 2Q23F and 8.8% in 2H23F.
- Reiterate Add with an unchanged DCF-based TP of HK$151.
1Q23 results largely in line
In 1Q23, revenue for China commerce, international commerce, local consumer services, Cainiao, cloud and digital medical achieved -1%, 2%, 5%, 5%, 10% and -10% yoy growth, respectively, leading to yoy flattish total revenue growth, slightly better than our expectation. In the China commerce segment, customer management revenue dropped by 10% yoy, due to large order cancelation because of logistics problems caused by the Covid situation. But direct sales revenue from Freshippo, Alibaba Health, Sun Art, etc. grew by 8% yoy in 1Q23. Freshippo and Sun Art played an important role in supplying daily necessities to people in the locked-down areas. The online sales contribution of Freshippo and Sun Art reached 68% and 36% in 1Q23. Alibaba’s GPM dropped by 2.8ppt yoy to 36.9%, and its OPM dropped by 8ppt yoy to 12.1% in 1Q23, mainly because of the increased revenue contribution from direct sales with a lower margin and a higher admin expenses ratio.
Cost-saving measures will continue in the following quarters
Operating profit and adjusted EBITA dropped by 19% and 18% yoy to Rmb24.9bn and Rmb34.4bn, respectively, in 1Q23. Alibaba improved its cost control and became more cautious about new business investment in 1Q23. The loss from Taocaicai expanded slightly yoy, but fell qoq. The losses from Taobao Deal and Freshippo narrowed on both a yoy and qoq basis. Management said (in the investor conference) it will continue to save costs and improve efficiency in the rest of the year, so we expect the margins to improve gradually. Alibaba has changed its focus from user acquisition to improving user segmentation and increasing its share of the customer wallet.
Reiterate Add with an unchanged DCF-based TP of HK$151
We maintain our earnings forecasts for Alibaba and reiterate our Add rating. We recommend investors revisit Alibaba because of its attractive valuation, stabilizing fundamentals, and reduced policy overhang. Our TP is derived from DCF valuation (WACC: 10.3% and g: 3%). Downside risks includes weak economy may reduce the consumer’s purchase frequency and ticket size on the ecommerce retail and wholesale.
Ant Finance (Unlisted) contributed US$555m in net profit to Alibaba in 1Q23, implying that Ant Finance had net profit of Rmb11bn in the 1Q22 calendar year, based on Alibaba’s 33% shareholding. Alibaba recently announced that it will apply for a primary listing on the HK stock exchange, along with its New York listing. The purpose of this action is to allow more investors to invest in Alibaba stock. Management expects the whole process to be completed before the end of this year. After completion, Alibaba’s HK shares will be eligible for inclusion in HK and mainland China’s Stock Connect, allowing more China domestic investors to buy Alibaba shares. Management said (in the investor conference) it has observed that many ADR holders have exchanged their ADRs for Alibaba’s HK stocks.