Solid 1QFY24; Taobao+Tmall DAU/Time Spend To Be The Key Focus
Alibaba is seeing continuous moderate consumption recovery persist in the near term, leading to high single-digit top-line growth for the June quarter. We reckon revenue growth should recover to double digits in FY24, empowered by new strategies which bode well for steady consumption recovery (reflected by the 618 shopping gala). Alibaba still offers an attractive risk-reward opportunity on the back of its restructuring plan. Maintain BUY. Target price: HK$130.00 (US$130.00).
WHAT’S NEW
• Positive CMR growth performance in 1QFY24 stemming from 618 shopping festival. Alibaba Group’s (Alibaba) 4QFY23 total revenue is estimated to deliver an accelerated growth of 8% yoy, compared with 2% yoy in 4QFY23. We estimate customer management revenue (CMR) to recover to positive growth of 8% yoy in 1QFY24 from the 5% yoy decline in 4QFY23. EBITA margin is projected to grow 13% yoy to Rmb37b, translating to adjusted EBITA margin of 16%. The gap between CMR growth and GMV is gradually closing due to a lower order cancellation rate. Looking ahead, the company will focus on user experience instead of GMV growth under the challenging competitive environment. It has been posting more short videos on the app and is targeting to build a shopping and lifestyle venue, while Taobao+Tmall’s top KPIs will be on daily active consumers and time spent on a three-year investment strategy.
• AliCloud: Paving the way for sustainable growth trajectory. We estimate cloud revenue to deliver accelerated growth of 5%/7% yoy in 1QFY24/FY24 (vs 4QFY23: -2% yoy). The price reduction of some AliCloud products lowered the average ARPU while the impact of Tiktok will be gone after the June quarter. We expect public cloud will continue to see solid double-digit growth. In 1QFY24, AliCloud’s EBITA margin is guided to remain stable at 2%. We think the core growth pillars of the cloud segment are the increasing adoption of public cloud services and the implementation of high-quality hybrid cloud projects.
• Alibaba mulls selling shares to Ant for share repurchase plan of nearly Rmb567.1b. On 9 Jul 23, according to an announcement on the HKEX, Alibaba stated that Ant Group will convene a shareholder meeting to approve a proposal for Ant Group to repurchase up to 7.6% of its shares. The proposed repurchase price represents an estimated valuation of approximately Rmb567b (approximately US$78.5b) for Ant Group. It is understood that the repurchased shares will be transferred to Ant Group’s employee incentive plan. Alibaba is considering whether to participate in the proposed share repurchase. We believe the end of the rectification implies a normalized regulatory environment in the Internet space. As a result, we expect this will facilitate Ant Group license application and subsequently lead to IPO listing.
ESSENTIALS
• 1QFY24 outlook for DME and other segments. Management guided for the revenue of digital media & entertainment (DME) to grow 6% yoy to Rmb7.6b in 1QFY24. Cainiao will deliver solid revenue growth of 20% to Rmb14.6b due to Aliexpress’ exposure to international operations and change in revenue recognition. China’s wholesale, international retail and international wholesale are expected to deliver decelerated growths of 4%/29%/6% yoy respectively compared with 26%/-3%/12% in the same period last year.
• CMR growth momentum spurred by resilient 618 campaign. We believe the strategic investments and efforts such as stepping up investment in content, price competitiveness and user experience have started to generate positive spill-over effects. Despite the alleviated consumption recovery, Alibaba’s performance in the 618 promotional event still remain intact. According to QuestMobile, daily active users (DAU) of the Taobao app ramped up 7.6% yoy in Apr-May 23. During the 618 campaign, gross transaction value (GTV) on Taobao and Tmall grew yoy, paving the growth trajectory for Alibaba’s GMV and CMR in 2H23.
• AliCloud’s launch of Tongyi Wanxiang at WAIC. Alibaba Cloud has introduced Tongyi Wanxiang, an AI Painting and Creation Big Model, at the 2023 World Artificial Intelligence Conference (WAIC). This model assists in image creation and has potential applications in various fields such as art design, e-commerce, gaming and cultural industries. Tongyi Wanxiang’s initial release includes three main capabilities: a) the ability to generate various styles of images based on textual input, b) the generation of creative AI artworks with similar content and style to any uploaded image, and c) pioneering image style transfer, enabling users to automatically transform their original image into a specified style.
• Potential financial impact from Ant. Alibaba owns 33% of Ant Group and records its share of profit under equity investees. We estimate the Rmb7.1b fine will have a small financial impact on Alibaba compared to Ant which recorded Rmb9.6b in March quarter profit. In our SOTP valuation, we value Ant at HK$206b to Alibaba or c.7% of our BABA valuation.
EARNINGS REVISION/RISK
• We trimmed our revenue estimates by 2%/1% for 1QFY24/FY24 respectively. We forecast 9%/9% revenue growth and 12%/6% yoy net profit growth in 1QFY24/FY24. Our 1QFY24/FY24 net non-GAAP net margin forecasts are 16%/17% vs 17% in FY23.
• Risks. a) Intensified competition among e-commerce peers, and b) continued investment in new initiatives may drag on margin.
VALUATION/RECOMMENDATION
• Maintain BUY with a lower target price of HK$130.00 (US$130.00). Alibaba Group and each of its holdcos are valued at a steep discount and with ex-cash PE of 8x, with core commerce Taobao + Tmall businesses at 9x FY24F PE. Alibaba is trading at 10.9x 12- month forward PE, 1.7SD below its historical mean of 23x against 16% EPS CAGR from FY23-26F.
SHARE PRICE CATALYST
• a) New retail segment to see profits and economies of scale, b) continued strong growth in international business, c) potential listing of Ant Financial, and d) incoming spin-off events over the next 6-12 months.
