Alibaba (BABA.N) 1Q24FY | Initial results achieved in strategic transformation

This financial report is Alibaba's first financial report after the "1+6+N" architecture adjustment, and adjustments have been made in the disclosure of the financial statements to reflect the high independence of the operations of various business departments.

1) Taotian Group: divided into China Retail Business (customer management business and direct sales and other businesses) and China Wholesale Business (1688 wholesale). Customer management business includes domestic e-commerce retail platforms such as Taobao and Tmall, while direct sales and other businesses mainly come from Tmall Supermarket and Tmall International; 2) Alibaba International Digital Group: including International Retail AliExpress, Lazada and Trendyol, as well as International Wholesale Alibaba, which is basically the same as before; 3) Local Life Group: mainly including Hungry Mai and Gao De; 4) Cainiao Group; 5) Intelligent Cloud Group: Alibaba Cloud+DingTalk; 6) Entertainment Group: Youku and Alibaba Pictures; 7) All others: Gao Xin, Hema, Alibaba Health, Yintai (in the domestic retail self operation under the original Chinese commercial); Intelligent information (UC and quark, in the original entertainment business), Flying Pig (in the original local living business).

The biggest highlight of this quarter's financial report is the domestic e-commerce business. CMR customer management revenue has performed well, increasing by 10% year-on-year, exceeding market expectations of 6.7%, benefiting from the overall improvement of GMV and increased advertising willingness. Due to the low base impact caused by the Shanghai epidemic last year, the market had early expectations for a year-on-year rebound in this quarter. According to data from the National Bureau of Statistics, the total retail sales of consumer goods in China increased by 18%/13%/3.1% year-on-year from April to June 2023, with a growth rate of 5.6% in the second quarter compared to the same period in 2021. Alibaba's advantageous clothing and cosmetics sectors have rebounded significantly, with a year-on-year increase of 24.3%/11.7%/4.8% in the total retail sales of cosmetics in April/May/June, and a year-on-year increase of 32.4%/17.6%/6.9% in clothing, shoes, hats, and textiles in April/May/June.

From a data perspective, the CMR growth in this quarter is still weaker than the overall retail market and e-commerce platform growth, and live streaming e-commerce continues to impact traditional e-commerce. In the second quarter, online retail continued to outperform the overall retail market growth, with online retail sales of physical goods increasing by+22%/+11%/+7% year-on-year. From the data of "618", the total online commodity trading volume of "618" this year reached 798.7 billion yuan, a year-on-year increase of 14.77%, and the growth rate has slowed down, an increase of 38% compared to 2021; The year-on-year growth rate of shelf e-commerce only slightly exceeded 5%, while the sales of live streaming e-commerce increased by 27.6% to 184.4 billion yuan.

The exceeding of expectations in e-commerce business mainly reflects the initial results of Alibaba's e-commerce transformation towards cost-effectiveness strategy in the increasingly obvious trend of consumer parity. During the quarter, Alibaba vigorously launched promotional activities such as Tmall Mother's Day, Import Carnival, 618 Zhongda Promotion, and Juhuasuan 66 Juhui, introducing a large number of new merchants. In Q2, Tmall's new merchants increased by 75% year-on-year, and a considerable portion of them quickly became new forces in the price power battle. The price power battle will still be a key investment project in the future. From the results, it can be seen that the low-priced transformation has played a favorable role in competing for sinking market traffic, attracting more sinking users, young users, and elderly users. From the perspective of sales expenses, Non GAAP's sales and marketing expenses increased by 10% year-on-year, exceeding market expectations, accounting for 12% of revenue. The EBITDA margin of Taotian business has slightly decreased from 44% in the same period last year to 43% (according to the new disclosure criteria), partially reflecting the impact of promotions and price wars, but the overall profit margin has not declined significantly currently.

The e-commerce industry is already a stock market, and competition is becoming increasingly fierce. The traffic competition on Taotian may mean a decrease in traffic from other e-commerce competitors. According to Quest Mobile data, the average daily active user growth of Taobao app in the second quarter was leading on a month on month basis, followed by JD. According to financial reports and management conference calls, the average daily active user (DAU) of Taobao app increased by 6.5% year-on-year in June, while the DAU growth rate in July exceeded 7%, continuing to improve month on month. The increase in user scale is expected to attract more merchants and bring about transaction growth.

The performance of international e-commerce business far exceeded market expectations, with overseas retail businesses such as Lazada, Aliexpress, and Trendyol achieving a 60% revenue growth this quarter, far exceeding market expectations of 32%. The overall order and cash flow rate of retail business have all improved. On the premise that many negative factors in international e-commerce have subsided, the market has expected an accelerated rebound in international e-commerce in the second quarter, but the actual performance still far exceeds market expectations. The overall order growth of international retail commerce was about 25% year-on-year, and the order growth was weaker than the overall revenue growth. It is speculated that more of it came from the contribution of liquidity and ARPU.

1) AliExpress: The impact of European VAT value-added tax began in July 2021, and since the start of this quarter's financial report, the year-on-year negative impact has been eliminated. The new business AliExpress Choice channel received good response after its launch in Q1 2023. Starting from the end of February 2023, AliExpress has successively launched Choice channels overseas, focusing on cost-effective products and more determined logistics delivery times. AE Choice continued to contribute to high growth in the second quarter, with the improvement of logistics experience helping to attract customers. Amid high inflation, overseas consumers' demand for cost-effective consumer goods has increased.2) Trendyol: This quarter, Trendyol achieved positive operating results for the first time. The exchange rate of Türkiye tends to be stable. Since March, the negative impact of the earthquake on Trendyol has gradually disappeared. It has once again increased its weight in the European market. On May 3, it began to expand Azerbaijan's new market, which contributes to Trendyol's income growth.3) Lazada: This quarter recorded a double-digit year-on-year growth in orders, and its core competitor Shopee in Southeast Asia has shifted its development strategy from focusing on revenue to focusing on profit. In the short term, the competitive landscape has slowed down. Lazada provides merchants with more value-added services to continuously improve their monetization rate.Alibaba International E-commerce continued to narrow its losses in this quarter as scheduled, with an adjusted EBITA loss of 420 million yuan (58 million US dollars), compared to a loss of 1.38 billion yuan in the same period of 2022.

The total revenue of Cloud Intelligence Group (adjusted to include revenue from customers within the Alibaba ecosystem in this quarter) was RMB 25.123 billion ($3.465 billion), a year-on-year increase of 4%, an improvement from -2% in the previous quarter, but overall it is still relatively weak. The cloud computing business is mainly affected by the cautious IT spending of enterprises, the decline in online demand for remote work and online education after the epidemic, and the loss of top internet customers. After adjustment, EBITA increased by 106% year-on-year to 387 million, mainly due to the reduction in host hosting and bandwidth costs caused by the return to normal usage volumn of DingTalk compared to the same period last year.

The fierce competition in cloud computing has intensified. This financial report reflects the results of Alibaba's price reduction in April. The price reduction in the short term has led to a decrease in the revenue generation ability of new order businesses, which is beneficial for expanding user scale and seizing market share in the medium to long term.The rapid development of AI is expected to bring incremental demand for cloud computing. The open-source platform ModelScope provides a large number of machine learning and deep learning models, tools, and services. As of July 2023, it has hosted over 1000 AI models, with a cumulative model download volume of over 45 million. In the future, Alibaba's development direction in AI will focus on open source of large models. In the short term, monetization still needs to wait. Alibaba's goal is to enable more users to use Alibaba's basic inclusive models or deploy large models on Alibaba Cloud, bringing about an increase in computing power demand with the increase in user volume.

Cainiao: Cainiao Logistics' revenue has been adjusted this quarter to include two parts: internal and external customers of the group. The logistics timeliness has been enhanced to help attract users. Cainiao Group's revenue for the quarter was RMB 23.164 billion ($3.194 billion), an increase of 34% compared to RMB 17.292 billion in the same period of 2022. The correlation between Cainiao business revenue and e-commerce is high, mainly contributed by the revenue growth of international logistics fulfillment solution services and domestic consumer logistics services. This quarter, Cainiao provided lower cost and faster delivery services to merchants supporting AliExpress Choice, including the recently launched "Global Five Day Delivery" flagship service. At the same time, Cainiao Wrapping provides "half day delivery" and "next day delivery" services to help C-end users expand.Local life: The impact of last year's epidemic has had a significant impact on local life that relies on offline performance. In this quarter, the local life group's revenue increased by 30% year-on-year to RMB 14.45 billion ($1.993 billion), with an adjusted EBITA loss of RMB 1.982 billion ($273 million). In the same period of 2022, the loss was RMB 2.834 billion, a significant reduction in losses. Driven by the strong revenue growth of the Hungry and High Tech businesses, the local lifestyle group's order growth exceeded 35% year-on-year. The unit economic benefits of each order continue to record positive numbers, and the order density continues to increase, resulting in a continuous narrowing of losses year-on-year. Benefiting from the strong recovery of travel and travel demand, Gaode's order growth has rapidly increased year-on-year.Alibaba Entertainment: Thanks to the restoration of entertainment consumption scenes such as cinemas and concerts, as well as the broadcasting of some popular content on Youku, the Alibaba entertainment sector achieved 36% revenue growth this quarter. Adjusted EBITA was a profit of RMB 63 million (USD 09 million), resulting in a loss of RMB 907 million in the same period of 2022.

Overall, against the backdrop that the market has become less sensitive to the profit growth brought about by cost reduction and efficiency enhancement, Alibaba's substantial revenue growth exceeding expectations in the current quarter was gratifying to the market. The domestic and international e-commerce business exceeded expectations, reflecting that in the environment of white-hot competition in the e-commerce landscape, Alibaba has successfully achieved the attraction and retention of new users with the help of the price-performance strategy shift to alleviate the market's previous concerns about the decline in competitiveness in the market, and Alibaba's fundamentals are still stable, which is conducive to the market's sentiment boost. At the same time, after the "1+6+N" structure change, each business independent accounting, the loss reduction of each business unit is conducive to the market segment valuation. At the same time, the ant group penalty landing marks the platform economic risk clearing, the future if the policy favor landing and cloud business, Cainiao business, Hema and many other business disclosure spin-off listing progress, will form the catalyst for the stock price.