Alibaba: Profit loss is just a paper tiger. 'Competitive Deadlock' is the fatal blow.

$ Alibaba.US announced the financial report for the second quarter of the 2023 fiscal year ending September, released on the evening of November 17, Beijing time: Alibaba's revenue this quarter is CNY 207.2 billion, a growth of 3% from the same period last year, slightly lower than the expected CNY 208.9 billion.

As for the profit, many people might have been scared by the media's push of a net loss of CNY 22.5 billion, but the actual profit is very good. However, the issues reflected in this financial report remain very serious:

1) Can it really lose more than CNY 20 billion? The so-called CNY 22.5 billion loss is due to the market value decline of the listed company invested by Alibaba-SW.HK, which is an unrealized loss. This doesn't mean much for an e-commerce company like Alibaba, and the profit number has been unstable because Alibaba has invested in many assets. Dolphin Analyst never looks at this profit number but rather focuses on adjusted profit performance.

2) Profit actually exceeded expectations: The most important adjusted profit (excluding share-based compensation expenses, amortization expenses, and share donation expenses) for this quarter is CNY 36.2 billion, significantly exceeding the market's expected CNY 33.4 billion. In the case of weak revenue, this impressive profit performance is achieved by hard-core cost reduction and efficiency improvement. The sales and advertising expenses, including user subsidies, decreased by 22% year-on-year.

3) Taobao and Tmall are fatal weaknesses: However, the better-than-expected profit is perhaps the only bright spot that the company can present. The real problem with Alibaba is hidden behind the weak revenue-this time, the poor performance of Taobao and Tmall's customer management income is the main reason for the revenue decline, which fell by 6.5% year-on-year, much larger than the expected -3% to -4%. Correspondingly, the GMV of Taobao and Tmall still showed a single-digit decline.

4) Alibaba Cloud: like an arrow penetrating the clouds with declining growth. After emerging from the epidemic last year, Alibaba Cloud's growth rate has further decreased from 10% in the previous quarter to 4%. The decline in customers in the Internet industry is too severe, and the growth of non-Internet customers is relatively slow, which leads to a direct deceleration of the growth business.

Dolphin Analyst's Opinion:

Overall, Alibaba's performance is basically consistent with the previous quarter, with profit exceeding expectations. This is mainly due to the decline in stock prices, low share-based compensation expenses, and significant reduction in sales and advertising expenses brought by various subsidies reductions. In addition, there is still considerable room for cost reduction in the next quarter, because last year at this time, Taobao and Tmall were still in heavy subsidies. Furthermore, the space for cutting overhead costs will be released. Therefore, it is not surprising that profits exceed expectations next quarter.

Dolphin Analyst noted that the market reacted positively to this financial report, but besides the profit, there is no reason to be very pleased with Alibaba's marginal changes in the two key revenue indicators this quarter. "The Weak Camel"

1) "Weak" Taobao and Tmall

As the number of users has peaked and GMV growth has stalled, Alibaba no longer discloses these two critical indicators, making customer management revenue for domestic retail ecommerce - Taobao and Tmall - the focus of the market. This number, which is basically stable with a slight decline in monetization rate, can be regarded as a "replacement" indicator for observing Taobao and Tmall's GMV growth and Alibaba's market share trend, which is currently one of Alibaba's biggest challenges. For investors, Alibaba can only have hope if its market share stabilizes or even recovers.

For example, Alibaba's performance in Q3 this year was disappointing as the customer management revenue (CMR) growth rate for Taobao and Tmall was -6.5%, with only 66.5 billion in revenue for this high-margin business, while the YoY growth rate of the overall online retail industry in China was about +7%.

This -7% YoY performance (compared to -10% in the previous quarter under the impact of the epidemic) corresponds to a contraction in GMV of approximately 5% or less for Taobao and Tmall (officially stated as: excluding unpaid orders, Taobao and Tmall GMV shrank by a low single-digit percentage YoY). In other words, although the conversion rate (including commission and advertising) of Alibaba's domestic platforms has decreased slightly compared to the previous quarter, its monetization ability is still declining slightly compared to last year's.

2) The new business "Save, Save, Save", profits are squeezed out

Due to the high profitability of domestic platform e-commerce, Alibaba's China Retail (including self-operated e-commerce, new retail business, and wholesale e-commerce platform 1688.com) released profits that far exceeded market expectations after various cost-saving measures were implemented, especially after reducing subsidies and cutting sales expenses.

In this quarter, China Retail's adjusted EBITA profit, excluding stock-based compensation and amortization expenses, reached 44 billion yuan, with a profit margin of 32%, showing significant improvement both YoY and QoQ.

This is the result of meticulous planning by Taote and Taocaicai. Taote has shifted its focus from acquiring new users to cultivating user stickiness, while Taocaicai has reduced its user subsidies and carefully calculated every delivery fee, resulting in a surplus of funds that are often reflected in the significant decline in sales expenses.

As domestic platform e-commerce is no longer seeking market share regardless of investment, Alibaba's overall adjusted EBITA profit after adjustments was 36.2 billion yuan. Despite lower-than-expected revenue on its core platform, profits significantly exceeded market expectations of 33.4 billion yuan, with a profit margin of 17.5%, up 2 percentage points from the previous quarter.

Furthermore, behind this performance, apart from the slimming movement of platform e-commerce, the group's other businesses can also see Alibaba's clear efforts to streamline: for example, the digital entertainment business only lost less than 200 million in this quarter, and the profit margin of cloud computing continued to rise, and even Cainiao made its debut in the black after years of losses.

Furthermore, except for China Retail, other profits (adjusted EBITA) have also improved across the board:

a. For the first time this quarter, Cainiao turned a profit of 125 million yuan, with a profit margin of 1%;

b. International Retail reduced its losses from the single-quarter loss of 15-30 billion yuan in the previous four quarters to 1 billion yuan with a loss rate lowered to 6%. c. Even though this single business sector has lost 3.5 billion RMB more than the previous quarter, totaling 35 billion RMB, the loss rate has improved to 27%, especially after the post-pandemic period, as Ele.me's unit economics still remain positive by reducing user subsidies and optimizing rider costs. Dolphin Analyst estimates that this sector's overall loss of several billion RMB is mainly due to high subsidies for Gaode's taxi business.

II. Self-operation: All thanks to HEMA's support

The domestic heavy asset retail business mainly includes HEMA, Gaoxin Retail, Yintai, Cat Super Self-operation, Tmall Self-operation, Koala, and Ali Health's self-operation.

The revenue of the domestic heavy asset retail business is still 64.7 billion RMB this quarter, and growth is further slowing down after the post-pandemic period in Shanghai. Since Gaoxin has shrunk by about 2%, Dolphin Analyst estimates that the main growth contribution should come from HEMA. According to HEMA's revenue growth of around 10-15%, Dolphin Analyst implies that the growth rate of Ali's self-operated e-commerce (Yintai, Cat Super Self-operation, Tmall Self-operation, Koala) is not particularly smooth.

Fortunately, HEMA's performance looks good: HEMA's online order ratio still exceeds 65%, and the vast majority of HEMA stores that have been open for more than 12 months have achieved positive cash flow.

III. Saving money is like squeezing water from a sponge, as long as you're willing, you can always make it

Since spending money is no longer extravagant, Alibaba's Non-GAAP gross profit, excluding equity incentives, was 77.2 billion RMB this quarter, a year-on-year growth of 5%. Under the circumstances of reducing gross profit margins and increasing proportions of low gross profit self-operated income, the monthly profit margin remained generally stable on a month-on-month basis, improved year-on-year, and clearly exceeded market expectations. This should be attributed to self-operated businesses, such as HEMA's improvement of gross profit margin.

On the expense side, Alibaba spends generously, but it still saves quite a bit:

1. Sales and marketing expenses were 21.4 billion RMB, a year-on-year decline of 22%, compared to a slight decline of 6% in the previous quarter. The year-on-year increase was as high as 86% on the same period last year. User subsidies and marketing should have been saved relatively well.

2. R&D expenses were 11.3 billion RMB, a year-on-year increase of 4.3%, a little more than 3% of the revenue growth. As a technology company, there is less room for cost reduction in this area.

3. Administrative expenses grew relatively fast, with 8.7 billion RMB, a year-on-year increase of 27%. This increase rate was basically the same as last quarter, and Dolphin Analyst estimates that this should be related to severance pay for layoffs. After Alibaba's layoff of nearly 10,000 people in June, the company had 243,900 employees at the end of September, and nearly 2,000 people were laid off again, which is estimated to be almost complete.

In this way, Alibaba drastically reduced its sales expenses when its revenue failed to meet market expectations, and achieved an adjusted EBITA profit of 36.2 billion, far exceeding the market expectation of 33.4 billion, which was the most closely watched profit indicator by the market.

The adjusted net profit was 33.8 billion, also greatly exceeding the market expectation of 30.4 billion. After a year of nearly 30% contraction, net profit growth finally returned to positive growth, increasing by 19% year-on-year this quarter.

After reviewing retail and Alibaba's overall performance, let's take a look at the performance of other highly anticipated businesses of Alibaba:

1. Alibaba Cloud: A piercing arrow with declining growth

As the original star business, Alibaba Cloud was like a piercing arrow with declining growth this quarter, unable to stop on the slide of growth. Its revenue this quarter was 20.8 billion, an increase of only 4% year-on-year.

Specifically, non-Internet business revenue increased by 28% year-on-year, accounting for 58% of cloud revenue; but Internet business revenue decreased by 18%, largely due to the impact of TikTok's gradual departure from Alibaba Cloud, the clearing of educational clients, and the very weak cloud demand in the entire Internet industry.

2. Local Services: One of the few growing businesses

The revenue of local life services (to home-Ele.me; to store - Gaode, Fliggy) was 13.1 billion, an increase of 21% year-on-year. After the epidemic eased, the total orders of this business increased by 5% year-on-year, driven by orders from Gaode, while the growth in average revenue per order was due to a significant reduction in user subsidies. The user subsidies of Ele.me are calculated as a deduction from revenue, and the unit economics of Ele.me is still positive after it recovered from the extreme situation during the epidemic.

It can be reasonably inferred that the takeaway market has entered a rational competition state.

3. Cultural and Entertainment Business is close to profitability

Alibaba's large cultural and entertainment business has finally seen hope of turning losses around: This quarter, revenue of Alibaba's large cultural and entertainment business was 8.4 billion, showing a slight growth trend. The pusher is still the revenue turnaround of Alibaba Pictures and Youku, while the game revenue is shrinking.

The most commendable thing is that the loss rate has also narrowed after continued cautious content investment. The loss rate this quarter was only 1%, and profitability is within reach.

4. Ant profits shrink dramatically

"This quarter, Alibaba's equity method income from Ant has dropped to only 2.4 billion yuan. According to the 33% shareholding proportion, Ant's profit should only be 7.2 billion yuan, a year-over-year decrease of 64%. This is not just a big drop – it's downright disastrous. In addition to Ant's own operating profit shrinking, there is also a decline in the fair value of Ant's invested assets."

"In summary: the answer is failing."

When the last financial report was released, the stock price of Alibaba was still hovering around 90 yuan. Even after the profit inflection point was clarified, Alibaba's stock price is still declining.

This shows that the market is not satisfied with Alibaba's profit release by simply cutting costs and reducing advertising and user subsidies; after all, the sustainability of profit release without revenue is a big problem.

Therefore, as Dolphin Analyst mentioned before, truly undervalued companies need to continuously deliver "profit surprises" that exceed market expectations on profit, and the most crucial factor is GMV, as well as the gradual stabilization of alternative indicators such as customer management revenue while entering the e-commerce sector of Douyin, and the ability to maintain its position.

"However, in answering the question of core GMV and customer management revenue this quarter, the 7% decrease is significantly higher than the market's expectations – so this answer is failing."

For more of Dolphin Analyst's related articles, please see:

Financial Report Season

August 5, 2022 Financial Report Analysis: "Alibaba Playing with Fire as It Loses Its Way" (Chinese) [https://longbridgeapp.com/topics/3251434]

August 5, 2022 Financial Report Conference Call Notes: "Without User Growth, Alibaba's Focus is on Wallet Share, Seeking Quality and Efficiency" (Chinese) [https://longbridgeapp.com/topics/3252187]

May 26, 2022 Conference Call: "Sustainable Operations and User Expectations are the Keys to Recovery" (Chinese) [https://longbridgeapp.com/topics/2672177?channel=t2672177&invite-code=032064]

May 26, 2022 Financial Report Review: "After a 70% Plunge, Has Alibaba Finally Seen the Light?" (Chinese) [https://longbridgeapp.com/topics/2671459?channel=t2671459&invite-code=032064] On February 25, 2022, Telephone Meeting "Six Thousand Words Summary: Alibaba Underestimated, Repurchase and Spin-off Will be Done Besides Hard Work"

On February 24, 2022, Financial Report Review "Is Alibaba still in the Storm? Don't Pick Out Such A Cheap Cabbage"

On November 18, 2021, Financial Report Review "Has Alibaba's Mobile Internet Era Come to An End?"

On November 18, 2021, Telephone Meeting "Alibaba Struggles to Explain Its Great Ambitions Behind The Dramatic Drop (Minutes)"

On August 4, 2021, Telephone Meeting "After Listening to Alibaba's Conference, E-commerce May Need to Adjust for a While"

On August 3, 2021, Financial Report Review "Alibaba: Still Powerful, Lackluster Performance"

On May 13, 2021, Financial Report Review "New Alibaba After Strict Regulatory Measures: Battle-Ready With Full Force"

On February 3, 2021, Telephone Meeting "An Article to Understand the Core Content of Alibaba's Telephone Conference"

On February 3, 2021, Financial Report Review "Dolphin Investment Research| Alibaba Q4 E-commerce is Not Bad, Not as Fragile as Imagined"

On May 12, 2021, Financial Report Preview "Reflection After Regulatory Storm: Alibaba's Strategic Investment is Stingy, Can it Reverse the Trend in the Next Five Years?"

Depth:

September 22, 2022 "Alibaba, Meituan, and Pinduoduo, All Acknowledge Their Fate? Still Requires Great Efforts" 2022 年 4 月 27 日"Alibaba vs Pinduoduo: After the bloody battle, only coexistence left?"

2022 年 4 月 13 日"As the cycle "decays", how much value is left for Alibaba, Tencent, etc.? "

September 22, 2021 "Has the crazy Alibaba, Meituan, and Pinduoduo left any real barriers after the e-commerce traffic melee? "

April 16, 2021 "2021, the 'total war' of internet e-commerce "

Hot Topic:

August 12, 2022 "Has the SoftBank-Alibaba relationship come to an end, leaving only each to go their own way? "

February 16, 2022 "After the B and C businesses switch hands, the new Alibaba finally takes the 'difficult but correct' step "

January 17, 2022 "Is retail 'winter' particularly cold? "

November 29, 2021 "Pay attention to this quiet change about Alibaba! "

December 15, 2021 "The peak season in the peak month, online retail is 'just okay' "

November 12, 2021 "Another Double Eleven, with a different outcome"

October 18, 2021 "August was too poor due to the epidemic, and online retail was 'passable' in September " On September 22, 2021, "Taobao Live's true aggregation entrance has arrived."

On September 16, 2021, "Updating the recent situation of community group buying with the help of Taocaicai."

On August 9, 2021, "Talking about the organizational vitality of the Internet giants."

On April 12, 2021, "After the sky-high fine, Alibaba's stock price soared. What did Alibaba say to investors?"

On April 10, 2021, "With the landing of the sky-high fine, will Alibaba rise from the ground?"

Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure