Company Reports

We now estimate Alibaba Group's revenue and adjusted EBITA for the fourth quarter of fiscal 2024 ending March to rise 5% and decline 3% year over year, respectively, compared with our previous forecasts of 3% and 38% increase. We raised our revenue estimate as we project customer management revenue—marketing services and commissions on transactions—to grow faster than expected, thanks to less market share loss than anticipated. On the other hand, the lower adjusted EBITA is attributed to substantially larger expansion expenses in the fast-growing Alibaba International Digital Commerce, or AIDC, and Cainiao Smart Logistics, or Cainiao. Management wants to increase investments in Cainiao to improve AIDC's logistics services. In addition, Alibaba increased compensation to retain Cainiao's employees while we expect cost savings in local services and digital media and entertainment to lag our forecast. As a result, we reduced Alibaba's adjusted EBITA during fiscal 2024-26 by 6%-8%. We maintained our fair value estimate at USD 94 per ADS (HKD 91 per share) as the effect of lower earnings is offset by adding back higher impairment in fiscal 2024 to our free cash flow calculation and lower share count. We think Alibaba continues to be undervalued. Its December quarter net cash, including short-term investments, accounts for 67% of its market cap as of the US close on April 11.

We maintain wide-moat Alibaba Group Holding, or Alibaba‘s, fair value estimate at USD 94 per ADS and HKD 91 per share after 1) the withdrawal of the Hong Kong IPO application of Alibaba’s logistics subsidiary Cainiao Smart Logistics Network; and 2) Alibaba’s offer to purchase the 36.3% stake held by Cainiao's minority shareholders for total consideration of up to USD 3.75 billion. We think this consideration is priced at the high end of the valuation range due to the need to maintain the morale of Cainiao’s employees, who are also shareholders. The consideration only represents 4% of Alibaba’s cash, cash equivalents, short-term investments, and equity securities and other investments in the current assets as of Dec. 31, 2023. Cainiao’s December-quarter adjusted EBITA accounted for only 3% of Alibaba’s total adjusted EBITA. Therefore, purchasing a minority stake in Cainiao won’t have a meaningful impact on Alibaba’s balance sheet and earnings.

Alibaba is losing market share to PDD Holdings, or PDD, and Douyin in the China e-commerce business and we don't see a quick fix in the near term. Alibaba's number of annual active consumers in the China retail marketplace was surpassed by PDD in the fiscal year ended March 2021. Meanwhile, Douyin has gained share from Alibaba especially in the beauty and apparel categories in recent years, and entered the traditional search-based e-commerce space, competing directly with Alibaba. The number of annual active consumers at Alibaba is close to the ceiling in China. Alibaba's gross merchandise volume to China's online retail sales of goods ratio was 62% in the year ended March 2023 at Alibaba, down from 72% in the year-ago period. We believe Alibaba's marketplace monetization rates will decline in the long run, due to mix-shift toward Taobao which has lower take rate compared with Tmall, and more competition.

Alibaba is losing market share to PDD Holdings, or PDD, and Douyin in the China e-commerce business and we don't see a quick fix in the near term. Alibaba's number of annual active consumers in the China retail marketplace was surpassed by PDD in the fiscal year ended March 2021. Meanwhile, Douyin has gained share from Alibaba especially in the beauty and apparel categories in recent years, and entered the traditional search-based e-commerce space, competing directly with Alibaba. The number of annual active consumers at Alibaba is close to the ceiling in China. Alibaba's gross merchandise volume to China's online retail sales of goods ratio was 62% in the year ended March 2023 at Alibaba, down from 72% in the year-ago period. We believe Alibaba's marketplace monetization rates will decline in the long run, due to mix-shift toward Taobao which has lower take rate compared with Tmall, and more competition.

We like Alibaba upsizing its share-repurchase program until the end of March 2027 to USD 35.3 billion, amounting to 18% of its market cap as of Feb. 7. Alibaba is committed to reducing its outstanding shares by at least 3% annually for the next three fiscal years. However, as cash and investments under current assets accounted for 44% of its market cap, we hope to see share repurchase at a faster pace and greater magnitude. While we agree with the firm's emphasis in driving market share growth at domestic and international e-commerce, and in cloud, we think this will come at the expense of margin erosion. Alibaba is committed to selling noncore assets and increasing return on invested capital to double digits over the next few years. This is longer than we hope, as selling assets amid weak market conditions is difficult.

We are surprised that Alibaba will no longer fully spin off the Cloud Intelligence Group and we see larger uncertainty around the size and timeline of capital returns to shareholders. We leave Alibaba’s forecasts and fair value estimate unchanged. Although Alibaba is still undervalued, we now prefer JD.com over Alibaba as we think the former is more likely to turn around next year. Alibaba de-emphasizes the importance of gross merchandise volume, or GMV, which leads us to think Alibaba is not confident about its GMV growth in the future. Meanwhile, JD.com guided for 2024 GMV growth to be higher than the retail sales of consumer goods growth next year. In the September quarter, there was a modest decline in Taobao and Tmall online paid GMV, but a high-single-digit GMV growth at JD.com.

China’s August online and offline retail sales of consumer goods growth improved to 4.6% year on year in the month versus 2.5% in the prior month, thanks to the rollout of supportive policies by the government, in our view. Online sales of goods in the month were up 8% year on year, slightly better than the 7% in the previous month. We maintain our forecasts and fair value estimates for Alibaba Group at USD 128 per ADS and HKD 124 per share; JD.com at USD 88 per ADS and HKD 341 per share; and PDD Holdings at USD 117 per ADS. This is because we think China’s online consumption trend is in line with our expectations. In our view, PDD Holdings is fairly valued. While both Alibaba Group and JD.com are undervalued for long-term investors, we don’t see near-term catalysts for these shares. The physical goods e-commerce penetration in the month reached 26.3%, compared with 25.5% in August 2022. So far after the phasing out of the lockdown measures, we don’t see the offline segment taking market share, although people are going out more. Year-to-date physical goods e-commerce penetration was up 80 basis points year on year, supporting our forecasts of long-term e-commerce penetration increasing to 42.2% in a decade.

There are three new ideas in the internal letter issued by the new Alibaba CEO Eddie Wu on Sept. 12 that we like: openness, young leaders and a focus on the long term. We maintain our forecasts and fair value estimates. While Alibaba is undervalued currently, we think it may take a longer time for the firm to unlock its value through the potential listings of its business units.

According to an Alibaba internal letter from chairman Joe Tsai, Alibaba CEO Eddie Wu will succeed Daniel Zhang as the chairman and CEO of Alibaba Cloud Intelligence Group, or Alibaba Cloud. This is surprising as Zhang resigned from Alibaba as the chairman and CEO in June while keeping the Alibaba Cloud chairman and CEO roles. We think this latest change was not planned back in June and there are concerns of disagreements among Alibaba’s partners. We have mixed thoughts on this news but we are comfortable in maintaining our forecasts and fair value estimates for Alibaba. While we think the shares are undervalued, the near-term share price performance may be muted, as the pace of unlocking the value of Alibaba through potential listings of its units could be postponed, with the reported delay of Freshippo’s IPO due to low valuation.

Alibaba reported strong June-quarter results, with revenue beating Refinitiv consensus by 4% and adjusted EBITA by 21% in the first quarter under the new organizational structure. Revenue and adjusted EBITA year-on-year growth were 14% and 32%, respectively, for the June quarter, versus 2% and 60% in the March quarter. We see noticeable top line recovery in its China commerce retail, local services, cloud and digital media, and entertainment businesses in the quarter as a result of a low base from lockdown in the same period last year. Nevertheless, we think in the near term the China commerce business will see a choppy recovery due to the recent weak macroeconomic data such as year-on-year deflation and imports decline in July and an absence of major consumption stimulus like cash or voucher handouts so far. We are impressed with the margin improvement efforts in the quarter, which are especially pronounced in the two large loss contributors international digital commerce, or AIDC, and local services businesses. There wasn’t any significant update on the spinout and spinoff of Alibaba’s businesses nor the scale and timing of shareholder capital return after such events.

We remain buyers of Alibaba despite a 25% cut in our fair value estimate to USD 128 per ADS/HKD 124 per share. At the current share price, investors are only paying for the value of Taobao and Tmall Group, Alibaba’s strategic investments, and cash and cash equivalents while getting the value of all the other five businesses groups for free, based on our analysis. Our alternative sum-of-the-parts valuation, which adopts a 50% discount for these five groups and strategic investments, is USD 138 per ADS/HKD 134 per share. However, we still prefer PDD Holdings over Alibaba, given its rapid market share increase and improving profitability.

Alibaba is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. We think a strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba.

Alibaba Group's leadership plan, which sees the segregation of the chairman and CEO role alongside the appointment of Eddie Wu, the chairman of Taobao and Tmall Group, to succeed Daniel Zhang as Alibaba Group CEO, should enhance corporate governance. Zhang, who will remain CEO and chairman at the Alibaba Cloud Intelligence Group, will be able to focus on reaccelerating its slowing cloud revenue and preparing its IPO. We think these shifts will enhance the Cloud Intelligence Group's independence from Alibaba Group. Overall, the leadership changes don't have an impact on our fair value estimates.

According to a media report from LatePost on June 19, Alibaba’s management may allocate more resources to Taobao, smaller merchants, and value-for-money products versus Tmall, which houses larger merchants and brands. We believe such a strategy places near-term earnings pressure on Alibaba, but it should boost Alibaba’s long-term competitiveness and supports our wide moat rating. Pending additional details, we maintain our fair value estimate and our earnings forecast for Alibaba is unchanged.

The readthrough from Vipshop’s (VIPS, not covered by Morningstar) first-quarter earnings for our e-commerce coverage is generally positive, with continual recovery in consumption. This is especially the case for Alibaba Group, whose core category is apparel; and PDD Holdings, which is a value-for-money platform. Vipshop is a leading online discount retailer for brands in China that focus on the apparel category. We make no changes to our fair value estimates for Alibaba, PDD and JD.com.

Alibaba is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. We think a strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba.

Although Alibaba Group’s adjusted EBITA rose 60% year on year, 15% higher than Refinitiv consensus as of May 18, the share price fell 5% in U.S. trading on May 18. We think the market reacted negatively because the company's investment in users, a robust ecosystem, and technology in the China commerce business is likely to cause year-on-year declines in adjusted EBITA margin during the next three years, and the pace and magnitude of unlocking value missed expectations. The Alibaba international digital commerce group, which contributes 10% to our sum-of-the-parts valuation, will raise external capital instead of going public in the foreseeable future.

Our takeaways from the conference call on restructuring with wide-moat Alibaba Group on March 30 were positive. We view management’s comments on the sale of less strategic investments positively, and we expect there to be capital returned to shareholders following the spinoffs.

Wide-moat Alibaba Group’s plan to split itself into six main companies is a continuation of the policy of empowering business units, which began in 2020. Alibaba's shares rose 14% in U.S. trading on March 28 following the news. We expect this restructuring to enhance the operating efficiency and margins of Alibaba Group's business units. We are maintaining our fair value estimate, based on a discounted cash flow model of the consolidated business, of USD 177 per ADS (HKD 171 per share), and we believe Alibaba is significantly undervalued. We estimate the value of the separated business units to be essentially the same as our fair value estimate based on a sum-of-parts valuation, indicating that a future spinoff of the businesses could unlock further value. The key assumptions in our SOP valuation are 11 times fiscal 2023 price/earnings ratio for the China commerce business and 4.9 times fiscal 2023 price/sales ratio for the international commerce business—the latter multiple is based on the average multiple of its peers. The most cash-generative Taobao Tmall business group will remain wholly owned by Alibaba Group. We think all of these other five businesses can meet the requirements of Hong Kong Stock Exchange Main Board listing rules, thus eventual listing of these businesses, potentially after three financial years, is possible, in our estimate. As a holding company, we suspect Alibaba Group may experience a holding company discount, offset by the crystallization of the value (and potentially higher valuation) of these five other business groups. Under SOP valuation, assuming a 20% holding discount of all the five business segments, we think Alibaba’s current value would be USD 172 per ADS (HKD 166 per share).

Although wide-moat Alibaba's December quarter revenue was roughly in line with Refinitiv consensus and our own estimates, adjusted EBITA was better than consensus and our estimates, and management provided a positive outlook. We maintain our fair value estimate at USD 177 per ADS and HKD 171 per share. The shares are trading at 17 times PE ratio for fiscal 2023 and only 10 times PE ratio for fiscal 2024. The share price is undemanding. We continue to think Alibaba will benefit from the reopening of China due to its exposure to discretionary goods and the rebound in higher-margin apparel category following Chinese New Year.