After Taobao has been crouching for too long, can Alibaba (09988) still jump up?

Although the stock price has been lackluster, it has always been the focus of the market's attention and a key recommendation by sellers. Today, Alibaba Group (09988) announced its second quarter report for the 25th fiscal year. How is the performance? The following is Dolphin Research's opinion: 1. Shareholder returns are still in the top tier According to the company's disclosure, Alibaba repurchased a total of $4.1 billion worth of shares in the quarter ending in September, reducing the total share capital by 2.1% this quarter. Although slightly lower than the average of over $5 billion in the first half of the year. Considering the slight increase in the stock price towards the end of September, the decrease in repurchase can be understood. With a stable repurchase volume of $4 to $5 billion per quarter, corresponding to Alibaba's market value of less than $220 billion, it is expected to have a return rate of at least 8%. This does not yet take into account the possibility of additional dividend returns. Compared to other Chinese concept companies (which have seen significant increases recently), Alibaba has performed well in terms of share buybacks in the third quarter, showing a slight decline in strength. 2. Taobao's business is still the biggest "burden" for the family The core business of Alibaba Group, Taobao, saw a 2.5% year-on-year growth in domestic retail customer management revenue (CMR) this quarter, an improvement from the 0.6% growth in the previous quarter, but below the average consensus expectation of 3.3%. This performance is not satisfactory. In terms of performance trends, there has been a change in the rule of order growth rate > GMV growth rate > revenue growth rate > profit growth rate that has been consistent for the past few quarters, with this quarter's CMR growth rate possibly nearing zero compared to GMV. Although the company did not disclose the growth rate of GMV this quarter, it has specifically stated that the take rate has stabilized year-on-year. Combining this information with the introduction of a 0.6% technical service fee for Taobao at the beginning of September and the promotion of site-wide advertising tools, the positive impact of these measures released in the third quarter may be limited. As these two new measures gradually take effect, the gap between CMR and GMV growth rates is expected to continue to narrow, until CMR growth surpasses it, which is likely to happen. If the trend of CMR growth improves and the relative weakness compared to expectations can be somewhat compensated for, the profit aspect of Taobao Group this quarter saw a year-on-year decrease of about 5.3% in adj. EBITA, an expansion from the 1% decrease in the previous quarter, with actual profits also falling about 3% below expectations, leaving no room for compensation. Considering other data, the significant increase in marketing expenses should be the main reason for dragging down Taobao's profits. 3. Alibaba Cloud's increasing revenue and profit, steadily moving towards expected targets Alibaba Cloud, the group's second most important segment, has been struggling with single-digit revenue growth in the past two fiscal years. However, after management loudly announced at the beginning of the year that cloud business revenue growth in the second half of the year would exceed double digits, Alibaba Cloud recorded a revenue of $29.6 billion this quarter, a year-on-year growth rate of 7.1%, continuing to improve from the previous quarter's 5.7% (but still not beating expectations). According to the company, the recovery in growth was mainly driven by double-digit growth in public cloud business (contributing with AI), partly offset by private cloud. In terms of profitability, this quarter Alibaba Cloud's adjusted EBITA profit reached $2.66 billion, 21% higher than expected. The adj. EBITA profit margin continued to rise by 0.2 percentage points quarter-on-quarter, indicating a trend of profit improvement. Although there is still some distance from double-digit growth, the revenue growth rate and profit margin both continue to rise this quarter, undoubtedly strengthening market confidence in the continued recovery of the cloud business. 4. International e-commerce "quietly makes money", focusing on reducing losses first The revenue volume of the group's second largest segment, international e-commerce, continued its trend of more refined operations this quarter, with a significant increase in the base number compared to the same period last year. Although the revenue growth rate has slightly slowed to 29% year-on-year, it is still 1.5 percentage points higher than expected. The growth rates of international retail and wholesale businesses were 35% and 9.4% respectively, a slight slowdown compared to the previous quarter of 3-4 percentage points, with similar rhythms. Corresponding to the slowing growth rate, the losses in the international segment continued to narrow this quarter. The adjusted EBITA loss reduced from $3.7 billion in the previous quarter to $2.9 billion this quarter, better than expected. The loss rate also decreased from -12.7% to -9.2%. Given the increased regulatory risks in cross-border business, the trend of making profits quietly, and the partnership with local e-commerce companies in Southeast Asia choosing profit, the international business is likely to continue to show "high-quality" growth and prioritize reducing losses in the future. 5. Profits return to zero, additional investment weighs down Cainiao Cainiao, closely tied to the development of overseas business, saw its revenue growth rate drop from 15.7% to 8% year-on-year this quarter, due to the significant capital expenditure required for cross-border logistics. Despite being already profitable last quarter, Cainiao's adj. EBITA profit this quarter dropped significantly to just $6 million, much lower than expected. When considering the combined figures for international e-commerce and Cainiao, the overall narrowing of losses is only about $200-$300 million better than the previous quarter, which is not good considering the increased investments in heavy asset spending are borne by Cainiao. 6. Prioritizing reducing losses in local life services Alibaba's local service revenue grew by 13.9% this quarter, slightly accelerating, but the market expected growth rate was as high as 24%, a significant miss. However, the market expected a loss of $920 million, but the actual loss was only $390 million. Instead of the market's strategy of high investment, high growth, and high losses, Alibaba has opted for steady growth and reduced losses, which may be a better choice. 7. The progress of reducing losses in entertainment and "N" companies is paused: Alibaba's digital entertainment segment reported a loss of $180 million this quarter, higher than the $100 million loss in the previous quarter and higher than market expectations. The "N" companies as a whole reported a loss of $1.58 billion, in line with market expectations, but an increase from the $1.26 billion loss in the previous quarter. It seems that the investment intensity has increased again? 8. Fierce spending is the main reason for the group's declining profits Despite Alibaba's Taobao Group missing profit expectations by about $1.3 billion, Alibaba Cloud continuing to improve profits, and the less-than-expected losses in the local life business due to refined operations, the overall profitability of the group and its expectations are generally consistent. However, in terms of trends, the group's overall adj. EBITA profit margin has continued to rise from the previous quarter.The rate declined from 18.5% to 17.2%. Last quarter, all businesses except for Taotian exceeded expectations in reducing losses/increasing profits, leading to a significant improvement in the group's profit margin. However, this trend did not continue in this quarter. The reason for this can be attributed to marketing expenses (excluding SBC), which increased by nearly 30% year-on-year (compared to 19% in the previous quarter), exceeding market expectations by approximately 9%. Meanwhile, management expenses and research and development expenses increased by 10-11% year-on-year. Although not as exaggerated as marketing expenses, compared to the modest 5% growth in revenue, the expense ratio still expanded. It is evident that the significant increase in expenses is the main cause of the decline in profit margin this quarter.Dolphin Research Opinion: Overall, the Dolphin Research view on Alibaba's performance this time is somewhat negative. The key Taobao business is the most critical, although the CMR growth rate has improved marginally, the absolute growth rate is still a "low single-digit range of 2.5%," which is below expectations and not good. More seriously, the year-on-year decline in profit has widened and profit margins are also declining. The market has always been concerned about whether the previous rebound in Taobao's GMV growth was driven by subsidies. The consecutive decline in Taobao's profit for two quarters, and the widening decline, has not only failed to alleviate these concerns but has worsened them. Therefore, summarizing Taobao's performance with the word "weak" is not an overstatement. As for Alibaba Cloud, which has not only accelerated revenue growth but also improved profit margins, it still has commendable performance and a promising future worth looking forward to. However, the international e-commerce and Cainiao sibling businesses have seen a slowdown in revenue growth, and the combined losses have not significantly narrowed. Although the loss rate of the international e-commerce segment has decreased, this has been at the cost of logistics asset investment by sibling companies, so it cannot be considered good overall. As for other less significant businesses, the previous quarter's highlight was the noticeable narrowing of the loss rate in these "somewhat marginal" businesses in terms of expectation difference and sequential trend. However, in this quarter, the losses in the local life segment remained stable, while losses in major entertainment and "N" companies slightly increased. Taking into account expense data, there seems to be a reinvestment leading to a potential increase in losses. The benefit of rapid reduction in losses for the "relatively marginal" business has (temporarily) disappeared. Looking at the current performance, Alibaba's performance can at most be described as "weak as expected," and currently the Dolphin Research's attitude towards Alibaba's investment value is to rely on high buybacks to support valuation at the bottom, while "hoping" that Taobao can recover slightly through government consumption stimulus and enhanced monetization. Looking down, the current return rate of at least 8% brought by buybacks to Alibaba ranks top in the Chinese asset class, providing a solid bottom support. In terms of funds or event catalysts, the market's long-awaited benefits of Alibaba's dual primary listing in Hong Kong and inclusion in the Stock Connect have already materialized. Although the actual inflow of funds from the south, or passive index funds allocating to Alibaba, may not have been completed, from an expectation perspective, this benefit is already a thing of the past. Currently, the potential event catalyst is the rumored relisting of Ant Group. However, unlike Alibaba's entry into the Stock Connect being just a matter of time, the relisting of Ant Group is still just a "castle in the air," and investors should not overly expect it. Fundamentally, after several quarters of adjustment, the key Taobao business has not shown any real signs of improvement so far (such as a significant increase in CMR or at least stabilizing profits to match revenue growth). The benefits of the 0.6% technology service fee and full-site advertising tools implemented by Taobao in early September are reportedly expected to take at least six months to take effect on monetization rates. Whether Taobao's performance will truly improve in the future, we can only say there is a possibility of improvement, but in the current macro and industry competitive environment, there is not enough evidence to support us in making confident optimistic judgments. In summary, let's first hold the line and then "imagine" possible reversal opportunities. This article is reprinted from the Dolphin Research WeChat public account; GMTEight Editor: Huang Xiaodong.