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[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity?

[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity? -1

In Mainland China, there used to be two big companies, namely Ali and Tencent. At their peak, the market capitalization of both companies exceeded $700 billion each. Today, both giants have fallen significantly, but Tencent's market capitalization still exceeds $400 billion, and Ali has less than $200 billion left, less than half of Tencent's, and even far outperformed by subsequent shows. Can Alibaba’s stock price regain its glory?Perhaps depending on its performance, it will be possible to reverse the logic of reversing the rebound.

Recently, $BABA-SW   (09988.HK)$ Its latest results will be announced. Every time a company publishes results, it may mean a good deal or investment opportunity. Before that, investors need to figure out how to understand its performance. How do you see Ali's performance? We can focus on three points: changes in revenue growth, changes in profitability and share buybacks.

1. Revenue growth

If Alibaba can reverse the situation, it will first be necessary to see if its revenue growth will be able to mount a steady rebound.

Prior to Q2 2022, Ali's revenue growth was more than 30% for most of the time, making it a high-growth company in the eyes of the market. The turning point occurred in Q3 2022, when Ali's revenue growth slowed to 9.7%, and for nearly 10 subsequent fiscal quarters, its revenue growth was almost below 10%, or even slightly lower. Can Ali's revenue rebound and return to double-digit growth? We can look at its business composition separately.

[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity? -2

Ali's business is a big mess. Starting in Q1 2024Q1, Ali will redistribute its business modules to include the outpost group for domestic e-commerce business, Ali International for cross-border e-commerce business, Alibaba for cloud business, poultry group for domestic and cross-border logistics, takeout and store business It operates a local life group, an online video and movie publishing business, and a whole bunch of other businesses.

[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity? -3

In Ali's complex business, there are three businesses that may be the focus of market attention.

The first is the Taotian Group, which includes Taobao and Tencat, which is Ali's home business and is Ali's biggest source of revenue today, accounting for nearly half of its revenue in FY 2024. The decline in revenue growth at Ali was largely due to the deterioration of its domestic e-commerce business.

While the growth of Alibaba's business has slowed, much of the pressure from its peers, in addition to being affected by the domestic economic environment. Taking as an example the four fiscal quarters following the redistribution of the Ali business, Natutian Group's revenue growth has been below 5% for three consecutive fiscal quarters, and growth has been virtually stagnant. In contrast, revenue growth has continued to accelerate over the past two quarters, doubling year-on-year growth over the past two quarters. Under these conditions, Ali's domestic e-commerce business will naturally face great pressure.

[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity? -4

In order to regain market share, Ali also began to imitate the bidding, more profitable for consumers and leaning towards small and medium-sized merchants, has also had some effect. In Q4 2024, AliGMV returned to double digit growth with revenue growing by 3.7% year-on-year, rebounding from 1.6% in the previous fiscal quarter.

The second is Ali's international business, including Lazada, Hypermarket, Alibaba.com, etc. With the increase in volumes in the domestic market, going out to sea has become the main melody for many companies. In this piece Ali has been doing for decades, but to a large extent it can be said that it was a big early and late episode. Undoubtedly, there is no doubt that many Temu and Ticktock are making the most of cross-border e-commerce today, especially Temu, which has been on the rise for almost two years, with a continuous doubling of almost all competitors.

[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity? -5

However, with ample cross-border e-commerce market space, Ali's international business continued to grow at a modest pace, with revenue growth of more than 40% in the last four fiscal quarters, making it the fastest growth of all Ali's business segments. In addition, as Ali's poultry division is also responsible for logistics fulfillment for cross-border e-commerce, revenue growth of more than 20% in recent quarters is also the second fastest growing business.

THE THIRD IS THE CLOUD INTELLIGENCE BUSINESS, OR ALICLOUD, WHICH WAS ONCE ALI'S RED HOT CHICKEN, GROWING AT AN ANNUAL RATE OF MORE THAN 50% BEFORE FISCAL 2022. However, Alibaba's growth has stalled for nearly two fiscal years. Over the past four fiscal quarters, Alibaba has grown less than 5% in revenue per quarter.

However, as Alibaba is actively cutting out some of its inefficient, project-driven private and hybrid clouds, the revenue decline in this segment has also dragged on overall growth. Ali disclosed in the results a revenue growth rate of more than 10% for its core public cloud products, after which we can continue to see if AliCloud accelerates further in terms of revenue growth after optimizing its revenue structure.

[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity? -6

In addition to these three core businesses, Ali includes local living businesses in Hungry Ho, Gode, including Yukuo, entertainment businesses within Ali Studios, and businesses including Ali Health, Box Horse, Gao Xin Retail, etc., with a relatively low revenue share in the city and development in general. There was also less attention on the field.

For future results, we can focus on whether its domestic e-commerce business will accelerate growth and regain more market share; whether its cross-border e-commerce business will continue to grow at more than 30%; and whether its cloud business will return to more than double digit growth after structural optimization.

2. Profitability

In this downward cycle, both Ali and Tencent saw cliff-edge declines in earnings, but Ali's share price decline was much larger than Tencent's, the core reason being that the profitability trends of the two companies differ.

Tencent's adjusted net profit margin rose gradually and hit a new high after a period of setbacks. But after falling, Ali's net profit margin never returned to its peak, falling below 20% in recent quarters.

[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity? -7

For specific business segments, Ari discloses Adjusted Profit Before Interest Tax (EBITA) for each business segment. Among them, the Natutian Group is the absolute main contributor to profits, with the addition or even losses of other business segments other than Natutian.

In the first key business, Taotian Group's adjusted EBITA margin was around 41.3% in Q4 2024, although not lower, it was still 1.6 percentage points lower than in the same period last year. AND FROM THE PERSPECTIVE OF TAOTIAN GROUP'S ADJUSTED EBITA GROWTH TREND, THE GROWTH RATE HAS ALSO BEEN STRAIGHT DOWN IN RECENT QUARTERS, FALLING FROM 9.1% ALONG THE WAY, AND EVEN SHOWING NEGATIVE GROWTH IN Q4 2024.

[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity? -8

The profit level of Natutian Group fell, largely due to the increase in domestic e-commerce sector turnover, and Ali had to increase investments and lower the conversion rate in order to regain market share, which naturally put pressure on profitability. Therefore, the profit level of the out turn may be expected to return to a stable state until the competitive situation in the domestic e-commerce industry is restored.

In the second key business, the EBITA of Ali International remains loss-making, and the loss rate is widening, along with the Caviar Group's earnings loss. However, given that Ali International is still in a fast-growing expansionary state, a momentary loss may be acceptable.

Our next focus will be on whether Ali International continues to grow in revenue, while maintaining rapid revenue growth, will eventually turn profitable. Otherwise, if the growth rate of Ali International fell and the loss rate remained low, it might have lost room for imagination altogether.

[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity? -9

IN A THIRD KEY BUSINESS, ALIYUN'S EBITA IS IN A MORE FAVOURABLE POSITION, WITH PROFIT MARGINS INCREASING YEAR-ON-YEAR FOR NEARLY FOUR QUARTERS, AND EBITA PROFIT INCREASING OVER 40% FOR FOUR CONSECUTIVE QUARTERS.

After cutting out inefficient project-based businesses, Ali focused on a more standardized public cloud business, and the boost in profit margins was evident. Subsequently, we can see whether the level of profit margins will continue to improve as the structure of the Alibaba Cloud business continues to improve, bringing profit scale to the next level and bringing significant gains to the overall profit level of Ali.

[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity? -10

In addition to these three core businesses, Ali's local living business is in a process of loss reduction, and the entertainment and [other] business segments, in the event of a loss slowdown in revenue growth, look far from timeless. To some extent, it looks like a negative asset, so Ali will not choose the future. It is a business to strip away this part of the continuous bleeding.

3. Stock Buyback

Aly's revenue growth has been hit by a slump in earnings and a slight deterioration in profitability, which has sickened some investors and a major reason for the long-term pressure on its share price. But there is no denying that Ali's cash flow is indeed strong. Even for almost two fiscal years, Ali has had around $150 billion in free cash flow per year and nearly $600 billion in its account cash reserves.

[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity? -11

Abundant cash reserves and strong overall bloodmaking capabilities mean that Ali has the ability to repurchase shares, while the share price is down, and Ali also needs to use repurchases to boost investor confidence. After all, only the repurchase of gold and silver is the most direct and powerful expression of the company's prospects by management.

Ali has had repurchases in the last five fiscal years, but the repurchase power in the last two fiscal years has been significantly greater. In FY 2024, Ali's repurchase amounted to $12.5 billion and announced a dividend of $4 billion, with a repurchase bonus of $16.5 billion, representing a return of more than 8% on its total market capitalization.

In Q3 FY 2024, Ali announced the expansion of its total repurchase program by the end of FY 2017 to $65 billion. Excluding historical repurchase amounts, the current repurchase plan amount remains at approximately $30 billion, which is an average of $10 billion per year over the next three fiscal years, plus regular dividends. The annual return on repurchases+dividends will also exceed 6% if Ali continues to expand its repurchase program or increase dividends in the future, in the market If the value is unchanged, its rate of return is also higher.

In the future, we can continue to observe the execution of the Ali Repurchase Program and the pace of dividend payments, and whether the Company will have further moves to expand the repurchase program amount. With Ali's results still mired in tough times to reverse, the company's buyback is undoubtedly the most important underpinning of its share price.

See here, you may have some new insights into how to read Alibaba's results. It is worth mentioning that every time many star companies post results, it can mean a difficult trading opportunity for different types of investors.

For example, if investors feel that a company's recent performance will release some positive signals and favor short-term stock prices by interpreting past performance and incorporating recent progress, investors may consider doing more, doing more could be to consider buying a positive stock, or considering buying bullish options, etc.。

Conversely, if investors feel that the latest performance of a company will be less than optimistic and put pressure on short-term stock prices, investors may consider going blank, or consider buying bearish options, etc.

Of course, if investors feel that the direction of a company's performance is not very clear, but the stock price may fluctuate significantly upwards or downwards after the results are published, then investors may consider doing more of its share price volatility and consider buying both bullish and bearish cross strategies to grasp Potential opportunities.

Finally, to summarize,

For Ali's report, we can focus on three points: revenue growth, profitability and share buybacks.

For Ali's revenue growth, we can see whether its domestic e-commerce business will accelerate growth and narrow the growth gap with competitors; whether its cross-border e-commerce business will maintain a higher growth rate; and whether its cloud business will return to double-digit growth after restructuring.

Regarding Alibaba’s profitability, we can pay attention to when the industry involution of its domestic e-commerce business will end, thus ushering in a rebound in profit margins; whether the loss rate of its cross-border e-commerce business will increase with the scale of its revenue. The expansion will lead to an inflection point of narrowing losses; whether the profit margin of its cloud business can be further improved.

For the share repurchase of Ali, we can focus on the execution of its existing repurchase program and the expansion of future repurchase plan amounts.

[2024.8] The profit margin has sharply declined, and the market cap is only 40% of Tencent's! Can Alibaba turnaround in adversity? -12

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.

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