What’s interesting about Alibaba is that its GMV is twice that of Amazon
- Shifting to New Retail strategy to drive top-line growth
- New Retail strategy provides growth but comes at a cost
- Superior market share means profit beats its closest rival
A speech that crashed the share price
- Back in the late 2020, Jack Ma gave a speech criticizing China’s banking system as being inefficient.
- The speech led to Chinese government’s realization that China’s big techs are wielding too much power.
- The Chinese government responded with an immediate cancellation of Ant Group’s IPO and a series of Anti- fines.
Recent updates on Alibaba
- Ant Group: The company has been restructured into a financial holdings company, which subjects the company to regulations that applies to financial institutions.
- Alibaba and Ant group has terminated data sharing agreement.
- There are no plans to revive the IPO of Ant Group.
- And Alibaba currently holds a 33% stake of Ant Group.
- Hong Kong primary listing: Hong Kong Stock Exchange has approved Alibaba’s primary listing.
- Gaining primary listing in Hong Kong would make Alibaba eligible to take part in stock connect with Mainland China.
- This would give access to qualified Mainland Chinese investors to access Alibaba’s shares.
Revenue breakdown 2022
Business model summary
- The main revenue driver is the China Commerce segment and can be divided into:
- Customer management (E-commerce platform)
- Direct Sale (E-grocery)
- The China Commerce segment is supported by: Logistics, Local Consumer Service and Cloud segments which help build Alibaba’s ecosystem.
Shifting to New Retail strategy to drive top-line growth
- Alibaba’s Sun Art, Tmall Supermarket and Freshhippo subsidiaries are instrumental in driving the growth of New Retail strategy.
- The concept is to blur the line between online and offline retail.
- Today, all of Alibaba’s subsidiaries’ physical supermarkets and hypermarkets are integrated into Alibaba’s platform.
- This enables a less-than-one-hour delivery to customers through Alibaba’s ecosystem.
Direct sales to become a new revenue growth engine
- Direct sales already account for 45% of China commerce segment in 2022 compared to just 16% in 2019.
- The explosive growth was driven by the pandemic.
- Digital grocery sales in China reached nearly $200bn in 2021.
- And the market size is expected to almost double in 2025.
New Retail strategy provides growth but comes at a cost
- Alibaba’s traditional driver of revenue growth has been its e-commerce platforms.
- By being the facilitator of exchange between buyers and sellers, Alibaba traditionally has low inventory costs to its revenue.
- With the surge of revenue contribution coming from direct sale segment, Alibaba has increased its inventory cost that came from operating supermarkets.
- The consequence of this is the decline in gross profit margin.
Gross margin has consistently been on a decline
- In 2022, Alibaba’s cost of revenue increased by 28%.
- Alibaba attributes this to the consolidation of Sun Art which increased the cost of inventory.
- And the growing expansion of Taocaicai which increases the logistic costs.
- Alibaba plans to continue investing in direct sales segment which it expects further decline in margin.
Superior market share means profit beats its closest rival
- In 2021, Alibaba has a market share of 47% of China’s retail ecommerce sale.
- While its closest rival, JD.com has a market share of 17%.
- This allows Alibaba to outperform JD.com on profitability measurements.
- The risk now for Alibaba is that it falls from its position.
- While JD.com has room to improve.
Consistent value creation compared to rival
- Unlike JD.com, Alibaba has consistently deliver value to its creditors and shareholders.
- Alibaba’s superior ROIC is attributable to its higher profitability.
- And Alibaba has more robust ecosystem compared to its rival.
- Despite anti-monopoly regulations, it is unlikely that JD.com will catch to Alibaba soon.
Consensus is bullish
- Most analysts are bullish on Alibaba.
- Analysts predict lower gross margin compared to historical average.
- This is in line with our forecast due to Alibaba consolidating subsidiaries with higher inventory costs.
P&L – Alibaba
- Revenue growth is expected to be disrupted by zero covid policy which disrupts supply chain and logistics.
Balance sheet – Alibaba
- Alibaba is expanding its ecosystems which means continuous expansion of net fixed assets.
- Alibaba has low proportion of debt to its capital, this gives Alibaba an ability to expand its ecosystem.
Ratios – Alibaba
- Alibaba is still not expected to pay dividends in order to continue pursuing growth.
- Alibaba is net cash giving it the ability to continue expanding its ecosystem.
Stock Picking Checklist
Can this company be a ten bagger?
Free cash flow – Alibaba
- Alibaba is still pursuing growth, I expect increasing level of CAPEX.
- Expect higher revenue growth than consensus but slightly lower gross margin.
- The terminal growth rate is put at 4% due to Alibaba still having a long growth runway.
Key risk is regulations
- Alibaba operates in an increasingly complex legal and regulatory environment.
- Failure to build successful ecosystem.
- Alliance risks; synergies between subsidiaries might not be successful.
- Direct sales to drive further growth.
- Decline in gross margin due to enhanced focus on direct sale.
- Dominant position likely to continue despite regulations.
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