maybefalse
Elevator Pitch
I have a Buy investment rating assigned to Alibaba Group Holding Limited’s (NYSE:BABA) [9988:HK] shares. I previously touched on how pandemic lockdowns in China might affect BABA with my September 20, 2022 write-up.
The focus of the current update is a preview of Alibaba’s upcoming financial results for the second quarter of fiscal 2023 (YE March 31). I also cover other key issues that warrant investors’ attention such as Double 11 sales, China’s COVID-zero stance, and the attitude of regulators towards Chinese internet firms. Taking into account all these factors, I come to the conclusion that the tide has turned for Alibaba, and I decide to raise my rating for BABA from a Hold to a Buy.
BABA’s Q2 FY 2023 Earnings Announcement Date
Alibaba will reveal the company’s Q2 FY 2023 financial performance this week on November 17, 2022 before trading hours, as disclosed in an earlier press release issued on November 4.
Market’s Expectations Point To A Return To Positive Earnings Growth For Alibaba
BABA’s bottom line has declined for four consecutive quarters between Q2 FY 2022 and Q1 FY 2023 in RMB terms, but the sell-side analysts expect a turnaround for Alibaba in the upcoming quarter.
Based on the market’s consensus financial projections (in RMB terms) taken from S&P Capital IQ, Alibaba is expected to reverse from a -0.1% YoY contraction in its top line in Q1 FY 2023 to achieve a positive +4.0% growth in its revenue for Q2 FY 2023.
With regards to the bottom line, the analysts’ consensus financial forecasts suggest that BABA’s normalized earnings per share or EPS in RMB terms will increase by +3.5% YoY for the second quarter of fiscal 2023. In contrast, Alibaba’s normalized EPS decreased by -37.7%, -23.4%, -23.0%, and -29.3% for Q2 FY 2022, Q3 FY 2022, Q4 FY 2022, and Q1 FY 2023, respectively in RMB terms.
My Bet Is On An EPS Beat For Alibaba
In my view, Alibaba’s actual Q3 FY 2022 earnings should surpass the market’s expectations.
The current sell-side’s consensus estimates for BABA as outlined in the preceding section imply that the market sees Alibaba’s customer management revenue or CMR declining by a mid-single digit percentage on a YoY basis in Q3 FY 2022. I take the view that BABA’s actual CMR will decrease by a better-than-expected low single-digit percentage for the upcoming quarter, considering relevant industry data trends.
Chinese state media China Daily reported on October 29, 2022 that “China’s express delivery service companies” saw +4.2% YoY growth in delivery volumes for the first nine months of this year, according to “data from the State Post Bureau.” Based a review of past data disclosures by the State Post Bureau, I estimate that the Chinese express delivery companies achieved reasonably healthy volume growth rates of approximately +7% QoQ and +5% YoY in the third quarter of 2022.
The performance of express delivery businesses in China tends to be a good proxy for Alibaba’s Gross Merchandise Value or GMV growth. BABA had noted at the company’s Q1 FY 2023 earnings call that “CMR growth lagged GMV growth” in the first quarter of fiscal 2023, but I think Alibaba’s actual CMR growth (and revenue) for Q2 FY 2023 should still be better than what analysts are predicting.
I also expect an improvement in Alibaba’s profitability for the second quarter of fiscal 2023.
At its Q1 FY 2023 results briefing, BABA had disclosed that it “made meaningful progress” in “narrowing operating losses” for a number of its fast growing businesses like Taocaicai. At the most recent quarterly results call, Alibaba also emphasized that it will be “prioritizing cost structure optimization and cost control” in the quarters ahead. The company’s management comments give me the confidence that Alibaba’s actual profit margins for Q2 FY 2023 will surprise on the upside.
In summary, I am of the opinion that Alibaba will surprise the market in a positive manner when it reports its Q2 FY 2023 earnings this Thursday.
Other Key Things To Consider Prior To BABA’s Q2 Earnings Announcement
Apart from the chances of an earnings beat (which I addressed in the preceding section), I think there are three key matters that investors should consider before Alibaba announces its second quarter results later this week.
Firstly, China’s Double 11 shopping festival offers a glimpse of how Alibaba will perform in Q3 FY 2023 (or the fourth quarter of calendar year 2022).
A sell-side report (not publicly available) titled “China Internet sector – Double 11 GMV” published by DBS Bank Research on November 14, 2022 highlighted that the “Double 11 GMV of comprehensive e-commerce players” in China rose by +2.9% YoY which “is slightly ahead of 618 festival’s +0.7%” YoY growth in the middle of this year. Alibaba also issued a media release on November 11, 2022 noting that it “delivered results in line with last year’s GMV performance” for this year’s Double 11.
As such, it is reasonable to assume that Alibaba’s Q3 FY 2022 financial performance will be decent judging by the data and management comments presented above.
Secondly, it appears that China has made meaningful changes to its COVID-zero policy, paving the way for an eventual reopening which will benefit Alibaba.
In my prior late-September 2022 update for Alibaba, I mentioned that “BABA’s Q1 FY 2023 financial performance illustrates how lockdowns can disrupt and affect the company’s business operations.” I also stressed in the September article that “a ratings upgrade (for Alibaba) is only warranted if China indicates that it will change its current COVID-19 strategy.”
There are signs that China is now ready to gradually pivot away from its existing COVID-zero approach towards the pandemic. A recent November 11, 2022 Bloomberg article highlighted that “China reduced the amount of time travelers and close contacts of virus cases must spend in quarantine, and pulled back on testing.” A shift away from China’s COVID-zero policy will be a tailwind for the Chinese economy and Alibaba’s business operations.
Thirdly, the political and regulatory risks for Chinese internet companies might have eased, taking into account recent news flow.
On November 2, 2022, Chinese state media Global Times published a news article which mentioned that “the investment arms of state-owned telecom operator China Unicom and internet behemoth Tencent (OTCPK:TCEHY) (OTCPK:TCTZF) have gained unconditional regulatory approval for a newly created joint venture.”
This recent collaboration between Tencent and a state-owned telecommunications company might be reflective of a change in the stance and attitudes of Chinese policymakers and regulators towards the major Chinese internet and technology companies. Alibaba and its technology peers have suffered from a severe valuation de-rating in recent years as a result of the regulatory crackdown on the Chinese technology sector. If regulatory and political risks for Alibaba and the Chinese tech sector eases, BABA should see a positive re-rating of its stock price and valuations going forward.
Closing Thoughts
The worst might be over for Alibaba. BABA is expected to return to positive bottom line growth in Q2 FY 2023, while there are encouraging signs for the company like the change in China’s pandemic strategy and reasonably healthy GMV growth for China’s Double 11 festival. As such, I take the view that Alibaba is deserving of a Buy rating now.
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