Is There Still Growth Left In Alibaba Group Holdings
July 3, 2020
Alibaba Group Holdings (HKG: 9988) is China’s largest e-commerce player with a 50% to 60% market share of total retail e-commerce sales in 2019.
The e-commerce giant grew with China’s rapidly-expanding online retail industry to become the country’s largest publicly listed companies, with a market capitalisation of US$586 billion.
Can Alibaba sustain its growth to deliver market-beating returns to its investors? We delve into its operations and Financial Year (FY) 2020 results to find out.
Alibaba’s businesses span across diverse sectors that form an ecosystem of interconnected and synergistic entities.
Its Core Commerce segment comprises the online marketplace and e-commerce platforms, such as Taobao that focuses on individuals and small businesses-to-consumer sales, and Tmall that facilitates retailers-to-consumer transactions. The online platforms collectively had 846 million active mobile users in March 2020.
Alibaba Cloud provides a full suite of cloud services such as database management, data storage, computing, cyber-security, and machine learning to support the burgeoning digital economies. According to a Gartner report, it is the world’s third-largest cloud infrastructure service provider with a 9% market share.
Consumer insights and data gained from the core commerce segment enables Alibaba to expand into the Digital Media and Entertainment sector, capturing consumption beyond the core commerce business. The group owns Youku, the third-largest video streaming platform in China, and Alibaba Pictures, an internet-driven content production company.
Alibaba develops new services under its Innovation Initiatives and Others segment that aims to improve the efficiency of customers’ daily lives. Key products include Amap, a major navigation and traffic app in China; and DingTalk, the largest corporate communication and efficiency app in China.
Alibaba’s business segments and corresponding FY2020 revenue. Source: FY2020 Results Presentation
The diverse business segments, together with its consumers, merchants, service providers, and strategic partners form Alibaba’s digital economy. This is an ecosystem of platforms with strong self-reinforcing network effects that benefit the various stakeholders.
Collectively, the digital economy posted a US$1 trillion of gross sales in FY2019.
In the quarter ended Mar 2020, Alibaba posted revenue of RMB114 billion which is a 22% increase year-on-year. Revenue from the Core Commerce segment grew 19% to RMB93 billion. Most of the growth comes from the fresh produce category in the self-operated Freshippo market, and Tmall Supermarket that brings traditional markets online.
Cloud Computing raked in RMB12 billion of revenue, 58% higher than 2019.
Non-GAAP net income that excludes the impact of revaluation, disposal, and investment losses increased by 11% to RMB22 billion.
Source: FY2020 Results Presentation
The crown jewel of Alibaba’s businesses is the Core Commerce segment. Besides the Taobao and Tmall platforms shared earlier, the group has a thriving international retail operation, local consumer services, and New Retail.
The gross merchandise value of the group’s china e-commerce platforms increased to RMB6,589 billion. This was due to improved consumer engagement built on more accurate search results and recommendation feeds. New sales tactics such as live-streaming and short videos by key influencers also helped.
The international retail business grew strongly in 2020 as well. Lazada, its wholly-owned subsidiary that owns South East Asia’s largest e-commerce platform saw strong order volume growth of more than 100%.
Alibaba’s initiative to transform traditional retailing under its New Retail strategy is making good progress. The Freshippo grocery chain which combines online and offline shopping seamlessly had expanded its network to 207 stores in China. Taoxianda, its offline-online retail integration service provider for physical retailers secured a major customer in SunArt Retail that has 486 markets in China.
Leveraging its comprehensive platforms, deep consumers’ data, and advanced technologies, Alibaba will drive, and benefit from, the global trend of retail digitisation in the future.
33% Stake in Fintech Giant Ant Financial
Alibaba owns a 33% stake in Ant Financial, one of the world’s leading financial technology companies with about 1.2 billion annual active users in 2019. Ant Financial started as Alipay that processed payments between Alibaba’s online merchants and consumers. It has since evolved into a global leader in digital finance with diverse financial services to consumers and small businesses.
Ant plays a critical role in Alibaba’s digital economy as the digital infrastructure that supports an enormous amount of funds flow, payment, and financial transactions. I believe it will continue growing to be one of the world’s largest financial institutions soon.
Ant Financial overview. Source: 2019 Investor Day Presentation
Local Consumer Services
The Local Consumer Services segment expands the group’s retail offering from shopping to services. It taps on the group’s data and consumer insights to offer delivery, services information, and digital solutions that increase merchants’ operational efficiency. The main portal under this segment is the Ele.me app, the second-largest food delivery, and local services platform in China.
There are 60 Chinese cities in less developed areas with more than one million urban population which Ele.me does not have a presence yet. This represents large market potential as third and fourth-tier cities’ consumption levels are expected to catch up with those of first-tier cities.
Alibaba Cloud is the key significant revenue contributor outside of retail-related businesses. It posted a revenue of RMB40 billion in FY2019 which was 62% higher year-on-year.
Alibaba’s cloud computing operations started as the internal data intelligence and operating system that powered its online retail activities. The group has since leveraged its big data analytics capability and digital infrastructure to turn its cloud computing segment into a global powerhouse. It is currently the largest player in China and the Asia Pacific, and the third-largest player globally.
Alibaba Cloud leadership position in China. Source: 2019 Investor Day Presentation
With personal and business activities shifting online, Alibaba Cloud is set to become the technology backbone of China’s digital economy. The group will invest a whopping US$28 billion to expand and upgrade its cloud infrastructure.
I will sum up the key risk faced by Alibaba in one word: execution risk. With businesses in different sectors, there is a possibility that some of these initiatives would not fulfil its growth potential, or even incur losses. This is especially true in the promising but yet-profitable segments such as Cloud Computing, Digital Media and Entertainment. The group needs strong management with sharp acumen of industry trends, and sufficient resources to run the entities until they bring in profit.
I have shared about Alibaba’s myriad businesses in e-commerce, cloud computing, digital media, and entertainment. Financial technology, information technology, data analytics, and cloud infrastructure are the foundations that support the group’s diverse business.
I would argue that Alibaba has evolved into a technology company. Its operations are integral to China’s national efforts towards consumption upgrading and digitalisation of the economy. Being entrenched in China’s future development agenda gives it a strong growth runway.
However, with high growth comes high investment risks, particularly when some of the promising sectors falter.
In this respect, Alibaba, with a price-earnings ratio of 37.8 is more suitable for growth-oriented investors who are after capital appreciation.
CS Jacky is a Remisier and Financial Adviser with Phillip Securities Pte Ltd. Graduated with a Bachelor in Business Administration (Finance), he has been investing in the stock market since 2010. He identifies companies with good prospect trading at a low valuation using a unique blend of fundamental, technical, and portfolio analysis. He also holds REITs and dividend paying shares. He holds regular seminar to share about market updates, investment insights of specific stocks in his watch list, and overall wealth management for retail investors. He is the owner-blogger of 'CS Jacky - 360 Wealth Management' and a guest writer for Value Invest Asia.