Excerpts from UOB KH report

Analyst: Julia Pan Meng Yao

Alibaba Group (9988 HK)
2QFY23 Results Preview And APSARA Conference Takeaways

ALIBABA 

Share price: 
HK$69.70

Target: 
HK$127

The company is seeing a weaker-than-expected recovery in consumer spending due to disruptions by the ongoing implementation of lockdown measures. We remain cautiously optimistic on Alibaba given disruptions from periodic lockdowns weighing on 2QFY23 performance.

Alibaba still offers an attractive risk-reward opportunity given the encouraging sentiment on the Single’s Day pre-sales. Maintain BUY with target price lowered to HK$127.00 (US$120.00).


Alibaba Shutterstock11.22Photo: Shutterstock
WHAT’S NEW
2QFY23 results preview. Alibaba Group’s (Alibaba) 2QFY23 total revenue is estimated to grow 5% yoy to Rmb210.7b. We forecast customer management revenue to decline by 2% yoy, driven by weaker GMV growth in Sep 22 given weakened consumer sentiment. We expect to see a decline in total GMV given its exposure to the weak demand for discretionary items. The Local Consumer Services (LCS) segment is guided to deliver an accelerated growth of 29% yoy compared to +8% yoy in the same period last year.

We estimate cloud revenue to deliver decelerated growth of 10% yoy to Rmb22b (vs 2QFY22: +22% yoy). Adjusted EBITDA is expected to improve with a 3% yoy growth from the previous -27%/-16% yoy plunge in 1QFY23/2QFY22, translated to an EBITDA margin of 17%. The improved profitability is mainly attributable to reduced losses from new strategic initiatives and the continued trend of cost optimisation.

Better 3QFY23 underpinned by 11.11 shopping festival. The company reported swift Singles’ Day pre-sales despite soft recovery and weakening consumer sentiment. 102 brands on Tabao and Tmall surpassed Rmb100m in an hour after the first round of sales. Taobao Live surged 600% yoy in the first hour while the live-streaming channel on Tmall exceeded Rmb100b in the first 20 minutes, outperforming its peers. The strong sales are continuously driven by unfulfilled demand for smartphone devices and essential goods.

Amid the intense market competition, Alibaba can leverage on its strengthening customer loyalty to seize and secure market share from rivals such as short-form video platforms.

• At the AliCloud Summit and APSARA Conference (“云栖大会”), management blamed the latest growth slowdown in the cloud industry on less government spending, as well as the slower growth and policy impact on internet gaming and education industries. Alicloud expects the manufacturing industry and the increased content needs driven by Metaverse to be its next revenue growth engine.

Management believes the impact of the CHIPS act for AliCloud is limited in the near term, as customers’ high-end and massive computing power needs is limited in China currently. However, with the increase in demand for advanced cloud services in China, the management expect some challenges in the future, with current products becoming outdated if the global chip industry continues to develop at the current pace in the next few years.

ESSENTIALS
Key takeaways from Alibaba Cloud Analyst Summit & APSARA Conference. Remarks by Alibaba’s CEO, Daniel Zhang:

Development of core competitiveness of Alicloud brought by debut of self-developed CIPU. The special processor CIPU aims to replace CPUs in managing and accelerating computing, storage and network resources. The integrated performance of "Feitian+CIPU" generally outpaced similar products in the industry by 20%. The CIPU architecture has laid a solid foundation for the full-stack of self-developed Alicloud infrastructure to be extensively built.

Cloud-native processor “Yitian 710” was unveiled in Oct 21. At present, the Yitian 710 cloud instance has been broadly adopted by many internet companies and the smartphone industry. The cost performance ratio of computing power has improved by more than 30%, while the power consumption per unit of computing power has been reduced by 60%. This is the first self-developed CPU for large-scale cloud application in China. During the Double 11 festival in 2021, the core trading system of Tmall's Double 11 was shifted smoothly to Yitian 710.

AliCloud is developing software to automate AI. A serverless framework gets rid of operation and maintenance issues while reducing the threshold of software development, rendering more pre-fabricated modules which sequentially improve software productivity. In the past, open-source has promoted the progress of software architecture. In the future, open-source will accelerate the progress and development of AI applications’ basic models.

Ample room for growth. AliCloud now has paying customers of 4m and has achieved profitability for the last seven consecutive quarters. According to Alicloud, over 62% of Ashare listed companies are AliCloud’s customers and 21m companies and organisations use DingTalk. The management remains optimistic as the China cloud market is far from saturated.

AliCloud is undertaking business restructuring to shift its customer base from the internet sector to retail and financial services, which currently accounts for 53% of the cloud revenue. The transition in customer mix will likely benefit the company as non-internet consumers are less-price sensitive. With this, we reckon the transition will bode well for Alicloud’s top-line and bottom line in the upcoming quarters.

• Our forecasts. Cloud computing and internet infrastructure is expected to deliver a decelerated growth of 10% yoy to Rmb 22b (vs 2QFY22: +22% yoy). The company will streamline its non-profitable business offerings such as CDN (content delivery network) while emphasising more on higher margin products such as AI solutions. We forecast Alicloud’s adjusted EBITA at Rmb400m for 2QFY23, with adjusted EBITA margin of 2%.

11.11 key focus lies in enhancing customer experience and customer loyalty amid weak GMV environment. For Alibaba, brand loyalty memberships allow brands to interact most directly with consumers and ensure a higher degree of certainty over sales. During the pre-sale period, over 4000 brands achieved >100% of member-led GMV yoy growth while brand members accounted for >50% of the GMV for 2700 prominent brands.

Given the company’s greater exposure to non-essential goods, it focuses on serving the consumer groups with higher spending power, while providing a matrix of consumer offerings with diversified value proposition for various user segments. Enhancement of customer loyalty and integration of offline and online offerings helped Alibaba to capture consumers’ mind share and generate high-quality growth for the long term.

EARNINGS REVISION/RISK
• We lowered our 2QFY23 revenue estimate slightly by 3%, as our previous forecast had not factored in the soft recovery pace in consumer demand. FY23 revenue growth is estimated to be moderated at 6% yoy vs FY22’s 19% yoy given that the near-term visibility remains unclear. We lower our FY23 net profit forecast by 1%, representing non-GAAP net margin of 16%, down from 17% in FY22.

• Risks: a) Increasing e-commerce competition with PDD and JD.com, and newcomers such as Douyin, and b) increasing merchants’ acquisition channels.

VALUATION/RECOMMENDATION
• Maintain BUY with a lower target price of HK$127.00 (US$120.00), as we roll forward our valuation to FY23. Our target price implies 16.5x FY23F forward PE against 19% EPS CAGR from FY23-26. The company is currently trading at 8.9x 12-month forward PE, 2.4SD lower than its historical mean of 24.4x.

SHARE PRICE CATALYST
• a) Successful listing of Ant Group,
b) continued improvement in profitability of its cloud business, and
c) continued growth from business expansion, particularly in the Southeast Asia market/lower-tier cities.


Full report here.

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