Alibaba FQ2 23 – Recovery in waiting

The turn depends on Covid Zero policy.

• Alibaba reported reasonable results where e-commerce remained flattish but an increase of share buybacks to $40bn to the end of 2025 provided much-needed support for those patiently waiting for the recovery.
• FQ2 23 revenues were RMB207.2bn some RMB3.4bn (1.7%) below consensus of RMB210.6bn as local e-commerce stagnated and newer businesses like food delivery and location-based services provided the modicum of growth recorded.
• Even cloud, which is still growing quickly everywhere else in the world struggled as its main customers (Chinese technology sector) continued to labour under the weight of both heavy new regulations and Covid Zero.
• Non-technology customers fared much better recording 58% growth YoY indicating that once the Chinese technology sector normalises, then growth in the Chinese cloud should begin to reflect what other players are seeing.
• Logistics also fared well as a result of the pivot to offer services outside of the Alibaba group, but the core business was disappointing.
• Here China e-commerce posted a decline of 1% YoY to RMB135.4bn as a result of both the Covid Zero-induced stagnation of the economy as well as increasing competition.
• Management papered over the cracks as best it could but the reality is that Alibaba remains a hostage to the CCP’s Covid Zero policy and there is unlikely to be any real recovery before China reopens for business.
• Fortunately, there has been some movement on this with the CCP’s 20-point plan which essentially eased quarantine for international arrivals as well as the lifting of flight bans.
• In reality, these are tiny readjustments that will have very little real impact, but it is a sign that China does intend to end its self-imposed isolation from the rest of the world at some point.
• Furthermore, with interest rates at 4%, there is scope for some economic stimulus to get the economy moving once the CCP has decided that the time is right.
• RFM and Alavan Independent view the current makeup of the Standing Committee of the Politburo as a sign of a more authoritarian approach raising the possibility of doubling down on bad policies such as Covid Zero.
• Hence, this relaxation is a surprise but not necessarily a sign of an imminent return to normal.
• There is no indication of when this will happen meaning that until then, investors in Alibaba who have not jumped ship will have to continue waiting patiently.
• Alibaba is still by far the biggest e-commerce marketplace in China and when the market returns it will be in a good position to make the most of its scale and take back market share.
• Alibaba remains one of the cheapest large technology stocks available being on 11.5x 2023 PER and 9.8x 2024 PER and it trades on a tiny fraction of the multiple afforded to Amazon.
• Once things normalise in China, there is scope for both earnings to increase as well as the multiple paid for those earnings to expand leading to an outsize recovery.
• I remain happy to be patient.