Alibaba Group (9988.HK)

Alibaba Group (9988.HK)

Overview

Alibaba Group, a global technology and e-commerce giant, is one of the largest companies in China, operating in sectors such as e-commerce, cloud computing, digital media, and financial technology. With a diversified portfolio, Alibaba plays a crucial role in China’s economy and continues to expand its global reach. Recent strategic moves include its inclusion in the Hong Kong Stock Connect, as well as launching innovative payment and merchant policies, all aimed at boosting user growth and improving its ecosystem’s monetization.

Key Developments and Catalysts

1. Inclusion in the Hong Kong Stock Connect List: Alibaba’s inclusion in the HK Stock Connect list from September 10, 2024, opens the company to a broader investor base, particularly mainland Chinese investors. This move is expected to boost share price performance in the medium term as Alibaba’s shares become more accessible through the Hong Kong and Shanghai exchanges.
   • Shareholding Forecasts: The inclusion is likely to drive up Alibaba’s shareholdings through the HK Stock Connect to 8-10%, valued at approximately US$15.7 billion-19.6 billion. This could enhance liquidity and improve the stock’s price performance.
   • Impact on Market Sentiment: Alibaba is expected to benefit from increased market confidence due to its dual listing on the New York Stock Exchange (NYSE) and Hong Kong Stock Exchange (HKEX), completed in August 2024. This provides a solid foundation for the company’s stock to perform well in the coming quarters.
2. Integration of WeChat Pay on Tmall and Taobao Platforms: On September 4, 2024, Alibaba announced the integration of WeChat Pay with its key platforms—Tmall and Taobao. This strategic move is expected to attract new users, especially from lower-tier cities, where WeChat Pay has a stronger user base than Alipay. The combination of these payment platforms is crucial in expanding Alibaba’s customer base and improving the user experience across its ecosystem.
   • Expanding Customer Reach: With 1.3 billion WeChat Pay users compared to Taobao’s 1 billion users, this integration offers Alibaba the opportunity to gain new customers. An estimated 247 million WeChat users have yet to install the Taobao app, representing significant potential for growth.
   • Future Collaborations with Tencent: There is speculation that Alibaba could further collaborate with Tencent in advertising and other digital domains. This could include the introduction of Alibaba mini-programs within the WeChat ecosystem, offering mutual benefits to both tech giants.
3. Supportive Policies for Merchants and Users: Alibaba has implemented several measures aimed at boosting its merchant ecosystem, with a focus on reducing costs and increasing merchant participation.
   • One-year Fee Exemption for Taobao Live Merchants: Starting from September 1, 2024, Alibaba is offering a one-year exemption on live broadcast technical service fees for Taobao Live merchants. This initiative aims to reduce the operating costs for small and medium-sized merchants, encouraging more participation and improving the overall quality of the marketplace.
   • Expansion of 88VIP Membership Program: Alibaba has been actively promoting its 88VIP membership program, designed to enhance the user experience through better shopping rewards. This move is expected to improve user retention and renewal rates for the subscription service, contributing to Alibaba’s stable revenue base.
4. Regulatory Clarity: Alibaba has officially completed its rectification process, as announced by China’s State Administration for Market Regulation on August 31, 2024. This signifies that Alibaba has complied with China’s tightened regulatory framework for digital platforms, signaling a more stable regulatory environment moving forward. As the digital economy continues to grow in China, Alibaba is well-positioned to play a proactive role in this development.

Financial Performance and Outlook

Revenue and Profit Projections

Alibaba’s revenue is forecasted to grow by 6.2% in the second quarter of FY3/2025 (ending September 2024), while the company’s non-GAAP net profit is expected to decline by 7.4% YoY due to a decrease in its monetization rate, heightened competition, and a weaker macroeconomic environment in China.

• Total Revenue (FY3/2024F): RMB 941.17 billion
• Operating EBITDA (FY3/2024F): RMB 142.85 billion
• Net Profit (FY3/2024F): RMB 149.07 billion

Despite the short-term challenges, Alibaba is positioned to stabilize its e-commerce market share, driven by the new merchant policies, user growth from lower-tier cities, and improved monetization strategies.

Share Repurchases and Capital Management

Alibaba has demonstrated its commitment to increasing shareholder value through share repurchases, having spent US$11 billion year-to-date on buybacks, accounting for 6.2% of the total shares outstanding. This active capital management strategy is expected to provide long-term support for the stock price.

Valuation and Target Price

• Target Price: HK$113
• Current Price (as of September 10, 2024): HK$81.60
• Upside Potential: 38.5%
• Valuation Metrics:
  • P/E Ratio: Alibaba is trading at a forward P/E ratio of 10.17x for FY3/2024, which is slightly below its historical average. This suggests that the stock is attractively valued, given the growth potential in its core businesses and the stabilization of regulatory pressures.
  • Dividend Yield: Alibaba offers a modest 2.03% dividend yield, reflecting its ability to generate strong free cash flow while reinvesting in its core businesses.

DCF-Based Valuation:

Alibaba’s discounted cash flow (DCF) valuation remains unchanged, with a target price of HK$113, based on a 10.3% WACC and a terminal growth rate of 3%. The company’s strong balance sheet, ample liquidity, and continued share buybacks support this valuation.

Risks and Challenges

1. Competition in China’s E-commerce Market: Alibaba faces stiff competition from JD.com, Pinduoduo, and other emerging platforms in China’s e-commerce space. This heightened competition may dilute traffic to Alibaba’s platforms and affect its ability to grow market share in key areas such as online retail and cloud computing.
2. Macroeconomic Weakness: Weak macroeconomic conditions, especially in China, could hamper consumer spending and impact Alibaba’s revenue growth. A slowdown in online consumption could negatively affect Alibaba’s core commerce business, despite the favorable policy environment.

Conclusion

Alibaba remains a key player in the global e-commerce and technology landscape, with a strong market position, diverse revenue streams, and a robust financial outlook. The company’s recent inclusion in the HK Stock Connect program and integration of WeChat Pay signals its commitment to expanding its user base and enhancing its monetization capabilities.

With a target price of HK$113, representing a potential upside of 38.5%, Alibaba offers an attractive investment opportunity. Although the company faces challenges from increased competition and macroeconomic uncertainties, its active share repurchases, strategic partnerships, and continued innovation provide strong growth prospects for both the medium and long term.

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