An investing quote goes: When the last bullish investor turns bearish, it’s only a matter of time before the market bottoms out. Masayoshi Son, Softbank’s chief executive officer and a staunch supporter of Chinese e-commerce stocks, recently reduced the company’s holdings of Alibaba stocks from 23.7% to 14.6% – could Son be that last bullish investor? All jokes aside, Softbank does have to raise cash to pay off some of its loans, and now could be a good time to review how investors should approach the businesses of e-commerce platforms.
Increasingly fierce competition
Investors who have looked closely at Alibaba’s results over the past few fiscal quarters must have noticed what management attributed to having impacted its earnings: Intensifying competition. Though of course, most investors know full well that the tightening regulatory oversight should also be among the factors that have had a bearing on Alibaba’s results. But its management, with Alibaba being at the forefront of regulatory actions, clearly knows better than to speak in public about anything related to the government. Indeed, the domestic e-commerce space has seen competition flare up significantly over the past few years. Pinduoduo, for example, now boasts active users whose number rivals that of Alibaba, while its gross merchandise value jumped 16-fold in the previous four years, up from just 3% to 30% of the gross merchandise value of Alibaba’s China commerce at the end of last year. Given that each active user spends around CNY 2800 annually on the Pinduoduo platform, just a fraction of the CNY 8800 annual spending of Alibaba’s active users, there should be plenty of scope for Pinduoduo to grow. While the company has repeatedly emphasised in the past that the platform focuses on agricultural products, as long as it garners enough users, it should be able to expand into other product categories with relative ease.
Apart from Pinduoduo, some short video platforms are also accelerating their livestream shopping businesses. Despite the Chinese government’s ongoing attempts to tighten regulatory control since late last year over the livestream shopping industry, Kuaishou still managed to grow its gross merchandise value by 47% in the March quarter compared with the same period the previous year. And in the last 12 months until the end of the March quarter, its gross merchandise value reached CNY 730 billion, close to 9% of what Alibaba made. While there’s no official data on TikTok, given that it’s still a private company, surely TikTok would boast more livestream transactions than Kuaishou. Clearly, competition among e-commerce platforms looks set to get increasingly fierce.
Earnings outlook
There are many one-time charges in Alibaba’s financial statements that if one is to get a good grasp of its earnings trends, one will have to look not only at its annual report, but also keep track of its core earnings per share in each fiscal quarter with all one-time charges removed from the analysis. Alibaba’s year-on-year core earnings per share started to drop since fiscal third quarter last year, and continued into fiscal second quarter this year without showing signs of narrowing in the scale of the decline. Given a slowdown in China’s economy induced by Covid-related lockdowns beginning in March, it remains unclear where the bottom of Alibaba’s earnings lies. As such, the pace at which Alibaba’s year-on-year earnings grow in fiscal second quarter becomes even more important – even though a low base last year would mean that the company should be able to achieve a year-on-year increase in earnings relatively easily, investors will need to be mindful of the residual effect of Covid-related lockdowns on Alibaba. And despite a plethora of investment initiatives, there’s no denying that, thus far, Alibaba generates a large part of its profits from the traditional retail e-commerce business in the domestic market. Unless any of its businesses make a breakthrough, we think it’s unlikely that Alibaba will see its earnings grow at the same scale as before.
The valuation of Alibaba
Alibaba has seen a decline in its year-on-year earnings since fiscal third quarter last year. Assuming a full-year drop in its core earnings in fiscal third quarter this year, and taking that into account in the calculation of its price-to-earnings ratio (P/E ratio), it will place Alibaba’s current P/E ratio at around 13.3x. Unless its earnings fall further on a year-on-year basis, we believe this P/E ratio looks quite fair.
Last but not least, given Alibaba’s plan to make Hong Kong its primary listing destination, capital from mainland China will likely stream across the border into Alibaba at the end of the year, supporting its stock price.
Conclusion
To summarise our analysis of Alibaba above, as the domestic e-commerce industry grows ever more competitive, we don’t see any new growth area for the time being unless there is a breakthrough in Alibaba’s new businesses. But if its earnings stabilises on a year-on-year basis in the coming fiscal quarter, there should be limited room for the stock price to retreat further from its P/E valuation of 13x. Meanwhile, it should help that Alibaba is seeking a primary listing in Hong Kong, whose capital inflow from China will likely support its share price.
Disclaimer
This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.
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