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Chinese tech giant Alibaba falls from grace

Kate Lin, CAIA  |  25 Nov 2021Text size  Decrease  Increase  |  
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The concept of “common prosperity” stunned many billionaires in China. The goal of this drive is to rectify income inequality by redistributing wealth, alongside other measures. As part of this, the country’s regulators took aim at the tech giants and other huge conglomerates, issuing fines on these mega-scale firms and launching new rules to regulate their misbehaviors, such as building monopolies and a lack of social responsibility.

In the past months, these rules upended the ecosystem, and disturbed much of the growth. Most recently, China’s market regulator fined e-commerce conglomerate Alibaba (BABA) and competitor JD.com (JD), alongside other companies, for failing to comply with anti-trust legislations in 43 deals that date as far back as 2012.

Third-quarter earnings were the first chance for our analysts to assess the impact of these measures on two wide-moat e-commerce titans, Alibaba and JD.com.

Fair value for Alibaba slashed

Morningstar analysts have cut the fair value for Chinese technology giant Alibaba by 32% to HKD 188 after a double digit drop in third quarter net income.

In its third-quarter analyst call, management at Alibaba blamed intensifying competition and dwindling consumer spending in China for the weak quarter.

Its three-month revenue was RMB 201 billion ($43.6 billion), up 29% year over year. After marking down the value of equity investments, Alibaba’s net income plummeted 81% to RMB 5.4 billion ($1.1 billion). Alibaba’s management guides down the yearly growth of the fiscal year 2022 to between 20% and 23%, short of the 25% that analysts at Morningstar were projecting.

It was a different story at competitor JD.com, where results beat analyst expectations and led to a 6% upgrade to fair value in November, from US$ 106 to US$ 113.

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In the third quarter of 2021, JD.com posted a net loss of RMB 2.8 billion ($0.6 billion), compared to a net income of RMB 7.6 billion ($1.6 billion) for the same period last year. While the environment is challenging for the whole sector, the results are better than our analysts’ expectations.

Chelsey Tam, senior equity analyst at Morningstar, points to stronger user loyalty and demonstration of strong execution in JD and says: “[Management’s] guidance has led us to increase our 2021 EPS by 61%.”

Alibaba no longer the clear winner in e-commerce war

Room for e-commerce firms to maneuver greater reduced following multiple rounds of regulatory investigations. After months of observation, Tam isn’t convinced that Alibaba will be the final winner in a tug of war.

While Alibaba still holds an exemplary rating in capital allocation, Tam points to evidence that its domestic and international business leadership is being shaken by a spate of contenders. “We are also less optimistic about Alibaba’s long-term growth due to the trend of consumers making purchases in an increasing number of channels.”

For instance, Alibaba’s online food delivery service Eleme lost its market share to Meituan (03690). Annual active buyers on Pinduoduo (PDD)’s platform now exceed that of Alibaba’s. Lazada, an online marketplace in Southeast Asia majority-owned by Alibaba, lost share to Shopee under Sea Group (SE). Alibaba’s weak earnings to surface challenges that “go beyond the economic cycle”.

Because of stricter regulations, e-commerce players in China, especially the country’s largest scale ones, are forbidden to use tactics like forging exclusive deals with vendors to bring down rivals. Under such an environment, JD’s primary focus on higher-margin business is a positive. 

Tam believes JD is the better pick between the two e-commerce giants. Earlier this month, Tam also granted a wide-moat rating to JD.com for its intangible assets. She thinks JD.com has built up a reputation for highly reliable inventory of genuine merchandise that is readily available and an efficient and fast proprietary logistics services.

She retains her wide moat rating for Alibaba and continues to view it as undervalued.

is a Data Journalist for Morningstar Asia, and is based in Hong Kong

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