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Alibaba Group (BABA): 2QFY25 First Take: In-line soft quarter; stabilizing take rate and GMV growth pick-up the bright spots; Buy

16 November 2024 | 2:14AM HKT

Alibaba reported a soft quarter that came broadly in line with ours & sell-side (Visible Alpha) expectations, with 5% top line growth where Customer Management Revenue came at +2.5% yoy (vs. GSe 3%/V.A. 2%) with a -5% decline in Taobao-Tmall adj. EBITA yoy (GSe & V.A. both at -4% yoy) while Cloud EBITA margin of 9.0% (GSe 7.0%) and improving margins at non-core/strategic segments were bright spots. We believe the mixed share price reaction (-3% as of writing) has mostly been due to the slower-than-expected Taobao-Tmall GMV growth over the Sep quarter (at c.2%, vs. GSe of 5%/China retail sales of 3%/JD Retail at 6%/China online retail goods of 6%) and the sequentially wider Taobao-Tmall EBITA/Group EBITA declines. These being said, management's forward commentaries for the Dec quarter were relatively upbeat on the back of a stabilizing of Taobao-Tmall take rate in the Sep quarter (that came earlier in timing vs. prior commentaries for Dec 24/Mar 25 quarters), healthy Singles' Day festival GMV growth (which saw an acceleration from Sep quarter GMV) and with Alibaba Cloud growth that improved further with continued high-single digit EBITA margins driven by AI demand. Numbers that matter most: 2QFY25 GMV at low-single digit yoy (vs. GSe of mid-single digit yoy and NBS retail/online retail of 3%/6%), while CMR came in broadly in-line +2% yoy (vs. GSe of +2.5% yoy); Taobao-Tmall EBITA came in broadly in-line at Rmb44.6bn (-5% yoy) vs. GSe of Rmb45.1bn (-4%); Group EBITA slightly declined by -5% yoy to Rmb40.6bn, broadly in-line with GSe/consensus of Rmb39.7bn/40.4bn.

We highlight a few key focus points from the company's earnings call, including: (1) A moderated pace of GMV growth in Sep quarter (GSe: 2-3%) but healthy GMV growth over the Singles' Day festival period, with gradual GMV acceleration in recent months. The company attributed some quarterly fluctuation in GMC growth, in Sep quarter, due to macro/charging of software service fees since Sep that impacted some low ticket size orders (a low single digit impact to GMV growth). For Singles' Day festival, Taobao-Tmall achieved robust GMV growth as per management at stabilized take rate. (2) Taobao-Tmall take rate outlook where the company sees positive drivers including the implementation of software service fees since Sep and improving penetration of site-wide marketing product, while part offset by new offerings/products that takes time to ramp up on monetization, that could lead to qoq fluctuation. (3) Loss narrowing for non-core business segments remain on track, with faster-than-expected progress in the local services, driven by improved operational efficiency and increasing scale, while the other segments will steadily achieve breakeven/profitability over the next 1-2 years; (4) Continued committed share repurchases with a total of US$10bn repurchase in 1HFY25 (US$4.1bn in 2QFY25), albeit at a slightly moderated pace vs. US$4.8bn/5.8bn in 4QFY24/1QFY25 with an abundant US$22bn left in the current share repurchase program where management commented on their focus to reduce share count at a pace that will be a function of share price.

More details on other segments:

  • Alibaba International Digital Commerce Group: revenue growth came in at Rmb31.7bn, +29% yoy (1% below GSe), amongst which, International retail/International wholesale revenues grew by +35%/+9% yoy. Adj. EBITA loss came in at -Rmb2.9bn (from -Rmb3.7bn in 1QFY25), with continued investments into AliExpress/Trendyol platforms to increase mindshare in Europe and the Gulf region. By platform, 1) Lazada reduced operating loss significantly supported by monetization improvement and optimized operations. 2) AliExpress Choice continued to display strong growth, with unit economics also improved on a sequential basis, and meanwhile launched "AliExpressDirect" model to expand product choice and optimize fulfillment efficiency by leveraging local inventories.

  • Local Service Group revenue grew by +14% yoy to Rmb17.7bn, with adj. EBITA loss narrowed yoy to -Rmb391mn (vs. -Rmb2.6bn in 2QFY24), on the back of strong order volume growth of both Amap and Ele.me, alongside revenue growth from marketing services. The narrowed loss is mainly supported by improving operating efficiency and increasing scale.

  • All Others (the N segments, including Dingtalk, Alibaba Health, Fliggy, Freshippo, Intime, Sun Art etc.) total revenue came in at Rmb52.2bn, +9% yoy and adj. EBITA loss came in at -Rmb1.6bn (vs. -Rmb1.4bn in 2QFY24). The revenue increase is primarily attributable to the increase in revenue from Freshippo and Alibaba Health.

We are Buy-rated on BABA/9988.HK with SOTP-based 12-month target prices of US$134/HK$131 per ADS/per share. Key risks: Slower GMV growth, lower monetization, more intense competition.

Exhibit 1: 2QFY25 results at a glance

Source: Company data, Goldman Sachs Global Investment Research, Visible Alpha Consensus Data

Exhibit 2: 2QFY25 results overview (group)

Source: Company data, Goldman Sachs Global Investment Research

BABA 12m Price Target: $134.00 Price: $90.58 Upside: 47.9%
9988.HK 12m Price Target: HK$131.00 Price: HK$87.20 Upside: 50.2%
Buy
Market cap: $239.1bn
Enterprise value: $200.6bn
3m ADTV: $2.0bn
China
China Ecommerce & Logistics
M&A Rank: 3
Leases incl. in net debt & EV?: No
GS Forecast
3/243/25E3/26E3/27E
Revenue (Rmb mn)941,168.01,016,718.31,114,988.11,222,178.0
EBITDA (Rmb mn)191,668.0209,171.6213,217.4233,158.0
EPS (Rmb)62.3563.8368.3671.47
P/E (X)9.610.39.69.2
P/B (X)1.51.61.61.5
Dividend yield (%)2.02.02.22.4
N debt/EBITDA (ex lease,X)(2.1)(1.9)(1.9)(1.9)
CROCI (%)17.215.716.317.5
FCF yield (%)9.57.89.710.9
6/249/24E12/24E3/25E
EPS (Rmb)16.4415.9020.0311.58
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 14 Nov 2024 close.

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The rating(s) for Alibaba Group (ADR) and Alibaba Group (H) is/are relative to the other companies in its/their coverage universe: Alibaba Group (ADR), Alibaba Group (H), Dada Nexus Ltd., Full Truck Alliance Co., J&T Global Express Ltd., JD Logistics, JD.com Inc. (ADR), JD.com Inc. (H), Kerry Logistics Network Ltd., Meituan, PDD Holdings, S.F. Holding, STO Express, Sinotrans Ltd. (A), Sinotrans Ltd. (H), Tencent Holdings, Vipshop Holdings, YTO Express Group, Yunda Holding, ZTO Express (Cayman) Inc. (ADR), ZTO Express (Cayman) Inc. (H)

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Goldman Sachs beneficially owned 1% or more of common equity (excluding positions managed by affiliates and business units not required to be aggregated under US securities law) as of the month end preceding this report: Alibaba Group (ADR) ($90.58) and Alibaba Group (H) (HK$87.20)

Goldman Sachs has received compensation for investment banking services in the past 12 months: Alibaba Group (ADR) ($90.58) and Alibaba Group (H) (HK$87.20)

Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Alibaba Group (ADR) ($90.58) and Alibaba Group (H) (HK$87.20)

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