Alibaba takes a step back as growth finally returns

Alibaba takes a step back as growth finally returns

(Bloomberg) — Alibaba Group Holding Ltd. has returned to growth across all of its major divisions, braving the economic turmoil in China to take a first step toward a long-awaited comeback after more than a year of malaise.

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The China online shopping company, a proxy for consumer demand in the country, reported a better-than-expected 14% increase in revenue in a quarter when the world’s No. 2 economy struggled to gain momentum after years of Covid Zero restrictions. Its shares rose as much as 3.9% in Hong Kong.

The strong showing is a step toward reviving a national icon grappling with post-Covid consumption chaos, and bullish emergence such as PDD Holdings Inc. and the continuing effects of China’s crackdown on the private sector. Alibaba led that expansion with a 6% cost cut, helped in part by a 3% cut in its workforce, or more than 6,500 people.

Alibaba, which is credited with creating China’s internet industry, along with Tencent Holdings Ltd.

For now, the results provide a solid foundation for Alibaba co-founders Joseph Tsai and Eddie Wu as they take over the helm of the company from Daniel Zhang in September. Alibaba’s cloud division reversed its decline in the quarter, and the outsourcing arm that includes Singapore-based Lazada and Trendyol expanded revenue 41%. The core Domestic Trade division – which is now cutting out certain peripheral sectors – posted its first sales increase in more than a year.

“We view the strong revenue and earnings generated in fiscal 1Q124 as what the Street has been waiting for,” wrote Citigroup analysts led by Alicia Yap. “Most investors were expecting a good quarter, but the amount of outperformance, particularly in terms of the profit differential, likely exceeded most expectations.”

Alibaba reported revenue of 234.16 billion yuan ($32.3 billion) for the June quarter, against an average forecast of 223.75 billion yuan. Net income rose nearly 50% to 34.3 billion yuan, also beating estimates.

Investors await more details on spin-offs, including grocery arm Freshippo, and its AWS-like cloud and logistics business Cainiao. In the June quarter, the cloud business returned to growth with revenue up 4%, while Chinese e-commerce retail revenue was up 13%.

“The numbers showed promising early results for our reorganization, which is starting to unleash new energy across our business,” Zhang, who will officially step down next month, told analysts on a conference call.

Read more: Jack Ma-Backed Ant profits up 17% at first signs of a rally

What Bloomberg Intelligence says

Alibaba’s proposed listing of nearly $60 billion in assets through 2024 could give the group resources to ramp up its competitive efforts in China’s grocery retail, cloud AI and logistics sectors. Freshippo may use proceeds from its estimated $4 billion IPO to chase Walmart in grocery e-commerce sales. After an initial public offering that could be valued at $45 billion, Alibaba’s cloud unit may expand with the support of new strategic investors to take on Tencent, Huawei and China Telecom. Cainiao’s IPO, which could be worth up to $10 billion, could accelerate the logistics unit’s expansion in China and abroad.

— Katherine Lim and Trini Tan, analysts

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China’s two largest technology companies Alibaba and Tencent Holdings Ltd. About $70 billion in market capitalization since the end of May, driven by expectations of a gradual return to sustained double-digit growth before Beijing launches a regulatory assault on its largest private companies in 2020.

Driven by the need to rejuvenate the world’s No. 2 economy, Xi Jinping has in recent months led party cadres and state media in declaring Beijing’s support for a sector wracked by two years of unexpected diktats. In July, Beijing signaled it was ready to deregulate the sector when it concluded an investigation into Jack Ma’s Ant Group Co.

However, some investors warn that the celebration may be premature.

Chinese policymakers have stopped providing direct major financial or political support to businesses, and consumer spending remains muted thanks to poor wage expectations and record youth unemployment. Profit margins remain under pressure amid increased competition from start-ups that have mostly escaped the brunt of the crackdown such as ByteDance Ltd. and PDD.

Alibaba and Tencent cut more than 20,000 jobs between them last year to weather the regulatory and economic turmoil. They face a two-pronged attack: competitors like Baidu Inc. and Meituan are vying for internet dominance thanks to the rise of generative AI. Baidu has stolen a lot of the spotlight so far in the post-ChatGPT race, debuting Ernie in March before launching into several iterations.

Abroad, both ByteDance and PDD’s Temu continue to make strides, building on expansions begun when Alibaba and Tencent were forced to show restraint. During the crackdown, companies including TikTok and ByteDance’s Temu have accelerated their forays abroad into growth. Despite rising geopolitical tensions, this generation of juniors provides a model for their older peers seeking to recapture pre-campaign heights.

“There are uncertainties ahead on this road,” said Trudy Day, head of Taobao and Tmall. “But I think in the face of all of these uncertainties and potential volatility, our greatest certainty is the need to continue to expand our range of users and our range of merchants.”

– With assistance from Debbie Waugh, Vlad Savov, and Henri Reine.

(Updated posts in the second paragraph.)

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