Alibaba offers few answers as crackdown uncertainty persists

Alibaba Group Holding Ltd. offered investors few clues into how the regulatory crackdown on Jack Ma’s tech empire will impact its future growth after reporting a stronger-than-expected 37% increase in quarterly sales.
The e-commerce giant has established a special taskforce to conduct internal reviews and is actively communicating with antitrust regulators on complying with their requirements as investigations continue, Alibaba said yesterday. It’s also unable to make a complete assessment of how the ongoing “rectification” of affiliate Ant Group Co. will affect its business, according to the statement.
The stronger-than-expected earnings may be overshadowed by an ongoing antitrust probe that has already wiped more than $130 billion off the e-commerce giant’s value since its October record. Uncertainty began in November when regulators first torpedoed Ant Group’s record initial public offering, then launched their investigation into the online retailer. Alibaba’s stock has dropped 13% since Ant’s aborted debut, the worst performance on Hong Kong’s benchmark Hang Seng Index. The shares in New York were little changed in pre-market trading.
“Ant Group’s business prospects and IPO plans are subject to substantial uncertainties,” Alibaba Chief Executive Officer Daniel Zhang said on a conference call yesterday. “We will further update the market when the investigation is concluded.”
Alibaba’s shares recouped some of their losses after Ma resurfaced in public during a live-streamed video conference last month, in an apparent signal that worst-case scenarios – such as a government-led takeover or break-up of his companies – are probably now off the table. Few expect Beijing to entirely back off its campaign to more tightly regulate Ant, Alibaba and the rest of China’s high-tech giants. But the stock’s partial recovery suggests investors are beginning to price out the risk of a crackdown that would put the country’s richest entrepreneurs and most innovative companies in serious jeopardy.
Zhang spent a substantial portion of Alibaba’s earnings call talking about the company’s “social responsibility” in elevating small merchants and driving rural consumption, two of Xi Jinping’s priorities as Beijing tries to lift the countryside from poverty.
Two of Alibaba’s largest and fastest-growing divisions made it into the black during the holiday quarter – an important milestone for the company. Its cloud business reported its first ever positive adjusted earnings before interest, tax and amortization, while revenue for the segment rose 50%, driven by customers in the internet, retail and public sectors. Cainiao, its logistics unit, was also operating cash flow positive, the company said.
Annual active consumers grew to 779 million in the December quarter, driving a 38% increase in its core commerce business. Alibaba booked $75 billion of sales over its annual Singles’ Day promotions last November, easily beating its 2019 haul after the company began promotions early and added additional services to the count for the first time. The increased spending came even as overall retail sales fell 3.9% last year, with consumption lagging industrial activity in the broader economic recovery.
But investors are questioning whether Alibaba can sustain that growth as Beijing steps up oversight of Chinese tech giants, particularly in online commerce. Ma’s firm, once the standard-bearer for China’s fast-rising private firms and booming internet sphere, now faces penalties of as much as 10% of its revenue or some $7.8 billion if it’s found to have violated rules against practices like forced exclusive arrangements with merchants known as “Pick One of Two,” predatory pricing or algorithms favoring new users.
Any regulations requiring Alibaba to implement a full halt to forced-exclusivity policies may hit Tmall’s sales by close to a tenth in 2021, before sales return to 18-20% annual growth in 2022 and beyond, according to San Francisco-based Octahedron Capital Management LP. As of now, less than 10% of the top-selling brands are exclusive, they estimated. While Alibaba has exclusive flagship stores with some merchants, in most cases they can sell the same goods on other platforms, Zhang said.
The regulations may also hamper its ability to fend off rivals from Inc. to Pinduoduo Inc., whose 730 million annual consumers are closing in on Alibaba’s user base. Meanwhile, short-video platforms like ByteDance Ltd. and Tencent-backed Kuaishou Technology are also tapping livestreaming as a sales outlet to wrest a larger e-commerce share. Beijing-based ByteDance revealed its Singles’ Day takings for the first time in 2020, with Douyin, the Chinese version of global sensation TikTok, booking 18.7 billion yuan in gross merchandise value.
Ant contributed 4.8 billion yuan to Alibaba’s profit in the quarter, indicating that the company earned 14.5 billion yuan in the three months ended September – before its $35 billion IPO was scuttled – as its earnings lag one quarter behind Alibaba. As part of the crackdown, Ant has been told to “rectify” its lending, insurance and wealth management services. MDT/Bloomberg

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