By Clay Chandler and Eamon Barrett
August 25, 2018

Dark clouds are gathering over the Chinese economy these days. An escalating U.S.-China trade war threatens exports. China’s stock markets are in a funk. The yuan is losing ground against the dollar. To hear The New York Times tell it, the nation’s middle class is in the throes of a “consumption downgrade.” How, then, to account for the sunny 2018 first quarter financial results of Chinese e-commerce giant Alibaba?

On Thursday, the NYSE-listed company, which operates China’s two largest e-commerce platforms, reported that total revenue in the three months to June 30 surged 61% over the previous year to $12.2 billion. That’s BABA’s best quarterly performance in four years, surpassing growth rates of all peers in the so-called FAANG + BAT group (which includes America’s Facebook, Amazon, Apple, Netflix, Google parent Alphabet, and China’s Baidu, Alibaba and Tencent.)

Alibaba said most of the growth came from its online shopping sites, led by Taobao and T-mall, which generate more than 80% of total turnover. The company’s top line also benefited from expansion of newer businesses including digital media and entertainment, where quarterly revenue rose 46% to $903 million, and cloud computing, where quarterly revenue nearly doubled to $710 million.

Vice chairman Joe Tsai, in a call with investors, said Alibaba’s buoyant revenues reflect the fact that China’s middle class continues to grow, and that consumers have ample savings and easier access to credit. A trade war won’t derail that growth, he argued, because Beijing will do whatever it takes to support domestic consumption. And if tariffs make goods from the U.S. more expensive? Chinese consumers can buy from other countries. “The world is a big place,” he said.

True enough. But many wonder about Alibaba’s ability to stay profitable in that big world—doubts that weren’t allayed by a 40% plunge in the company’s quarterly net income. Alibaba called the decline a “one-off,” attributable to a gain in the value of Ant Financial, its financial payments affiliate, which raised the cost of shares given to Alibaba employees. Excluding that one-time impact, the company said, net income would have risen 35% year-on-year.

Bloomberg columnist Tim Culpan doesn’t buy it. He argues that, for Alibaba, “exceptions” are becoming the new rule. And in aggregate, those “one-time items” have a recurring pattern: they goose revenue at the expense of profit. A case in point: Alibaba said Thursday it will team with SoftBank to pump more than $3 billion into, the food delivery arm it acquired in April, and merge operations with Koubei, a business unit focused on connecting restaurants to the internet. That consolidation follows a similar move last September, in which Alibaba assumed control of Cainiao Smart Logistics Networks, an unprofitable delivery business, for $800 million, and vowed to spend billions more to expand its shipping network. The company also has acquired Intime Retail Group, which operates a string of department stores and shopping malls; secured a large stake in Suning Commerce Group, a consumer-electronics retailer; and is scrambling to expand its chain of Hema supermarkets, which offer sit-down dinning, sell groceries and function as a delivery hub. Alibaba calls this its “new retail” strategy; the aim is to gain scale, ward off competitors, and establish as many “touch-points” as possible with Chinese consumers. But as it morphs from asset-lite digital retailer to bricks-and-mortar behemoth, Alibaba’s top and bottom lines are being pulled in different directions.

In Thursday’s release, CEO Daniel Zheng promised Alibaba “will continue to invest in strategic business opportunities and innovation to sustain our competitive advantage and for long-term growth.” For investors, the question is whether those “business opportunities” are truly strategic, or masking the fact that China’s e-commerce market is beginning to mature.

More China news below.

Clay Chandler


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