If China Sags, Can Alibaba Soar?

August 25, 2018, 11:53 AM UTC

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 Ele.me, 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.

Economy and Trade

War wages on. Talks between U.S. officials and a Chinese trade delegation yielded no results this week and a second tranche of tariffs went into effect on Thursday, hitting $16 billion of imports from both countries. Ahead of the meetings, President Trump expressed his low expectations for the talks, the first between Chinese and U.S. counterparts since the trade war began. President Trump also stated that he had “no time frame” for ending the dispute. Reuters

Geely changes gear. Hangzhou-based Geely has become China's third largest carmaker with profits growing 54% over 6 months. Geely cruised past Nissan, Toyota and Honda to take third place behind General Motors and Volkswagen in the world's largest car market. Financial Times

Made in Cambodia. As wages for factory workers in China have increased, fashion manufacturers have begun diversifying their supply chains, opening new workshops in other Southeast Asian countries. Now, with the added cost of tariffs on imports from China, the exodus is likely to pick up pace with Cambodia and Vietnam emerging as popular destinations. Bloomberg

Bad PR for BRI. Following a five-day visit to China, Malaysian president Mahathir Mohamad confirmed that two Chinese-backed infrastructure projects, costed at $22 billion, would be cancelled. The projects are the latest PR set-back for China’s Belt and Road Initiative (BRI), with several other governments backing out of proposals to avoid falling into severe debt. China state media went into spin mode, emphasising Mahathir’s general support of the BRI and talking up the mutual respect between the two countries. But Mahathir warned that China’s growing economic clout could lead to a new form of colonialism. New York Times

No more loans. A senior official at the China Banking and Insurance Regulatory Commission warned that the banking industry is facing a moment of reckoning. The official, Yu Xuejun, predicted there will be a surge in non-performing loans but said that the government will not allow another large scale expansion of credit to help financial institutions ease the pain. The government is still dealing with the fallout from previous stimulus efforts, he said. South China Morning Post

Innovation and Tech

Super IPO. China’s multi service superapp, Meituan Dianping, has reportedly chosen September 20 for the date – and Hong Kong for the location – of its upcoming IPO, which is expected to value the company at $50 billion. That would fall just shy of Xiaomi’s IPO last June, which valued the smartphone maker at $54 billion. It was the largest tech IPO for four years. Meituan is expected to embark on a global roadshow on September 3 to drum up investors for its debut. Caixin Global

Aussie rules. Australia has blocked Huawei and ZTE, two of China’s leading telecom manufacturers, from providing equipment to help build its national 5G network, due to concerns over national security. Huawei announced the news itself, on Twitter. Australia has often opposed Huawei’s operations, and both companies have been blocked in America for similar reasons. The United Kingdom has cast a wary eye over ZTE and Huawei too, where the latter is a major supplier of internet infrastructure. The main concern is that Chinese authorities will pressure the companies to hand sensitive data from foreign partnerships, as per the “National Intelligence Law” enacted by Beijing last year. TechCrunch

Data dash. A group of Chinese companies stole 3 billion pieces of user data from 96 tech companies, including the account details of shoppers on Alibaba’s platforms and user data from Tencent’s WeChat, by siphoning off information from China’s Big Three telcos: China Mobile, China Unicom and China Telecom. Caixin Global

Tencent's Toutiao. Qutoutiao, a Tencent-backed rival to China’s leading $30 billion news aggregator, Toutiao, is gearing up to go public on Nasdaq. The move follows an upward trend of Chinese unicorns seeking IPOs in the U.S. away from the floundering markets in Hong Kong and the mainland. Tencent and Toutiao have been locked in a bitter feud this year, with the latter accusing the former of stifling its growth to support its rivals. Nikkei Asian Review

In Case You Missed It

China Hotel Fire Kills 19 on Eve of International Marathon New York Times

China Is Getting Tougher on Cryptocurrencies A Year After Its Crackdown Wall Street Journal

Chinese vendors are refusing to accept cash and it’s becoming a problem TechNode

How Hackers Take Abandoned Chinese Uber Accounts for a Wild Ride Sixth Tone

Beijing real estate companies agree to stop raising rents Sixth Tone

AI system recognizes porn through voice recognition Xinhua

The great Chinese art heist GQ

Chinese state media mocks Trump in video, then deletes it Asia Times

Politics and Policy

Policy proof. Beijing will carry out a series of “targeted inspections” this year to ensure that national policies are actually being implemented at a regional level. The central authority has historically struggled to impose its will at a local level, with officials sometimes falsifying data to appear as though they are toeing the line. But the Xi administration is taking a harder stance against lackadaisical cadres. Xinhua

Taiwan untied. El Salvador has switched sides, formally recognising Beijing as the true government of China and severing diplomatic relations with Taiwan. Its motivation appears to be financial: Taiwan had refused to fund a port in the Central American republic because its engineers deemed it unfeasible; meanwhile China is intent on funding infrastructure projects worldwide and offers a host of economic opportunities besides. There are now only 17 nations that officially recognize the Taiwanese government. New York Times

Praise for propaganda. After the U.S. and China sank into a trade war, Beijing told national media to keep quiet about Made in China 2025: the plan to achieve superiority in various tech fields by 2025. It appeared China’s propaganda machine had overstepped its mark by flaunting China’s aspiration to surpass American engineering, because industries related to the policy are now the target of Trump's tariffs. But at a recent convention of top level officials, Xi Jinping praised the propaganda department’s work as “absolutely correct”. Reuters


This edition of CEO Daily was edited by Eamon Barrett. Find previous editions here, and sign up for other Fortune newsletters here.