Earnings season: A mixed quarter for Alibaba

Equities

Alibaba misses earnings estimates but the Chinese eCommerce giant has plans afoot to restore investor confidence after reporting fairly disappointing quarterly results.

Alibaba earnings

For the first time in two years, Alibaba earnings fell below market estimates. The headline is that the Chinese government’s ongoing crackdown on the internet sector has taken its toll on the eCommerce firm. There is still more at play here though.

In its latest quarterly report, Alibaba reported revenues of 205.75 billion yuan ($31.83bn). That’s a 34% increase year-on-year, but still came up shy of the 209bn yuan forecast by market analysts.

Subsequently, net profits slid 8% compared with the previous quarter.

Alibaba also reported 45.1 billion yuan in net income, or about $7 billion, slipped from 47.6 billion yuan

The company swallowed an 18 billion yuan ($2.8bn) antitrust fine earlier this year. Alibaba, like rival Tencent, has recently come under intense scrutiny from Chinese authorities. They believe the pair, which have so far reused to work together, are essentially establishing monopolies in their respective spheres – hence the major fine levelled by the CCP.

But the drop in revenue also comes from investment in an effort to enhance and expand Alibaba’s offer.

“We are investing our excess profits and additional capital to support our merchants and invest in strategic areas to better serve customers and penetrate into new addressable markets,” said Group Chief Financial Officer Maggie Wu in a statement.

However, it goes without saying the fines and shifting regulatory environment in China has caused consternation for Alibaba’s executive team.

“We are in the process of studying the regulatory requirements, evaluating the potential impact on our relevant businesses,” Daniel Zhang, Alibaba’s chairman and chief executive, told analysts on Tuesday. “We will respond with action.”

To reassure investors, Alibaba has revealed it plans to increase its shares buyback plan to $15bn from its current $10bn level.

Alibaba’s investment plan

According to Zhang, Alibaba plans on reinvesting incremental profits into numerous business areas. This includes more cash towards its technology development and ventures, as well as user acquisition, infrastructure, and methods to lower its merchant partners’ operating costs.

For example, instead of funnelling more users through flagship app Taoboa, the eCommerce firm said it plans to take a multi-app approach to grow new business. Alibaba said this would help it reach customers in rural China as well as lower-tier cities outside of the mega metropolises up and down the country.

“We are working on building a more complete app matrix to better serve the different needs of different consumers,” Zhang said.

The newly-launched Taoboa Deals app, built around budget eCommerce for customers with tighter budgets, is a good example of this. Since going live, Taoboa Deals has accrued over 190 million annual active users in just 16 months.

“When we plan our incremental investment, we always focus on value creation,” Zhang said. “We think that for other companies who are continuously loss-making but still try to enlarge their scale by subsidies, at the end of the day, they have to let the market see the real results.”

What does the market think?

Alibaba shares have been sliding in recent weeks as part of the broader fall in Chinese tech stocks. At the time of writing, however, shares were back in the green, tracking 2% upwards.

Market consensus is still positive about Alibaba shares, as per the sentiment tracker on the Markets.com trading platform:

Alibaba market sentiment

The analyst recommendations tool puts Alibaba as a strong buy:

Alibaba analyst recommendations.

But all depends on how successful Alibaba’s investment plans are – and how successfully the company can navigate a changing regulatory landscape.

To see which large caps are still due to report on Wall Street this season, make sure you check out our earnings calendar.

As a China spending boom looms are these global stocks must buys?

Equities
Investments

Analysts at the Bank of America has chosen luxury fashion stocks moving from one to watch to investor must-buys as Chinese spending boom is forecast. 

Millions of Chinese consumers are rushing to buy high-end fashion items and accessories online. BofA expects two stocks to benefit from this growing trend. China’s middle class already outnumbers the entirety of the US’ population, totalling approximately 700 million people. Their habits may point towards which stocks are must picks now and in the near future. 

“China is the most exciting opportunity in online luxury,” BofA wrote. The bank expects Chinese shoppers to spend $48.9 billion buying luxury goods online in 2025 – four times more than was spent in 2020. 

So which companies are set to benefit most from this boom? According to the George de Mendez-led analysts at the Bank of America Farfetch and Richemont are in the frame to potentially make some big gains. 

Farfetch 

The British-Portuguese brand has been dubbed a “big deal” by the bank in the past, and now its set to become a major juggernaut, according to BofA analysis, thanks to Chinese shopping habits. Farfetch has established a partnership with China’s e-commerce juggernaut Alibaba, and will start selling via the Tmall Luxury Pavilion, as well as on designer outlet platform Luxury Soho. Through the deal that will help Farfetch get access to a potential market of 780 million customers. 

Richemont 

Swiss luxury conglomerate is BofA’s second pick. The Cartier owner has pumped money in Farfetch, and has also partnered with Alibaba to launch a new entity: Farfetch China. 

Richemont’s Yoox Net-A-Porter online fashion business already has a partnership with Tmall and is showing impressive growth in the jewellery segment as highlighted by Bank of America. 

Partnering with Alibaba is crucial here. For Western firms, it can be difficult to crack the Chinese market.  As well as the economy featuring protectionist measures favouring domestic companies, Chinese consumers prefer to shop online or via so called “super apps”. It’s pretty much essential to partner with app owners to get access to markets. 

With an Alibaba partnership, Farfetch gets access to its massive user base. Chinese customers will be will subsequently get access to broader selection of designer labels than what other platforms currently offer. 

Farfetch currently has 3,500 brands available including Gucci, Off-White and Balmain. Comparatively, the Tmall Luxury Pavilion only stocks about 200 designers. 

Yoox Net-A-Porter and Farfetch are competitors, but the Chinese deal has “multiple advantages” for all of the players, according to the BofA analysts.  

Richemont already has access to the Chinese market via its Net-A-Porter Tmall Luxury Pavilion store, but the joint venture with Farfetch will give it access to a wider audience. 

The renewed focus on e-commerce follows a year in which consumers were forced to shop for luxury apparel and accessories online during coronavirus lockdowns.  

Bank of America said the online luxury sector had an “exceptional” 2020 and expects the global market to grow to 100 billion euros in 2025, 15 billion euros more than previous forecasts. 

What about Chinese stocks? 

Some Chinese stocks have great potential. The country’s rapid economic growth is nothing short of breath-taking, and several stocks have been identified as potential must buys. 

Alibaba   

Alibaba Group Holdings Limited is the largest retailer and e-commerce company in China. Alibaba operates some of the largest shopping platforms like Taobao and the aforementioned Tmall 

Very few of those investing in Chinese stocks haven’t heard of Alibaba. It is currently trading at a price over $266 per share, thanks to its cloud division becoming profitable for the first time according to its latest earnings call. Its core commercial revenues grew 38% year-on-year, Alibaba reported in January 2021, with total quarterly revenues clocking in at $33.88bn, beating market expectation.  

JD.com   

JD is one of the biggest B2C e-commerce service providers in China and in the world in general. It’s also one of Alibaba’s chief competitors. It was represented in 85 hedge funds om 2020, with a total hedge fund holding value of $13.57bn.  

Tencent  

Tencent is one of China’s internet kings, operating QQ, the country’s largest social media platform, as well as popular messaging services Weixin and WeChat. Over 1 billion users use Tencent’s messaging services each month, and it boasts over 500m social media users too.  

Recently, its shares tumbled after nearing a $1 trillion valuation, but quickly bounced back, gaining over $230bn following listings, as mainland investors hoover up Tencent contracts on the Hong Kong Stock Exchange. Growing proliferation of smartphone users in China, thanks to its massive middle class, and higher internet penetration rates, make Tencent a very attractive prospect to Chinese and international traders.  

Week Ahead: Inflation readings to shape central bank views

Equities
Forex
Week Ahead

There are a lot of things going on this week, with inflation leading the headlines.

Inflation 

With investors betting the Federal Reserve will cut interest rates again in September, Tuesday’s US inflation figures will be of key importance for the direction of global markets. Core CPI advanced 2.1% in June, its biggest increase in a year and a half. If inflation pressures continue to build, it could undermine doves on the FOMC calling for more hikes. UK inflation figures are released on Wednesday. 

China and Germany growth 

Fears about a slowdown in China and Germany are at the heart of investor concerns for the global economy. As such a batch of data from the two countries this week will be important for risk assets. China’s industrial production figures and the German preliminary GDP print on Wednesday will be the most closely watched. 

Walmart and US retail sales  

Q2 earnings season is well past its peak but US retail giant Walmart delivers its quarterly numbers on Thursday before the market opens. Q1 earnings were a positive surprise with EPS of $1.13 beating expectations of $1.02. The key comp sales number hit 3.4%, making it the best quarter in 9 years. Despite fears for the US economy, consumer confidence and retail sales gauges remain robust. On that front, US retail sales numbers are due on Thursday shortly after Walmart reports. 

Tencent and Alibaba 

We’ll also be watching earnings from China giants Tencent and Alibaba. The ongoing trade dispute between the US and China is sure to be a weight, however Chinese consumers have remained relatively robust. For Alibaba, in addition to its ecommerce platform, we’ll be watching to see how well its cloud computing business is doing. Both represent important bellwethers for the Chinese economy. 

Corporate Diary

Earnings season is still going strong, with these earnings releases in the next week.

Pre-Market14th AugustTencent Holdings Ltd – Q2 Earnings
After-Market14th AugustCisco Inc – Q2 Earnings
Pre-Market15th AugustWalmart – Q2 Earnings
15th AugustAlibaba – Q2 Earnings
After-Market15th AugustNVIDIA Corp – Q2 Earnings
XRay

Tune in live or watch on catch-up.

07.15 GMT12th AugustEuropean Morning Call
17.00 GMT12th AugustBlonde Markets
12.30 GMT13th AugustLIVE: US CPI Coverage
15.30 GMT13th AugustAsset of the Day: Bullion Billions
10.00 GMT15th AugustWalmart Earnings Preview: LIVE
Key Economic Events

Watch out for the following economic events in the coming week.

08.30 GMT13th AugustUK Average Earnings
12.30 GMT13th AugustUS CPI Inflation
09.00 GMT13th AugustGermany ZEW Economic Sentiment
01.30 GMT14th AugustAustralia Wage Price Index
02.00 GMT14th AugustChina Industrial Production
08.30 GMT14th AugustUS CPI Inflation
01.30 GMT15th AugustAustralia Unemployment Rate
08.30 GMT15th AugustUK Retail Sales
12.30 GMT15th AugustUS Retail Sales, Philly Fed Manufacturing Index

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