A Large Chinese Bellwether Stock Is Rising – Here’s Why

Ticker Symbol: BABA

One of China’s largest companies, Alibaba Group Holding Ltd. released its fiscal first quarter results today, and shares listed in New York are up 1.5% this morning. The company produced financials that were well ahead of analysts’ forecasts and better than what many feared. Alibaba is an especially closely watched company because of its size and breadth of presence across mainland China. The firm is typically viewed as a leading indicator of the strength of the Chinese consumer and economy.

While the company’s revenue was down year over year for the first time ever in its history, the top line still came in at 205.6 billion yuan, ahead of projections for 204 billion yuan. Alibaba operates through subsidiaries that have become household names such as Taobao, Tmall, and AliExpress. China’s commerce revenue totaled 142 billion yuan, while international commerce was 15.45 billion. Local consumer services revenue declined to 10.63 billion yuan. Management stated that starting in July, the company was seeing a recovery in consumer demand.

Digital media and entertainment revenue was the biggest laggard, coming in at 7.23 billion yuan versus the market’s estimate of 7.68 billion yuan. Cainiao, the logistics behemoth, reported revenue of 12.14 billion yuan for the three-month period. Cainiao’s growth in the future will be key to Chinese retailers going forward as the company opens sea freight services between China and the U.S. Global logistics and inflation watchers will likewise pay close attention to companies such as Cainio who are trying to shorten delivery times and improve supply chains between the East and the West.

Alibaba, China’s largest e-commerce company, with businesses as varied as digital entertainment to print media, reported earnings that similarly came in better than expected. Adjusted earnings per American depository receipt was 11.73 yuan versus the 10.33 yuan expected by Wall Street. Adjusted earnings before interest, taxes, depreciation and amortization were 41.11 billion yuan, also higher than the expected 34.19 billion yuan. The company reported an operating margin of 20%, higher than the forecast of 17.4%.

Chief Executive Officer Daniel Zhang said that the firm was doing a good job of navigating the government-mandated pandemic-induced lockdowns in the country. The company has also had to navigate amongst stiffer competition from challengers such as JD.com and Pinduoduo. Zhang noted that the slowing Chinese economy was to blame for the tepid 10% growth in the cloud business. Additionally, management laid off hundreds of employees during the quarter to better deal with expenses, which would remain a focus on a forward-going basis.

The company said it would continue to focus on efficiency and managing those factors under its control. Alibaba is also facing the possibility of being delisted from the NYSE as a spat between the U.S. SEC and Beijing continues. The firm has started to upgrade its listing in Hong Kong as a contingency. Lastly, Zhang noted that the company still has $12 billion unutilized in its buyback program which it would be deploying through March 2024.

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