Alibaba faces competition
We believe that competitive support (“Economic Moat”).Ali Baba (“Wide Trench”) is intact, but we have revised our outlook rating from Stable to Negative.
Despite increased competition, we maintained our competitive anchor estimate due to Alibaba’s strong network effect, where the platform’s value to consumers increases with more merchants.
Network effect
Alibaba monetizes the network effect better than any other e-commerce platform in China.
None of its new competitors, mostly e-commerce platforms Pinduo-duo and short video platforms Douyin and Kuaishouproved that physical goods can monetize the e-commerce market with sustainable profit margins.
Alibaba has been profitable for ten years and we believe it will remain profitable for the next 20 years.
In addition, we believe that Kuaishou and Douyin’s live e-commerce offerings complement, rather than replace, existing e-commerce platforms as consumers use live e-commerce for impulse purchases rather than planned or impulse purchases.
Live streaming has a high return and payback rate (30%-40% by Xiaohulu), which we believe is inherent to its impulse-buy nature. This makes it difficult for brands to rely solely on this long-term channel.
E-commerce heavyweights
Even if these new competitors manage to achieve long-term sustainable profits, we still find it difficult to change Alibaba’s position in the e-commerce market due to its share of consumer minds and access to a wider range of products (SKUs). its logistics infrastructure, operational expertise (eg product and merchant management, consumer protection) and tools for merchants to manage the full product lifecycle.
It is the largest e-commerce platform that results in predictable and predictable production costs for its merchants in terms of sales and production volume.
Despite competition, Alibaba said it retained more than 90% of its highest annual active consumers aged 25-44, contributing 70% of total merchandise volume for the year ending September 2021.
Alibaba is pioneering new retail and offers solutions to diversify consumer scenarios such as on-demand delivery, online-to-offline commerce and content-based e-commerce. We believe that Alibaba will always have a place in China’s increasingly complex retail market.
Negative outlook
However, due to increased competition and fragmentation in the online retail business, we view the outlook for competitive advantage as negative.
While there is great uncertainty as to whether Alibaba will remain a dominant player in e-commerce and the ability of other competitors to achieve the same scale and profitability, we believe that increased competition from multiple players will reduce market share.Alibaba’s market performance and return on investment capital.
Macro effect
We maintain our fair value estimate for the stock at HK$182 or US$188 per share.
We revised down our estimates for Alibaba’s total product sales, revenue and adjusted operating income (EBITA) in China for fiscal 2022, down 300 basis points to 7%, 370 basis points to 20% and 230 basis points to 142 to CNY billion due to weak macroeconomics and competition, respectively.
These changes are offset by the time effect of our estimation model.
We expect an economic recovery in 2022 driven by looser monetary policy and supportive fiscal policy.
We continue to believe that Alibaba is significantly undervalued in the current environment.
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