BABA.US 9988.HK
Alibaba International gets set to stand on its own

The international commerce unit of e-commerce giant Alibaba posted strong top-line growth as it prepares for potential fundraising

Key Takeaways:

  • Alibaba International’s revenue grew 41% in the June quarter, following consolidation of its various global assets under a single leadership team
  • Alibaba partner Jiang Fan is leading the team with major e-commerce operations in Europe, Southeast Asia, the Middle East and South Asia, and potential to expand into other markets

  

By Teri Yu and Doug Young

E-commerce giant Alibaba Group (BABA.US; 9988.HK)is best known as a juggernaut in its home China market. But its international arm is flexing its muscle to help prove that the company is more than just a Chinese act.

Alibaba International Digital Commerce Group (Alibaba International), whose major assets target both developed and developing markets such as Europe, Southeast Asia, the Middle East and South Asia, strutted its strong performance as a standalone business in its parent’s latest quarterly report released last Thursday, including strong double-digit revenue growth and a sharp reduction in its losses.  

Alibaba International’s move into the investor spotlight is being driven by its parent, which announced a breakup plan in March that would turn it into a holding company with six separate operating units. The international commerce business is one of those, alongside five other units consisting of segments such as China domestic commerce, cloud intelligence, logistics, digital media and entertainment and local services.

Alibaba emphasised that each of the six will have its own management team and board, enabling them to set their own strategy and conduct fundraising.

Alibaba International operates e-commerce businesses globally, including: Lazada, a Southeast Asian B2C platform; AliExpress, a B2C marketplace serving consumers in more than 100 countries and regions; Trendyol, the company’s European flagship; and Daraz, which is focused on South Asia. Apart from AliExpress, the other assets were all acquired over the past few years by Alibaba.

The company’s assets also include Alibaba’s original Alibaba.com marketplace, which is its only global B2B marketplace.

Strong revenue growth

Next, we’ll look at some of Alibaba International’s financials revealed in the latest disclosure, the second such set of financials since the parent company announced its recent breakup plan. Its revenue rose 41% year-on-year to $3.05 billion in the three months to June, ahead of analyst expectations for 20% to 36% growth and extending its 29% revenue growth in the previous quarter.

While it did not provide detailed revenue breakdowns for different assets, total revenue from Alibaba International’s retail business grew 60% to $2.36 billion on strong order growth driven by solid performance across its major retail platforms, and improvements in monetization. Revenue for the Alibaba.com B2B platform was flat during the quarter.

Combined orders for all of its major B2C e-commerce platforms grew around 25% year-on-year, driven by solid performance from all of its major retail platforms. The company also suggested that online activity remained brisk even after shopping in traditional brick-and-mortar stores returned to more normal levels with the lifting of Covid-19 restrictions worldwide.

The company’s adjusted EBITA loss for the quarter narrowed sharply by 70% to $58 million from approximately $190 million a year earlier, as margins improved for Trendyol and Lazada. Trendyol, which is based in Turkey, marked a major milestone by achieving its first operating profit during the quarter on strong revenue growth and improved operating efficiency.

Alibaba International also noted that orders on AliExpress continued to grow strongly on an expanding transacting user base and improving customer experience. It said its new “Choice” service has been a very successful addition to the platform’s integrated cross-border services, helping to improve customer experience and significantly boost AliExpress’ user retention rate and purchasing frequency.

“Looking ahead, we will continue to expand the ‘Choice’ model leveraging the capabilities of an integrated cross-border supply chain and enhanced consumer experience with higher certainty in logistics and service level,” said Alibaba Group Chairman and CEO Daniel Zhang on Alibaba’s earnings call, adding the “Choice” model will be expanded to other platforms.

Lazada recorded double-digit order growth year-on-year by offering more value-added services to merchants to improve its monetization rate. As a result, the platform’s unit economics continued to improve year-on-year.

Dedicated leadership team

The results show how Alibaba is starting to wring out greater efficiencies and more synergies by bringing together its various global assets under a dedicated leadership team led by Jiang Fan, one of a core group of Alibaba partners that determines the company’s strategic direction.

Jiang joined Alibaba in 2013 when the company acquired Umeng, a mobile app analytics service he founded in 2010. With his strong background in product development during his earlier stint at Google China, Jiang became heavily involved in developing Alibaba’s popular Taobao app. He previously served as president for both Taobao and Tmall, Alibaba’s two main domestic e-commerce platforms, and became president overseeing the international commerce business early last year. He is currently the CEO of Alibaba International.

His strong e-commerce and technology background will be two of his biggest strengths as he tries to improve efficiencies at the various platforms now under him, and take the newly independent Alibaba International into new markets.

The Alibaba breakup will see most of the six new units, including Alibaba International, conduct their own fundraising to support their development. Alibaba International has yet to comment on specific fundraising plans, including the potential for an eventual IPO. But its strong growth and narrowing losses should help to attract external investors.

Rivals like Amazon (AMZN.US), Coupang (CPNG.US) and Sea Ltd.’s (SE.US) Shopee, as well as Alibaba Group itself, all currently trade at price-to-sales (P/S) ratios between 1.5 and 2.7. A ratio for Alibaba International in the middle of that range would give the company a market value of around $24 billion, based on an annualization of its latest quarterly revenue. Investment banks have provided their own valuation predictions for Alibaba International. Among them, Morgan Stanley’s estimate is relatively conservative at $32 billion, while Citigroup’s is more optimistic at $41.5 billion.

Alibaba previously said that Alibaba International was likely to use any new funds it raised to expand into new geographic markets, invest in new technologies, and enhance its products and services to help expand its customer and supplier bases. As an independent company, the unit will be able to respond more quickly to local market opportunities and attract local talent to strengthen its management team.

Not long after its U.S. listing in 2014, Alibaba noted that globalization was one of the three main pillars of its growth strategy, reflecting the importance it places on the international commerce unit. Yet Alibaba International currently contributes just 9% of its parent’s massive revenue, meaning it will feel some pressure to boost that contribution.

Results from the last two quarters show that Alibaba International is ready to stand on its own, though it still needs to find a formula for sustained profits, even as competition remains stiff in its various markets. Morgan Stanley said the profits could come soon, forecasting the business will break even in 2025 and become profitable in 2026. Such profits will be crucial for attracting future investors, including for a potential IPO down the road.

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