Company Overview: Alibaba Group Holding Limited (NYSE: BABA) is a holding company that provides a technical framework and advertising reach to merchants, brands, and other organisations, enabling them to leverage the power of innovative technology to engage with customers and operate more efficiently. Its operating segments are 1) Core Commerce, 2) Cloud Computing, 3) Digital Media and Entertainment, and 4) Innovation Projects and Others. As of February 16, 2022, it has 2.72 billion American Depositary Shares (ADS) listed and outstanding, with each ADS representing eight ordinary shares.

BABA Details

Takeaways from Q2FY22 (ended September 30, 2021)

• Double-Digit Growth in Revenue: In Q2FY22, the company's total revenue amounted to RMB 200.69 billion, representing a 29.43% YoY increase from RMB 155.06 billion reported in the same period of the corresponding previous financial year
• Contraction of Operating Margin: BABA reported an operating profit of RMB 15.01 billion for the quarter under consideration, representing a lower operating margin of 7.5% vs. 8.8% for Q2FY21, attributable to a 131-bps increase in total operating expense ratio.
• Decline in Net Income: The company's net income decreased to RMB 5.37 billion in Q2FY22 from RMB 28.77 billion in Q2FY21, representing diluted earnings per ADS of RMB 1.97 in Q2FY22.
• Growth in Active Annual Consumers: During the quarter ended September 30, 2021, BABA's global active annual consumers increased by ~62 million to ~1.24 billion, including 285 million overseas consumers.
• Share Repurchase: In Q2FY22, the company bought back 26.9 million of ADSs for an aggregate repurchase value of USD 5.15 billion. 

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• BABA, an International Olympic Committee (IOC) worldwide TOP partner, revealed its brand-new virtual influencer for the Olympic Winter Games Beijing 2022 on February 10, 2022. Dong Dong, Alibaba's advanced digital persona built to communicate with fans, uses cloud technology to bring the possibilities of cloud-based innovation closer to consumers.
• On December 5, 2021, BABA stated that Toby Xu, its Deputy Chief Financial Officer, will take over as Chief Financial Officer on April 1, 2022, replacing Maggie Wu. Maggie will remain an executive director on the BABA board of directors and a partner in the Alibaba Partnership.
• On December 17, 2021, BABA declared a commitment to achieve carbon neutrality in its operations by 2030 and a Scope 3+ target, a ground-breaking programme to facilitate 1.5 gigatons of decarbonization across its business ecosystem by 2035. BABA intends to give annual updates, with progress being audited by authorized auditors.

Segment Wise Results Q2FY22

• Core Commerce: This segment provides China and International retail and wholesale, logistics, and local consumer services via Taobao Marketplace and Tmall. Core Commerceaccounted for 29% of the total revenue in Q2FY22 and reported YoY growth of 30.74% to RMB 171.17 billion, attributable to 32.84% YoY growth in China commerce retail driven by consolidation of Sun Art and direct sales business including Tmall Supermarket and Freshippo.
• Cloud Computing: This segment offers a range of cloud services, such as database, storage, network virtualization services, big data analytics and others. It accounted for 97% of the total revenuein Q2FY22 and expanded by 33.12% YoY to RMB 20.01 billion, owing to a surge in revenue from the Internet, Financial Services and Retail sectors.
• Digital Media and Entertainment: This segment provides consumer services beyond the core business operations. This segment represented 03% of the total revenue in Q2FY22 and witnessed a YoY increase of 0.19% to RMB 8.08 billion, driven by an increase in revenue from Youku, Alibaba Pictures and the entertainment business.
• Innovation Projects and Others: This segment is engaged in innovating and developing new services and products. It reported YoY growth of 37.43% to RMB 1.43 billion.

Balance Sheet & Liquidity Position

• Cash Position: The company exited Q2FY22 with a cash balance (including equity securities and short-term investments) of RMB 459.21 billion, slightly lower than RMB 483.45 billion at the end of FY21.
• Cashflow from Operations: Operating cash inflow in the quarter ended September 30, 2021, decreased to RMB 35.83 billion from RMB 54.30 billion in the prior corresponding period.
• Leverage position : BABA reported total outstanding debt of RMB 151.75 billion at Q2FY22 end, higher than RMB 149.15 billion as of March 31, 2021.

Key Metrics: In Q2FY22, BABA's gross and net margins were 35.3% and -1.1%, lower than the industry median of 48.4% and -0.3%, respectively. ROE stood at 0.5% in Q2FY22, 110 bps more than the Q4FY21 return. Debt/Equity was 0.16x as of September 30, 2021, marginally higher than 0.14x on September 30, 2020.

Profitability and Leverage Profile; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders (in terms of ownership of ordinary shares listed on the HKEX) together form around 31.10% of the total shareholding, while the top 4 constitute the maximum holding. The SoftBank Group Corp and Tsai (Chung Joseph) hold the maximum stake in the company at 24.79% and 1.41%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Reliance on Alipay: BABA employs Alipay for the majority of its payment processing and escrow services. In FY21, Alipay settled ~70% of the GMV in the China retail marketplace. As a result, any deterioration in its quality, utility, convenience, or attractiveness could harm its operations.
• Ownership Concentration Risk: As of July 22, 2021, SoftBank owned ~24.8% of BABA's common stock, thus gaining substantial control over its operations. This constrains the ability of other shareholders to influence corporate decisions.
• Political and Regulatory Risk: The Chinese authorities' recent crackdown on its US-listed businesses and the consequent possibility of stricter rules could dent its operations. After the passage of a bill in the US, this could lead to the delisting of some Chinese companies from the country's exchanges (if the US authorities cannot satisfactorily audit the company for three consecutive years).
• Competition Risk: BABA operates in Internet & Direct Marketing Retail industry. It faces direct competition from significant Chinese internet companies like Tencent and global e-commerce players, such as Amazon, which could jeopardise its commercial interests.

Outlook

• Looking forward, in its Q2FY22 press release, BABA stated that it expects to achieve YoY growth of 20 – 23% in its FY22 revenues. 

Valuation Methodology: Price/Cash Flow Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last nine months, BABA's share price has corrected 40.92%. The stock is currently leaning towards the lower end of its 52-week range of USD 108.70 to USD 274.29. We have valued the stock using the Price/Cash Flow multiple-based illustrative relative valuation method and arrived at a target price with an upside of low-twenties (in percentage terms). We believe that the company can trade at a slight discount compared to its peer's average, considering its ownership concentration, political and regulatory risks, dependence on Alipay, and stiff competition. We have taken peers like eBay inc. (NASDAQ: EBAY) and Vipshop Holdings Limited (NYSE: VIPS). Considering the strong topline performance, growth in annual active users, associated risks and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 125.56, down 0.54% as of February 16, 2022.

BABA Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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