Alibaba smashes Singles Day record

According the Alizila, Alibaba Group’s news network, during the 2018 festival, over 40% of consumers bought from international brands. The top countries selling to China were Japan, the US, South Korea, Australia and Germany. Also, 237 brands topped 100mn yuan in GMV, including leading international brands Apple, Dyson, Kindle, Estée Lauder, L’Oréal, Nestle, Gap, Nike and Adidas.

According to the national bureau of statistics in China online retail sales have slowed 10.3% throughout 2018, from 37.3% YoY in February to 27% YoY in September. However, the Singles Day sales numbers confirm that consumer confidence in China is not yet feeling the pinch from trade tensions and the domestic slowdown. The sales figure of 213.5bn yuan represents an average of 5% of per capita disposable monthly income spent across the entire Chinese population. In fact, on these numbers alone, it looks like the secular growth thematic of the middle-class consumption premiumisation we have previously written about is alive and well and consumers certainly haven’t stopped shopping.  

Another secular growth theme arises from China’s lower-tier cities and rural areas as they become larger and wealthier, injecting further consumption potential into the economy. Income growth and urbanisation upgrades purchasing power in these areas which has been a key focus for Alibaba’s Taobao platform. Alibaba offered discount coupons in rural counties to promote customer penetration beyond cities, as well as employing “Rural Taobao representatives” at village centres. This has proven to be a successful strategy with sales in rural areas picking up in this year's Singles Day frenzy. Sales of Buick vehicles in rural areas, an automobile brand of the American manufacturer General Motors (GM), accounted for 1/7th of the total Buick sales. 

There are currently 52 sell-side analysts covering Alibaba, of which 51 have a buy rating with just one hold rating. The average 12-month price target is $206.53, which represents a 42.6% premium to yesterday's close. 

Despite sell-side analysts’ bullish recommendations, Alibaba’s stock has declined substantially in recent months. Alibaba is now trading 30% off the June 2018 highs, but long-term growth and earnings potential is still robust despite the economic impact of trade tensions.

If you are a long-term investor, the fundamentals are strong for Alibaba and the recent pullback in price could present an opportunity, although downside risks exist if the macro headwinds in China persist. However, given the large equity market declines and indiscriminate sell-off that has already been seen YTD, one could argue that the growth slowdown and adverse trade war impact has already been priced-in, leaving limited downside risk in the market. With the Chinese government being firm on supporting the economy it is our expectation that further weakness from here will not take the market down and that Beijing’s support should not be underestimated.

Alibaba enjoys a dominant position in the Chinese market and has increased its footprint both domestically as well as into new markets, leaving it firmly placed for expansion in the coming years. The Chinese middle class will grow from 12% of the country's population in 2009 to 73% in 2030, according to OECD statistics. These demographic shifts have unleashed a wave of consumer spending in China from which Alibaba benefits. The company operates two of China’s most popular online market places, Taobau and Tmall, which are the go-to options for products and services online. 

Surveys have shown more than 66% of shoppers prefer these marketplaces above others. The interconnected marketplaces drive traffic to each other, which lowers user acquisition cost. In Q3, Alibaba had significant user growth, adding 32mn more mobile monthly active users (MAUs). This represents an increase of 21% YoY, which is impressive given the user base already consisted of 549mn users, proving again that growth is still achievable despite the headwinds in China. As the Chinese consumer continues to spend and as purchasing power increasing, Alibaba's commerce revenues will continue to grow.

Alibaba is also transitioning away from the pure e-commerce model towards a “new retail” model, having expanded towards branded convenience stores and automated Hema supermarkets to combine offline and online and expand their target market. Hema currently has little contribution to Alibaba's revenue, but over the long term the business model should continue to drive growth being more efficient than just eCommerce or just bricks-and-mortar retail. 

Alibaba’s Lazada acquisition has allowed the parent company to establish a network in growth areas like Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam. This expansion gives Alibaba’s third-party merchants access to 200mn additional active internet users in an underpenetrated e-commerce market.

Alibaba also owns a 33% stake in Ant Financial which contains the WeChat pay competitor Alipay. AliPay holds around 50% of the mobile payment market by transaction volume. Alibaba has created a lifestyle ecosystem for the ever-growing consumer-centric economy in China, comprised of interlocking networks offering complementary services creating a powerful network effect, which is difficult to move away from.

Alibaba is the leader in the Chinese cloud computing market and is investing for growth in the longer term with the development of Alicloud, and investments in AI and machine learning. These investments put pressure on margins in the short term, but the company is investing for future growth. As gross margins expand, and operational expenditure slows, higher margins will be achieved in this segment of the business and long-term investors can forgo a drag on margins in the short term as profit will be higher in the long term

Overall, Alibaba is an attractive way to play Chinese consumption and mobile technology trends with increasing consumer disposable income and consumption trends and increasing internet and mobile adoption. Whilst Alibaba’s business is fundamentally sound the share price could still exhibit further downside especially if we see another round of tariffs enacted on Chinese goods in January.