Alibaba's 2H Performance Expectations Bolstered by China's Economic Policies and International Commerce: Analyst

Truist analyst Youssef Squali reiterated a Buy rating on Alibaba Group Holding Limited BABA with a price target of $130.

Squali now expects CNY223.9 billion in total revenue in F1Q24 (CNY211.3 billion previously), a 9% Y/Y growth, and virtually in line with the consensus of CNY224.0 billion due to further recovery in China Commerce, up ~6%, an improvement from the -3% in F4Q23. 

The National Bureau of Statistics (NBS) data shows recovering business activities. 

BABA executed well during the 6/18 shopping festival with positive Y/Y growth in users, merchants, and GMV and a healthier trend in AOV. The analyst now expects EBITA of CNY39.4 billion (~18% margin) vs. CNY32.3 billion previously, in line with the consensus of CNY39.3 billion driven by a commitment to increase investments likely to keep margins in check near term. 

Top-line growth will likely sustain through 2H24. Squali expects 10% and 11.5% Y/Y China Commerce growth in F2Q24 and F3Q24. Government moves, including the recent interest rate drop, supportive policies toward private sector enterprises, and pressure relief in some heavily punished sectors, should also be favorable for Chinese consumption and help re-accelerate growth at BABA in 2H. 

BABA's International Commerce is likely to achieve +24% Y/Y growth in 1Q24, bolstered by a recovering Europe and the U.S. market and rapid growth in Southeast Asia. 

China's online exports growth is significantly faster than total exports growth, which edged 3.7% Y/Y amid sluggish global economic growth. 

BABA can take advantage of the positive trend in cross-border DTC commerce, given its years of operating experience with international e-commerce platforms and recent infrastructure investments in areas including global logistics networks and cross-border transaction systems. 

AliExpress and Trendyol are almost breakeven, and Alibaba.com is already profitable. 

Squali notes that the management reshuffle sets the tone for the next growth phase under the holding company structure, reflecting BABA's longer-term focus on core e-commerce, international expansion, technology innovation, and the need to be more nimble. 

The organizational restructuring is a way to give Alibaba's businesses more autonomy, flexibility, and incentives and diversify risks given uncertainties around U.S. - China tension and local government regulatory pressures. 

More matured business units like Cloud and Cainiao should command attractive valuations as separate entities. At the same time, newer initiatives like Local Services and DME could benefit from outside capital to underwrite some losses to protect margins and improve FCF generation at the holding company level.

In November 2022, BABA announced that it would enlarge the program to $40 billion and extend it until the end of March 2025. Squali remains encouraged by the company's commitment to bolster shareholder returns. 

Price Action: BABA shares closed higher by 1.60% at $102.16 on Monday.