Alibaba posts surprise loss as China’s Covid restrictions take their toll

(Bloomberg) – Alibaba Group Holding Ltd. reported a surprise loss after quarterly sales barely grew as China’s tight Covid controls continue to weigh on consumer sentiment.

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China’s leading e-commerce company reported a net loss of 20.6 billion yuan ($2.9 billion) versus forecasts for a profit of almost the same amount after evaluating the value of investments in a portfolio owned by Didi Global Inc. up to GoTo in Indonesia. Its shares fell 3% in early trading in New York.

Alibaba is focused on bolstering its bottom line as Covid guidelines and antitrust measures imposed during last year’s crackdown on the tech sector slow growth. This month, for the first time in 14 years, the company failed to release full sales results for its signature Singles’ Day shopping festival, indicating disappointing turnout at its flagship annual event. And China retail sales fell 0.5% in October – the first drop since May and worse than expectations for modest growth.

On Thursday, business leaders expressed optimism about an easing — or even an eventual end — of the pandemic restrictions that have disrupted logistics, dampened retail activity and otherwise wreaked havoc on the world’s second-largest economy.

“With the introduction of the 20-point pandemic measures by the state authorities, positive effects can be expected. We certainly still see some disruptions in logistics in certain regions of the country,” Chief Executive Officer Daniel Zhang told analysts on a conference call after the earnings. “But overall we expect a further positive development.”

What Bloomberg Intelligence says

Alibaba’s stronger-than-expected Chinese retail and cloud profitability in the fiscal second quarter raises the likelihood that the company can beat consensus for 29% adjusted Ebita growth this fiscal year, we believe, even if revenue increases at both companies stay away The company’s international trading unit could turn profitable in fiscal 2024 if Lazada’s monetization rate holds up, which has helped trim losses by two-thirds from a year earlier.

-Catherine Lim and Trini Tan, analysts

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Revenue rose slightly less-than-expected by 3% to 207.2 billion yuan ($29 billion) in the September quarter after cloud sales — once the company’s biggest driver — hit their slowest pace of growth ever.

Still, investors are pointing to signs that Xi Jinping’s government is pulling away from its Covid-Zero framework — unraveling the logistical entanglements that have weighed on Alibaba’s business — and increasing support for tech companies. The company also greenlit a significant $15 billion expansion of an existing $25 billion buyback program, extending it through 2025.

Chinese tech stocks recouped some of their losses this month after the Communist Party began withdrawing from its pandemic playbook and offering more incentives to President Joe Biden’s administration to cooperate. Xi’s shift on these fronts, coupled with perceptions of a renewed focus on reviving the world’s No. 2 economy, is spurring speculation that Beijing will begin to unleash the private sector.

“We believe that Covid will eventually pass, that our society, economy and life will eventually return to normal, and that China’s tremendous potential as the world’s second largest economy will continue to be unlocked,” Zhang said.

Alibaba, once China’s most valuable company, has lost around $600 billion in market value since Beijing began its sweeping crackdown on the private sector nearly two years ago. The government forced its finance subsidiary Ant Group Co. to abandon the world’s biggest IPO in 2020, then launched reforms that undermine Alibaba’s business model. The fintech giant’s earnings plunged 63% in the June quarter.

Cost optimization — particularly at its relatively younger grocery and overseas businesses — should boost Alibaba’s margins for now. Excluding the writedowns, Alibaba posted adjusted earnings that exclude one-time items, beating analysts’ forecasts.

But in the longer term, it still has to find an answer to increasingly effective competition.

While Alibaba said its Singles’ Day sales were in line with last year’s performance, JD.com Inc. overtook its larger competitor in sales growth and set another record during the 11/11 shopping festival. JD has largely escaped the sector’s worst crackdown in 2021.

Emerging competitors, including short-video platforms, are pulling users away. The number of merchants attending Singles’ Day events on Douyin, the Chinese version of TikTok, between Oct. 31 and Nov. 11 increased by about 86% year-on-year. The number of shoppers on Kuaishou increased about 40% year over year during the same event, Jefferies estimates.

Faced with domestic stagnation, Alibaba has reignited an outward expansion that has worsened in recent years in the face of competition from Amazon.com Inc. and that of Tencent Holdings Ltd. supported Sea Ltd has slowed down.

Subsidiary Lazada Group is preparing its first foray into Europe, building on its success in Southeast Asia. But the US market remains relatively less hospitable.

Washington added Alibaba to a growing list of companies to be delisted from US stock exchanges due to a long-running audit dispute between the two countries. Although U.S. audit officials completed their first round of on-site inspections at Chinese companies, including Alibaba, this month, it’s still unclear whether Chinese firms will pass the muster.

The company is seeking a primary listing in Hong Kong, which would allow it to target more mainland investors while maintaining its listing status on the New York Stock Exchange. On Thursday, Alibaba said the planned transition of its Hong Kong listing will not be completed by the end of 2022 as planned due to new local regulatory changes to comply with.

–Assisted by Zheping Huang, Sarah Zheng, Lisa Du and Jennifer Ryan.

(Updates with manager’s comments from fourth paragraph)

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