Alibaba Post Surprising Loss As China Covid Curbs Take Its Toll

(Bloomberg) – Alibaba Group Holding Ltd. reported a surprise loss after quarterly sales barely grew as China’s rigid Covid controls continue to undermine consumer confidence.

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China’s e-commerce leader reported a net loss of 20.6 billion yuan versus forecasts for a profit of nearly the same amount after it downgraded investments in a portfolio that Didi Global Inc. to Indonesia’s GoTo. The company also greenlit a significant $15 billion expansion of an existing $25 billion buyback program, extending it through 2025.

Alibaba is focusing on strengthening its bottom line as Covid policies and antitrust measures imposed last year during the tech sector’s crackdown undermine growth. This month, the company failed to report full sales results for its signature Singles’ Day shopping festival for the first time in 14 years, signaling a disappointing turnout for its flagship annual event. And Chinese retail sales contracted 0.5% in October — the first drop since May and worse than expected for marginal growth.

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Read more: Jack Ma’s Ant posts 63% profit drop during regulatory overhaul

Revenue rose slightly less than expected by 3% to 207.2 billion yuan ($29 billion) in the September quarter, after sales of the cloud – once the company’s biggest engine – reached its slowest growth rate on record.

Still, investors are pointing to signs that Xi Jinping’s government is withdrawing from the Covid Zero framework — easing the logistical tangles that have weighed on Alibaba’s business — and support for tech companies is growing.

Chinese tech stocks recovered some of their losses this month, after the Communist Party began to pull out of its Covid-Zero playbook and the Biden administration offered more incentives to cooperate. Xi’s shift on those fronts, coupled with perceptions of a renewed focus on reviving the world’s No. 2 economy, fuel speculation that Beijing will begin to unleash the private sector.

Once the most valuable company in China, Alibaba has lost about $600 billion in market value since Beijing began its sweeping crackdown on the private sector nearly two years ago. The government forced its financial subsidiary, Ant Group Co., to call off what would have been the world’s largest IPO in 2020, then launched reforms that undermined Alibaba’s business model.

Cost optimization – particularly at the relatively younger supermarkets and overseas companies – is likely to boost Alibaba’s margins for now. But in the longer term, it has yet to find an answer to increasingly effective competition.

While Alibaba’s Singles’ Day sales were in line with last year’s performance, smaller rival Inc., which escaped the industry’s worst crackdown in 2021, overtakes Alibaba in revenue growth to record another record during the “11.11” shopping festival.

Emerging rivals, including short video platforms, are drawing users away. The number of sellers who participated in Singles’ Day events on Douyin, the Chinese version of Tiktok, between October 31 and November 11 increased by about 86% from the previous year. Buyers on Kuaishou rose about 40% year-over-year during the same event, Jefferies estimates.

What Bloomberg Intelligence says

User acquisition cuts for and a larger contribution from more profitable deliveries like groceries would have reduced the cost burden by more than 40% year-over-year, we calculate. Lazada’s rival Shopee’s continued focus on profitability versus revenue gains, reducing Alibaba’s incremental spending to defend its market share, should also have supported the rollout of more cost-effective marketing as it tries to cut losses outside mainland China .

-Catherine Lim and Tiffany Tam, analysts

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Faced with domestic stagnation, Alibaba has revived an external expansion that has slowed in recent years due to competition from Inc. and the Tencent Holdings Ltd. supported Sea Ltd.

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

Washington added Alibaba to a growing list of companies being delisted from US stock exchanges over a lengthy audit dispute between the two countries. Although US audit officials completed their first round of on-site inspections of Chinese companies, including Alibaba, this month, it is still unclear whether Chinese companies will pass the test.

The company is aiming for a primary listing in Hong Kong, which will allow it to tap more mainland investors while retaining its listing status on the New York Stock Exchange. On Thursday, Alibaba said the planned conversion of its Hong Kong listing will not be completed by the end of 2022 as previously planned due to the need to comply with new local law changes.

–With help from Zheping Huang, Sarah Zheng, Lisa Du, and Jennifer Ryan.

(Updates with company details from the second paragraph)

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