【Company Research】Alibaba (BABA US) – Investment for long-term growth

We expect Alibaba’s rev/ adj. net profit +58% YoY/+16% YoY in 4QFY21E, 0%/13% below consensus. Core commerce GMV solid, while margin dilution will continue. We believe 2021 would be an investment year, as BABA prioritizes TAM expansion than profitability. Regarding AML risks, BABA stated little material effect on business, apart from administrative penalty. We view this result as better-than-feared, without asset disposal or significant adjustment. After major regulation overhang has gone, market would focus more on its new initiatives and competition landscape. To factor in reinvestment, we cut its earnings by 1%/21%/20% in FY21/22/23E, with new TP of US$314.2 (from US$338.4).

  

  1. Expecting solid GMV while margin diluted by reinvestment. We forecast 4QFY21E topline/bottom line up 58.5%/15.6% YoY (0%/13% below consensus), in which core commerce/ cloud/ DME rev +62%/ 50%/18% YoY. CMR might see 36% YoY growth, above Jan & Feb industrial online sales. Given investment on local services and Taobao deal, we model adj. EBITA margin at 15% (-2ppts YoY). Looking ahead, BABA would prioritize on investment in 2021E, especially on community ecommerce, Taobao deal, live streaming and local life. BABA restructured its CGB business to MMC business unit in Mar 2021, with integrating Lingshoutong and Hema Jishi. Compared to peers, we expect BABA to leverage its advantage in supply chain, logistics and offline stores to expand CGB network.  We expect its CGB to generate net loss of RMB25bn/RMB20bn in FY22E/23E.

  

  1. Regulation overhang to lift. BABA hosted a call in response to the antitrust penalty decision (RMB18.2bn fine, 4% of its domestic sales in 2019) issued by SAMR. Mgmt stated little material impact on business, given already multi-platform mode for merchants. We view this decision as better-than-feared, as it does not require asset disposal or significant rectification. BABA would continue to eliminate the “two-choose-one” practice, to promote healthy competition. On the other hand, it tends to lower entry barriers and operating expenses of merchants, (e.g. waiving tech service fee), and to invest more on back-end workstation enhancement.

  

  1. Maintain BUY.  We trimmed its earnings by 1%/21%/20% in FY21/22/23E for heavier investment, with SOTP-based TP of US$314.2 (32x FY22E P/E).
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