We believe that the competitive bulwark (“Economic Moat”) ofAli Baba (“Wide Moat”) is intact, but we have revised our outlook rating from “Stable” to “Negative”.
Despite growing competition, we maintained our competitive bulwark estimate on Alibaba’s strong network effect, in which the platform’s value to consumers increases with more merchants.
Alibaba monetizes its network effect better than any other e-commerce platform in China.
None of its new competitors, mainly e-commerce platforms Pinduo-duo and short video platforms Douyin and Kuaishouhas proven that it can monetize the physical goods e-commerce market with a sustainable profit margin.
Alibaba has been profitable for a decade, and we believe it will remain profitable for the next 20 years.
Additionally, we believe that Kuaishou and Douyin’s live e-commerce offerings are a complement to existing e-commerce platforms rather than a replacement, as consumers tend to use live e-commerce for impulse purchases instead planned or urgent purchases.
Live streaming has a high return and refund rate (30%-40% by Xiaohulu), which we believe is inherent in its impulse-buy nature. This makes it difficult for brands to rely solely on this long-term channel.
Even if these new competitors succeed in generating long-term sustainable profits, we still view Alibaba’s position in the e-commerce market as difficult to dislodge due to its share in the minds of consumers, its access to wider range of products (SKUs), its logistics infrastructure, its operational expertise (e.g. product and merchant governance, consumer protection) and its tools for merchants to manage the complete product lifecycle.
It is the largest e-commerce platform that offers its merchants predictability in sales and production volume, resulting in predictable production costs.
Alibaba reported more than 90% retention for its top annual active consumers aged 25-44 and contributed 70% of gross merchandise volume for the year ending September 2021, despite competition.
Alibaba is pioneering new retail and offering solutions to diversify consumer scenarios such as on-demand delivery, online-to-offline commerce, and content e-commerce. We believe Alibaba will always have a place in China’s increasingly complex retail market.
However, we view the outlook for the competitive bulwark as negative due to increasing competition and fragmentation in online retail business.
While Alibaba remains a dominant player in e-commerce and there is great uncertainty about the ability of other competitors to achieve the same scale and profitability, we believe that increased competition from many players will reduce the share Alibaba’s market performance and return on invested capital.
The impact of the macro
We maintain our fair value estimate for the stock at HK$182 or US$188 per share.
We have refined our estimates for Alibaba’s gross merchandise sales volume, revenue and adjusted operating income (EBITA) for fiscal year 2022 in China, down 300 basis points to 7% , 370 basis points to 20% and 230 basis points to CNY 142 billion, respectively, due to weak macroeconomics and competition.
These changes were offset by the time effect of our valuation model.
We expect an economic recovery resulting from more accommodative monetary policies and supportive fiscal policies in 2022.
We continue to believe that Alibaba, in the current environment, is significantly undervalued.
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