Alibaba FQ1 24– No takers.

Nobody wants to know.

• Alibaba reported good results beating expectations and the moribund Chinese economy but even at depressed valuations and with a large share buyback, sentiment towards China remains so bad that no one cares.
• FQ1 2024 revenues / ADJ-EPS were RMB234bn / RMB2.36 nicely ahead of estimates at RMB226bn / RMB1.83.
• Revenues grew by 14% YoY and critically this was driven by new users which grew by 6.5% YoY.
• Xianyu which is a new marketplace designed to offset competition from ByteDance and other newcomers also saw good traction with DaUs growing by 18% YoY although revenues at the moment remain very small.
• However, both AliCloud and wholesale were very weak with 4% YoY growth and 1% YoY growth respectively demonstrating that enterprise in China remains under real pressure.
• This is a stark contrast to the West where enterprise and the cloud in particular are the bright spots in an otherwise difficult economy.
• The weakness in AliCloud is also an indication that China is missing out on the generative AI craze as its Western peers can not add capacity for generative AI fast enough at the moment.
• This is a result of the government’s harsh crackdown on its technology sector as well as the hardline it is taking on generative AI.
• Here China’s (and Europe’s proposed) regulations (see here) are unworkable because there is no way to guarantee that the bots will not say something that the government doesn’t like.
• This is clearly leading to a reticence on the part of Chinese enterprises to embrace this technology which is failing to give AliCloud the boost that Amazon, Azure and Google Cloud are receiving.
• Alibaba is also making steady progress on reorganising its business into 6 units which has resulted in significant improvements in profitability as the regulatory crackdown recedes further into the past.
• Alibaba also bought back RMB23bn worth of ADRs during the quarter given the significant improvement in cash flow from operations.
• Despite these solid signs of recovery on all fronts, there remains no interest in the shares whatsoever.
• This has been exacerbated by the new US restrictions on investment in China (see here) but the real damage has been self-inflicted by restrictive policy.
• The demographic impact of the one-child policy is now beginning to make itself felt which combined with high indebtedness and great regulatory uncertainty, means that an economic recovery will require a concerted effort by the government.
• Unfortunately, Alavan Independent has concluded that loyalty and subservience to the party is more important than economic prosperity meaning that it may be a while before President XI changes his mind.
• The sudden reversal of Covid Zero demonstrates that this is possible at any time, but it may take further social unrest to push Mr Xi to switch his priorities.
• Until then, Alibaba and most of the rest of the technology sector are likely to remain in a value trap where managements are powerless to do anything about it.
• I suspect Alibaba may get cheaper as its fundamentals improve and the shares fail to respond, meaning that there is a long wait ahead.
• Fortunately, I can be patient.