Alibaba investors seek catalyst for shares as China slows

[HONG KONG] Alibaba Group Holding has more than doubled profit in the span of a year. But you wouldn't know it from looking at its stock.

Its shares have lost more than a third of their value since peaking at US$120 just months after a record 2014 initial public offering, as the world's largest e-commerce company struggles to recapture its aura. That's despite revenue growth of at least 20 per cent and trumping expectations on adjusted per-share earnings every quarter since its debut.

A slowing China and the consequent deceleration in online transactions are mainly to blame. Alibaba - which handles more e-commerce than Amazon.com and eBay combined - is a proxy for an economy navigating a bumpy transition from export- driven manufacturing to one anchored in consumer spending.

On Wednesday, Alibaba shares slipped after noted short- seller and hedge fund manager Jim Chanos told CNBC he's betting against the company because of a lack of cash flow. Chanos also said he's still bearish on China.

The stock closed at US$75.82, down 0.1 per cent. Chanos was reiterating comments he made on Alibaba late last year.

Alibaba will have to provide a catalyst when it reports earnings Thursday for investors to push the stock higher, such as a resurgence in revenue growth that slowed to 32 percent in the December quarter from more than 45 percent annually before the IPO. They'll also be watching for progress in faster-growing South East Asia markets and the impact of Alibaba's acquisition spree on its bottom line.

"Expanding growth or accelerating margins are the two things Alibaba can do to make investors more bullish. Otherwise it's things they can't control," said Gil Luria, an analyst at Wedbush Securities Inc. "If the Chinese consumer strengthens or weakens a little, in the long term, it's of little consequence. Alibaba represents a big chunk of consumption in China and it will grow as more people will become middle class."

Alibaba shares have declined 6.6 per cent this year through Tuesday. Its shares have fallen even when it beats estimates, as it did for third-quarter revenue and profit. That's not because of a lack of support from analysts, with none of the 43 tracked by Bloomberg recommending selling the stock. Despite growing sales faster than Amazon, Alibaba shares trade at a lower multiple - of about 28 times estimated earnings compared with Amazon's 64 times.

Alibaba's reported net income more than doubled, to 12.5 billion yuan or 4.90 yuan a share in the final quarter of 2015. Adjusted earnings-per-share are expected to rise to 3.55 yuan in the fourth quarter, according to the average of estimates compiled by Bloomberg. Sales probably rose 33 per cent.

Investors are also keeping an eye on JD.com Inc, which has nibbled away at Alibaba's dominance in Chinese online shopping. JD's revenue growth has surpassed 50 per cent over the past three quarters, outpacing its bigger rival.

"Growth investors are focused on JD and short on Alibaba," said Chi Tsang, an analyst at HSBC Securities Asia Ltd. Short interest on Alibaba shares stood at a ratio of about 8.5 Tuesday, almost double JD's. "Alibaba is stuck in this box where value investors like it, but the incremental investors need to find some growth, whether it's accelerating revenue or improvements in gross merchandise volume." Alibaba declined to comment ahead of the earnings.

One area in which Alibaba may juice revenue growth is cloud computing services. Sales from that division more than doubled in the December quarter. While still a fraction of the business, Alibaba's staking US$1 billion on the belief that demand from governments and companies will take off in coming years. The business could account for more than US$1 billion of sales by 2018, according to SunTrust Robinson Humphrey.

By comparison, Amazon Web Services' revenue rose 64 per cent to US$2.6 billion in the March quarter.

"In five years this could become a cash cow," said Ray Zhao, analyst at Guotai Junan Securities.

The challenge for Alibaba is that it's increasingly reliant on Chinese consumer spending. Mr Ma has said he wants to get half the company's sales from abroad. Instead, the proportion of revenue it garners outside China has fallen for three successive quarters, to 6 per cent in the December period. That's a liability when the economy is slowing to its lowest growth since 1990 and people from George Soros to Carl Icahn warn of uncertain times.

Alibaba's response to the growth dilemma has been to entice affluent buyers with imported brands from Starbucks to Lululemon and tap the growing spending power of the rural population. Ventures beyond e-commerce - such as on-demand services - have shown promise but aren't expected to yield much bottom-line growth for now.

It's also embarked on a spate of deals, including last month's agreement to spend US$1 billion for control of Lazada Group SA, its biggest overseas acquisition and one that gives it an e-commerce foothold in Southeast Asia. Longer- term, Mr Ma is also investing in video content and media.

Then there's the Alipay wildcard. If Zhejiang Ant Small & Micro Financial Services Group goes public - which could be as soon as this year - Alibaba is entitled to about a one-third stake in the owner of Alipay, assuming approval to do so. That hands the company a chunk of China's largest online financial services firm, controlled by Mr Ma and said to be valued at about US$60 billion.

"If people had a clear timeline into that business going public, then I think investors would be willing to play the story through Alibaba," said Kirk Boodry, an analyst with New Street Research SG Pte.

BLOOMBERG