Since the beginning of the second quarter, although the overall market environment is still not good, a series of capital layouts have released bullish signals.

Michael Burry, an investor who was previously famous for the book and movie "The Big Short", significantly increased his holding of Alibaba in the second quarter, making it his largest holding with assets accounting for 21%.

In addition, the US stock holding status released by HHLR Advisors, a fund management platform under Gao Ling Group, also showed that Alibaba had become its third largest core holding in the second quarter, accounting for 9.55% of the total holding. In the previous quarter, its share of holdings was only 0.23%.

From the latest trends of these well-known funds, it is not difficult to see everyone's confidence in Alibaba.

On August 15th, Alibaba also released the Q1 2025 (fiscal year, Q2 2024) financial report. During the period, the company recorded quarterly revenue of RMB 243.236 billion, a YoY increase of 4%; adjusted EBITDA was RMB 51.161 billion, a YoY decrease of 1.7%; adjusted EBITA profit was RMB 45.035 billion, with earnings per ADS of 16.44 RMB.

So, what are the important highlights of Alibaba's earnings this quarter? And how should we view its investment value and potential?

01

Strategic investment continues to yield results, and core business has shown a bullish momentum.

For several quarters, Alibaba has been focusing on its core business, and the company's clear external statement has been to focus on the recovery of market share for basic businesses and to promote business growth.

This has also been validated by the company's series of operational trends this year, and the achievements obtained so far have been quite good.

On the one hand, it can be clearly seen that Alibaba has continuously focused on its main business and exited non-core assets. In the previous quarter, Alibaba cleared out 10 million shares of Bilibili and 8.43 million shares of Hello Group. Recent news also showed that Alibaba cleared out Zhihu in the second quarter.

Obviously, by strategically divesting non-core assets, Alibaba has further concentrated its resources and energy on its core competencies. This not only improves the company's focus in the core business area but also effectively releases capital constraints, providing greater financial flexibility and resource support for the deepening development of core businesses.

On the other hand, from the performance of various group divisions, the Taobao and Tmall Group, which accounts for the highest proportion of group revenue, still maintains a solid foundation. Other business sectors, including Alibaba Cloud, are also showing a bullish momentum.

Taobao and Tmall Group focuses on improving the user experience, consolidating the core advantages of the e-commerce business, investing in the merchant operating ecosystem, optimizing the "refund only" rules, launching the "shop comprehensive experience score," and launching the "full-site promotion", which not only helps the growth of merchants' business but also benefits the continuous growth of platform revenue.

Alibaba Cloud invests in AI and technology infrastructure construction, maintaining a leading position in the market. Based on cloud + AI technology and product capabilities, Alibaba Cloud supports large applications such as "The Dark Side of the Moon" and "Zhaopin". The number of paid users using Alibaba Cloud Baolian increased by more than 200% month-on-month. More than hundreds of large-model APIs have been integrated on Baolian. At the analyst conference call, Alibaba CEO Daniel Zhang said that in the past few quarters, the ROI of AI-related investments has been considerable, and "most of the computing power will generate revenue at full capacity."

After a series of strategic focus and investment, it can be seen that the revenue quality of Taobao and Tmall has been significantly improved, and the profitability has remained stable. This quarter, the adjusted EBITA of Taobao and Tmall Group was RMB 48.81 billion.

Core indicators from Taobao and Tmall Group also look good this quarter.

This quarter, Taobao and Tmall's online GMV achieved steady growth, with double-digit YoY growth in order volume, continuous growth in the number of buyers and purchasing frequency, and 88VIP membership numbers reaching over 42 million, a double-digit YoY growth. In addition, during the 618 period, Taobao and Tmall's online GMV grew strongly YoY. It can be seen that Taobao and Tmall's scale advantage continues to expand and market share remains stable.

Alibaba Cloud's performance this quarter is a direct reflection of the effectiveness of its "public cloud + AI" strategy. During the quarter, Alibaba Cloud's external customer revenue increased by 6% YoY, and public cloud revenue increased by double digits YoY, while AI-related product revenue increased by triple digits YoY. A high-quality product structure brings about a significant increase in profits, with adjusted EBITA increasing by a strong 155% YoY.

For the current capital market, Alibaba is proving that its core business in e-commerce is still solid and it continues to strive to return to the fast-growing track.

02

More importantly, the future.

Compared with short-term performance and market volatility, it is actually more important to focus on Alibaba's current series of strategic layouts, which is the key to its future value growth.

From the current perspective, Alibaba is entering an important stage of investment in core business, which is a steady and thoughtful long-term development strategy. The core lies in focusing on building a solid foundation and achieving sustainable development through long-term layout and planning.

First of all, Alibaba has learned to simplify and return to the most basic logic of competition.

This not only means divesting non-core businesses, but also returning to the original intention of core businesses and focusing on providing better consumer experiences and more efficient merchant services.

At the earnings conference in May of this year, Alibaba Group CEO Daniel Zhang said that enhancing product competitiveness, efficiency, and customer service and consumption experience to drive GMV growth and user consumption frequency is the primary task this year.

It can be seen that in this quarter, the company continued to increase investment in strategic measures such as products with price competitiveness, customer service, membership system benefits, and technology, aiming to improve user experience. These measures have also brought higher consumer retention rates and purchase frequencies, as well as positive feedback on the overall shopping experience for the company.

At the same time, while maintaining the trend of order and GMV growth, Alibaba has begun to push forward commercialization rhythmically. Alibaba's CEO said on the analyst conference call, 'It is expected that the CMR growth rate will gradually match the GMV growth rate in the next few quarters', which means that the monetization rate will increase in the future. This is a market trend that is expected and appreciated, and more importantly, a trend with high certainty.

In this process, Alibaba focuses on the growth of its own market share, faces market competition, and realizes top-down reform. Through organizational structure adjustments, Alibaba has ensured business agility and decision efficiency. This organizational change has improved the company's responsiveness to market changes and strengthened internal collaboration, providing strong support for rapid iteration and innovation, and directly bringing about cost-effectiveness improvements in various businesses.

AIDC, Local Life Group, and Cainiao all maintained high growth, and their business efficiency and commercialization capabilities improved significantly. Among them, Lazada's monetization rate and operational efficiency improved, and it achieved profitability and adjusted EBITDA in July. The unit's quarterly economic benefits of the aliexpress Choice business improved significantly. Due to the improvement of Ele.me's operation efficiency and business scale, the Local Life Group's adjusted EBITA loss was significantly narrowed to 0.386 billion yuan. In addition, the quarterly business performance of Sunart Retail, Hema, Alibaba Health, and Lingxi Interactive have also improved.

Alibaba's management team emphasized on the conference call that most businesses will prioritize improving commercialization capabilities on the premise of maintaining product competitiveness. 'Most businesses are expected to achieve a profit and loss balance within 1-2 years and gradually begin to contribute to scaled profitability.'

What are the bullish factors of Alibaba being included in Hong Kong Stock Connect?

03

At the post-earnings conference call, Alibaba CFO was asked about the dual primary listing progress, and he replied that it was being pushed forward according to the procedure.

From an intuitive point of view, Alibaba obtaining dual primary listing status will help expand its investor base and bring new liquidity to Alibaba.

Hong Kong Stock Connect is expected to usher in adjustments in September. CITIC Securities released a research report that if Alibaba successfully converts to dual primary listing at the end of August, the company may appear in the new Hong Kong Stock Connect list.

If Alibaba is included in Hong Kong Stock Connect, how will its stock price perform in the future? Tencent, Meituan, and Xiaomi, all of which are internet companies, were included in Hong Kong Stock Connect in March 2017, and October 2019, respectively.

What are the statistics on the holding ratio, market value, and stock price performance after their inclusion in Hong Kong Stock Connect?

Referencing the Hong Kong Stock Connect inclusion of Tencent, Meituan, and Xiaomi in March 2017, and October 2019, respectively, as internet companies.

What was the holding ratio, market value, and stock price performance after their inclusion in Hong Kong Stock Connect?

See the following several statistical charts.

From the graphs shown above, three points can be summarized:

Firstly, in the early stage of being included, for example, within a quarter (3 months), the shareholding ratio and stock price of the Hong Kong stock connect showed a synchronous upward trend, as shown in the following table:

Secondly, before 2021, the correlation between shareholding ratio and stock price trends was high and showed the same trend. After 2022, there was some differentiation.

Thirdly, since joining the Hong Kong stock connect, although the shareholding ratio has gone through some ups and downs, the trend is generally upwards. As of August 14, 2024, the Hong Kong stock connect market value ratio and shareholding market value of the three companies are shown in the following table:

How can we explain these phenomena?

Firstly, after the three companies were included in the Hong Kong stock connect, mainland investors, including institutions and individuals, could directly buy in through the Hong Kong stock connect. With these investors collectively referred to as "southbound capital" buying in, the shareholding ratio naturally started to rise from 0.

As can also be seen from the table, the cumulative purchase volume can reach billions or even tens of billions, which is quite a considerable incremental capital for the Hong Kong stock market's top Internet companies that have only a few hundred million or tens of billions in daily turnover.

With the support of these incremental capital, the basic law of the market that "liquidity generates a premium" begins to take effect, and the stock price therefore has the impetus to rise, which explains why the representative companies included in the Hong Kong stock connect in the initial stage could basically maintain an upward trend in stock prices within the first three months.

Taking the three representative high market value companies in the table as an example, their stock prices rose an average of over 20% in the early days of entering the Hong Kong stock connect.

This period can also be regarded as the initial dividend period of the Hong Kong stock connect, and it generally lasts for several months.

In the future, the trend of stock prices will depend more on the company's fundamentals and the liquidity and investment style of the overall market, rather than simply relying on "southbound capital", which explains why the stock price trends and shareholding ratios of the three representative companies showed differentiation after 2022.

At present, the Hong Kong stock connect shareholding ratios of the three representative companies have tended to stabilize and exceed 10%, corresponding to market values of tens of billions or even hundreds of billions. Tencent's Hong Kong stock connect shareholding market value is as high as 348.8 billion, and such a huge amount of capital can play a positive role in stabilizing stock prices and resisting strong market fluctuations.

With these precedents as reference, it is not difficult to predict that Alibaba will probably repeat a similar trend after being included in the Hong Kong stock connect.

Alibaba's industry and basic fundamentals have not encountered any particularly negative news over the past year. On the other hand, Alibaba has been actively reducing costs and increasing efficiency, improving operational efficiency and profitability, as can also be seen from this financial report.

At the trading level, Alibaba has not carried out large-scale shareholder reduction and its valuation is relatively reasonable.

Over the past month, Alibaba's daily turnover has fluctuated around 3 billion. Assuming that the shareholding ratio of southbound capital rises by a reasonable level of 2% within three months after Alibaba is included in the Hong Kong stock connect, then Alibaba's initial inclusion in the Hong Kong stock connect means the influx of at least about 30 billion in incremental capital, equivalent to an increase of nearly 10 billion in incremental capital southward each month. Further deduction shows that compared with Alibaba's average monthly turnover of nearly HKD 68.4 billion in the Hong Kong stock market over the past 12 months, the expected southbound capital is expected to contribute about 15% of liquidity increment during the initial period of inclusion.

If we use Tencent's stable shareholding ratio in the Hong Kong stock connect (i.e., 10%) as a basis for calculation and the current market value of 1.45 trillion as a base value, the potential market value increment contribution that the Hong Kong stock connect can sustainably provide for Alibaba in the future will reach 145 billion, which is a huge potential incremental capital for Alibaba at present. In the short term, even if it is not considered a help during difficult times, it is destined to be a boon for Alibaba.

For the southbound capital, it has also encountered a right opportunity with Alibaba at the appropriate time.

04

Conclusion

From the current perspective, while maintaining steady and healthy business growth, Alibaba is also continuously optimizing operational efficiency, strengthening innovative capabilities, and ensuring its leading position in the fiercely competitive market.

Although its stock price has fluctuated, the company has also successively launched large-scale share buyback plans and generous dividend policies, especially the company's increasingly accelerated repurchase strength, which not only creates returns for shareholders, but also highlights confidence in its business prospects. According to statistics, Alibaba has invested a total of $12.5 billion in buybacks during the past 2024 fiscal year, with the repurchase scale ranking first among Chinese concept stocks.

Previously, Fidelity stated that Alibaba will see more catalysts for stock price increases. The bank expects that after Alibaba completes its dual primary listing on August 24, September 24 may present a potential opportunity for inclusion in the Hong Kong stock connect. The company has spent $10.6 billion to buy back shares in the first half of the fiscal year, with the remaining $26.1 billion buyback amount expected to boost investor confidence.

It is evident that Alibaba is using real performance and tangible shareholder rewards to regain confidence. (End of article)