A Tale Of Two E-Commerce Giants

Alibaba reported fiscal year Q2 results prior to the US open. Alibaba’s fiscal year is different than the calendar year which explains why this is the company’s Q2 and not Q3. Expectations going into the release had been dropping as the company talked down analysts’ expectations. This led me to believe we might get a kitchen sink quarter i.e., the company writes down/off knowing the quarter isn’t going to be great. Alibaba ripped the band-aid as the cost of revenues increased to RMB 129.75B ($20.137B) from Q2 2020’s RMB 89.96B while sales/marketing expense increased to RMB 28.857B ($4.479B) from Q2 2020’s RMB 17.371B. Below you’ll notice big declines and disparities between GAAP and non-GAAP/adjusted in net income and EPS versus results a year ago.

Alibaba’s investments in publicly traded stocks are required to be written down by GAAP accounting rules. Analysts will focus on non-GAAP/adjusted net income and EPS as the company can’t control if the stock market goes up or down. The big three numbers, revenue/adjusted net income/adjusted EPS, missed analyst expectations. The company is investing heavily in its core business which resulted in increased expenses. The reality is Alibaba faces increased competition from JD.com, ByteDance’s Douyin, and others.

Ultimately, I don’t think the results are as bad as the headlines as management has navigated a tough economic and regulatory environment. Management made sure to emphasize that annual revenue guidance remains the same with expectations between 20% to 23%. It is worth noting the company bought 269mm shares in Q3. While the stock will be off today, this might be the final flush in BABA. % changes compare this quarter to the same quarter last year. 

JD.com’s decision to report earnings on the same day and same time as Alibaba was an indication that management was ready to rumble. The results absolutely smashed analyst expectations. There was a GAAP net income and EPS loss versus a non-GAAP/adjusted gain. The company’s stock-based compensation expense increased which GAAP accounting considers a cash cost. Analysts will focus on the adjusted/non-GAAP for net income and EPS as growth companies tend to pay employees with stock. Like Alibaba, JD had to write down investments in publicly headed companies which created, along with the employee stock, a big disparity between GAAP versus non-GAAP/adjusted net income and EPS.

Key News

Asian equities followed the US market south overnight. India’s blockbuster IPO of Paytm (PAYTM IN) opened with a thud as shares fell -27.4%, weighing on India’s market. Hong Kong was led lower by internet stocks with Tencent -2.4%, Alibaba HK -5.34%, and Meituan -2.46% following an off day yesterday in US trading. It was a broad sell-off with nearly 4 to 1 decliners to advancers. NetEase did manage a gain in the US yesterday and overnight in Hong Kong as investors cheered the company’s Q3.

US-listed Chinese internet stocks were off following Baidu and IQ’s quarterly results along with “soft” results from Singapore based gaming/e-commerce giant Sea Limited. The space fell further when the US-China Economic and Security Review Commission, a group that provides research to Congress, released their annual report recommending that Congress ban US investors from investing in China. No one believes this will be enacted but it shows the McCarthy era-like environment in DC. The commission is stacked with China bears so the output isn’t surprising. The analysis provides shockingly little coverage of how well US companies are doing in China. The biggest culprit from yesterday was likely nervousness about Alibaba’s results.

Hong Kong’s growth sectors were off with discretionary -3.5%, communication -2.41%, and tech -1.7% with only materials pulling a James Bond +0.07%. Real estate was off in Hong Kong -2.83% as Country Garden (2007 HK) sold shares to raise cash though the company’s bonds have been resilient considering investors’ risk-off attitude to the space. Tencent was a net sell in Southbound Stock Connect while Meituan was a net buy (again). Mainland China was off with Shanghai -0.47%, Shenzhen -0.65%, and STAR Board -0.85% as growth sectors also lagged.

The clean technology ecosystem was a bright spot though a few individual names saw profit-taking after yesterday’s strong move. There was talk about government support of the hydrogen industry as an alternative to EV though it was balanced with verbal support for the EV batteries. Hydrogen is abundant and clean though not economically viable so throwing some R&D money to explore makes sense to me. There was no clear catalyst for today’s weakness though the PBOC only replaced half of the expiring repos with new repos leading to a net drain of liquidity in the system. There was also regulators’ warning about metaverse enthusiasm, called yuancosmos in China, as several names have gone parabolic despite little fundamentals. Foreign investors sold -$697mm of Mainland stocks today while CNY eased a touch versus the US $, bonds rallied, and copper down more than -1%.

MSCI China All Shares Index

Country performance

Hong Kong Top 10

Last Night’s Exchange Rates, Prices, & Yields

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