Alibaba Beats As Hong Kong Internet Rebounds & Defense Stocks Fall

Alibaba Q2 Earnings Overview

Alibaba beat on the big three numbers investors and analysts care about: Revenue, Adjusted Net Income, and Adjusted EPS. YES, year over year, these numbers are down on percentage, BUT we knew this! Zero covid/lives first policy has had a material effect on consumption in China as Alibaba’s China e-commerce revenue was -2% YoY to RMB 136.977B ($20.45B). Despite this, Alibaba’s cloud business did well at +10% YoY though at this point is only 9% of total revenue. Cash flow and share repurchase plans are other highlights in the release.

On the earnings call, management was upbeat though cognizant of the macroeconomic headwinds that have been impacting the company. Head of IR Robin Li spoke about competing with multimedia E-Commerce platforms such as TikTok by diversifying the consumer buying experience. He also lauded the company’s ability to attract VIP shoppers, those who spend over RMB 57,000 on the platform annually, whose numbers are now over 100 million. He also reiterated one of the company’s slogans: “be yourself.” That is something the company has certainly been doing, focusing on improving its business despite its low valuation. He heralded stock buybacks as proof of how much he and the team continue to believe in the business. He also spoke of narrowing losses in Ele.me, Alibaba’s food delivery service, and its sensitivity to COVID restrictions. Among manageable negatives were contractions in the company’s Southeast Asian and European businesses due to currency devaluations and strikes. Cloud also grew less than last quarter due to the resurgence of COVID in China and slow demand from internet companies.

• Revenue was RMB 205.555 ($30.689B) versus estimate of RMB 203B and June Quarter 2021 RMB 205.74B
• Adjusted Net Income fell by -30% to RMB 30.252B ($4.517B) versus estimate of RMB 28.4B and June Quarter 2021 RMB 43.441B
• Adjusted EPS fell by -29% to RMB 11.73 ($1.75) versus estimate of RMB 10.27 and June Quarter 2021 RMB 16.60

Key News

Asian equity markets had a positive day, following yesterday’s strong rally in the US. The markets were led by Hong Kong and, more specifically, Hong Kong internet stocks, while India was off a touch. It is worth pointing out that defense and military-related sub-sectors were among the worst performers in China and Hong Kong today, indicating a strong signal local investors don’t anticipate an escalation post-Pelosi’s trip.

Hong Kong internet stocks performed well in advance of Alibaba’s financial results this morning as Hong Kong’s most heavily traded by value were Tencent 3.11%, Alibaba HK +5.15%, Meituan, Geely Auto +3.78%, and JD.com HK +5.49%. Today’s volume in Hong Kong was LIGHT showing a lack of conviction, while short sale turnover was off relative to the last month. Alibaba’s short sale turnover was 16% of the total, almost half of recent levels. Interesting that JD.com HK saw a jump in short sale turnover to 40%, which is nearly 2X recent levels. Authome’s HK share class +11.52% as local investors cheered their financial results, similar to the US ADR’s +11.75%. NetEase was an outlier being down today by -2.18% as a partnership with Blizzard fell apart. Mainland markets had a positive day though volumes were light. We would have preferred to have seen more conviction by buyers following two down days on stronger volumes. Regardless we’ll take it!

According to reports, Softbank will sell half of its Alibaba position via derivative contracts. This is arguably a good thing as it eliminates a seller from the market.

The Hang Seng and Hang Seng Tech gained +2.06% and +3.18% on volume, down -6.89% from yesterday, which is 65% of the 1-year average. 395 stocks advanced while 84 declined. Hong Kong short sale turnover declined by -22.57% from yesterday, which is just 63% of the 1-year average as short sale turnover accounted for 16% of total turnover. Growth factors outperformed value factors as small caps outperformed large caps. The top sectors were discretionary +3.69%, tech +3.41%, healthcare +3.38%, and communication +2.51%, while energy was the only down sector -0.17%. Top sub-sectors were online education companies, Apple supply chain, appliance makers, and Alibaba/Ant ecosystem stocks, while defense, pig, and oil sub-sectors were down. Southbound Stock Connect volumes were light as Mainland investors were net buyers of Hong Kong listed stocks as Tencent saw net buying today while Kuaishou and Meituan saw small net selling.

Shanghai, Shenzhen, and STAR Board gained +0.8%, +0.86%, and +0.96% on volume, down -19.46% from yesterday, which is 84% ​​of the 1-year average. 3,300 stocks advanced while 1,178 stocks declined. Top sectors were healthcare +2.01%, utilities +1.81% and staples +1.51% while energy and discretionary were down today -0.97% and -0.52%. Top subsectors were healthcare-related such as contract research organizations, semis, and Tik Tok-related companies, while defense, military, and rare earth sectors were down. Northbound Stock Connect volumes were light as foreign investors sold -$474mm of Mainland stocks. Chinese Treasury bonds were flat, CNY was off slightly versus the US $ -0.03%, and copper was off -1.05%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.76 versus 6.76 Yesterday
• CNY/EUR 6.88 versus 6.88 Yesterday
• Yield on 10-Year Government Bond 2.72% versus 2.73% Yesterday
• Yield on 10-Year China Development Bank Bond 2.88% versus 2.90% Yesterday
• Copper Price -1.05% overnight