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Alibaba 124% profit in 2020 Q2 brings China retail back to pre-pandemic levels

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E-commerce giant Alibaba Group Holding said it is closely monitoring the latest shift in US government policies towards Chinese companies, after the company posted a 124 per cent increase in profit and strong domestic retail sales in the June quarter.

“Today we face uncertainties from not only the global pandemic, but also increasing tensions between the US and China,” said Daniel Zhang Yong, chairman and chief executive of Alibaba, in a conference call with analysts on Thursday, after announcing the company’s latest financial results.

“As the world’s largest e-commerce platform, Alibaba’s primary commercial focus in the US is to support American brands, retailers, small businesses and farmers to sell to consumers and trade partners in China, as well as the other key markets around the world.”

Zhang, who described the current situation as “very fluid”, said Alibaba was “assessing the situation and any potential impact carefully and thoroughly, and will take the necessary actions to comply with any new regulation”.

Speculation that Alibaba, the parent company of the South China Morning Post, could be next on Washington’s hit list recently surfaced, as US President Donald Trump said on Saturday that he could exert pressure on more Chinese companies after short video app operator TikTok.

Hangzhou-based Alibaba reported a 34 per cent increase in revenue to 153.7 billion yuan (US$21.8 billion) in the first quarter of its new financial year, up from 114.9 billion yuan in the same period a year ago, on the back of robust sales at its China online retail and cloud computing businesses. That was ahead of the 148 billion yuan consensus from analysts’ estimates compiled by Bloomberg.

Net income jumped 124 per cent to 47.6 billion yuan in the quarter ended June 30, from 21.2 billion yuan a year earlier, to beat the consensus estimate of 36 billion yuan. That was mainly attributed to a net gain arising from the increase in the market prices of Alibaba’s equity investments in publicly-traded companies during the quarter.

“We mobilised our entire digital infrastructure to support the economic recovery of businesses across a wide range of sectors, while broadening and diversifying our consumer base by addressing their changing preferences in a post-Covid-19 environment,” Zhang said in a statement on Thursday, ahead of the conference call.

As China’s largest e-commerce services provider, Alibaba’s financial results are seen by many investors as a proxy for consumer spending in the country and an important barometer of its economic health.

China’s e-commerce industry has shown strong vitality and resilience amid the coronavirus pandemic. The country’s online retail sales reached 5.15 trillion yuan in the first six months of this year, up 7.3 per cent from the same period last year, according to data from the Ministry of Commerce.

Alibaba’s Hong Kong-listed shares were barely changed to close at HK$255 ahead of the results on Thursday. The stock was up 23 per cent year to date.

“The company is a leader in many of the areas that have done well during pandemic conditions, notably e-commerce, logistics and cloud services,” said Martin Garner, chief operating officer at research firm CCS Insight. “In addition, it has lower exposure to areas that have suffered during the outbreak, namely search and brand advertising, local services and physical retail – though these parts of its business are likely to have been knocked.”

Alibaba’s core China retail operations – led by Taobao Marketplace and Tmall – made up 66 per cent or 101.3 billion yuan, of its total revenue in the June quarter, according to the company.

That was driven by the growing number of users, including those from the country’s less-developed areas, on these platforms. These had 874 million monthly active users at the end of June, representing a quarterly net increase of 28 million.

“Chinese consumers are expected to spend 37 per cent more hours on mobile by 2021,” said Kanaiya Parekh, a partner at Bain & Co. “So the more they are online, the more potential e-commerce retailers have to capitalise on digital engagement.”

Annual active consumers on Alibaba’s China retail marketplaces totalled 742 million for the 12 months ended June 30.

“Our domestic core commerce business has fully recovered to pre-Covid-19 levels across the board,” said Maggie Wu, chief financial officer of Alibaba.

Cloud computing was Alibaba’s second-biggest revenue contributor

 last quarter, as sales grew 59 per cent to 12.3 billion yuan. That was primarily driven by its “public cloud and hybrid cloud businesses, reflecting higher average revenue per customer”, the company said.

Citing third-party studies, Alibaba executive vice-chairman Joseph Tsai said China’s cloud services industry is projected to grow from US$15 billion to US$20 billion in total size. “The US market is about eight times that,” said Tsai at the conference call, indicating that the market in China remains at a very early stage. “Based on what we’ve seen of our customers, as well as observing the full market growth, China is going to be a much faster growing cloud market than the US,” he said.

Revenue from Alibaba’s digital media and entertainment segment rose 9 per cent to 6.9 billion yuan, primarily driven by increased sales from online games and membership subscriptions.

The company’s innovation initiatives and others business segment recorded a 6 per cent drop in revenue to 1.2 billion yuan, following its move to reclassify revenue from self-developed online games to the digital media and entertainment business.

Despite current geopolitical challenges, Zhang said “global trade will continue”. He added that “Alibaba’s active pursuit of our mission to make it easy to do business anywhere, are fully aligned with the interests of both China and the United States”.

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