Fri. Apr 19th, 2019

Alibaba on track despite trade war hit to China economy

 

Another day, another indicator that China’s economy is slowing.

Today’s comes from the Chinese e-commerce colossus Alibaba.

The company, often described as that country’s equivalent of Amazon and eBay rolled into one, reported sales of 117.3bn yuan (£13.4bn) for the final three months of the year.

That was up 41% on the 83bn yuan reported in the same period a year earlier.

However, according to skynews,  not only was that number short of the 119 billion yuan that had been pencilled in by analysts, it also represented the company’s slowest sales growth in three years.

Alibaba’s sales had grown by more than 50% in each of the last 10 quarters.

The news ought not to have come as too much of a surprise, as Alibaba warned as long ago as November that its sales would grow more slowly this year than expected.

But they will still add to a growing sense of unease that China is set for another year of growth that, by its own astonishing recent standards, could be rather lacklustre due to the trade war between the world’s second-largest economy and the United States.

 

The quarter includes Singles Day, held on 11 November, which is traditionally Alibaba’s busiest day of the year.

The event, which has run since 1993 and celebrates single people, is the world’s busiest shopping day annually – both online and offline – generating around four times as many sales as America’s two biggest shopping days, Black Friday and Cyber Monday.

So, should investors be panicking?

 

Not according to Joe Tsai, Alibaba’s executive chairman, who points to the fact that, between now and 2030, China’s middle class will grow from 300 million today to 850 million.

He added: “The size of the Chinese economy is $13tn. In the future, obsessing over its rate of growth [will not be] entirely meaningful because of the law of large numbers.

“The reality is, the absolute dollar amount of new wealth creation in the Chinese economy will be well over $800bn each year.”

He argues that, contrary to a lot of commentary, household finances in China remain reasonably healthy.

Mr Tsai also addressed the trade war – previously described by Jack Ma, Alibaba’s founder, as “the most stupid thing in the world” – amid concerns that it is beginning to impact Chinese growth. He insisted that, while concerns about trade tensions might affect sentiment, Alibaba’s exposure to tariffs erected by President Trump was small.

 

He added: “For our businesses in e-commerce, consumer services, entertainment and cloud computing, the primary growth driver is not exports but domestic consumption and corporate transformation.

“Digitisation of the retail sector and the resulting productivity and efficiency gains will accrue to Alibaba with or without a trade war.

Mr Tsai even suggested that Alibaba could help bring down the trade deficit between the US and China that motivated Mr Trump to erect tariffs in the first place.

He went on: “With nearly 700 million Chinese consumers shopping on Taobao and Tmall (Alibaba’s two huge online retail platforms, the first consumer-to-consumer and the other business-to-consumer), we are the platform of choice for American companies and farmers to gain access to the Chinese market.”

 

Mr Tsai also highlighted recent measures by the Chinese government, including cuts to VAT and corporation tax and increases in personal tax allowances, that he said would be good for both business confidence and consumers.

Despite the slowdown in sales growth, shares of Alibaba rose by nearly 6% on Wall Street this afternoon, as profits came in stronger than expected.

And perhaps the greater concern should not be Alibaba’s retail operations but how it is performing in online entertainment, an area into which it has diversified, but in which it is being outpaced by rival Tencent – which recently overtook Alibaba to become Asia’s biggest company by stock market valuation – and Baidu.

 

By contrast, its cloud computing business continued to expand strongly, notching up sales growth of 84% during the quarter.

Other concerns include the amount of investment being piled into its meal delivery service, Ele.me, which together with Tencent’s rival offering has around 95% of the local market.

The worry is that some of these activities are making Alibaba less of an ‘asset light’ business, one which has relatively few capital assets like land, buildings and machinery, potentially losing its edge as a business.

However, for investors in the business such as Britain’s Scottish Mortgage Trust, these results should not provide too much cause for concern. This is a business still growing rapidly in spite of any trade war worries.

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