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Alibaba taps growth in China on trade war uncertainties

Alibaba Group Holding Ltd. appears to have been sheltered so far from the fallout of the trade war, the Chinese e-commerce giant said Aug. 15 after reporting first-quarter fiscal 2020 first-quarter earnings that came in above analysts' expectations.

During an earnings call with analysts, Alibaba Executive Vice Chairman Joseph Tsai noted that the company’s business "continues to do well" despite uncertain macroeconomics characterized by the slower global growth and the trade war.

Alibaba's revenue rose 42% to 114.92 billion yuan, slower than the 61% surge seen in the year-ago period but above analysts' expectations. Shares of the Chinese e-commerce retailer rose 2% in midday trading Aug. 15 to $165.27 after the company posted earnings.

Alibaba is reported to have filed for a second listing in Hong Kong. However, the current market sentiment and the ongoing turmoil caused by street protests in Hong Kong have delayed IPO plans for other Chinese companies.

The Hangzhou-based company may face far greater challenges in the slowing Chinese economy and weaker consumer sentiment. According to figures released Aug. 14, China's retail sales growth in July fell to 7.6%, compared to 9.8% growth in June.

Tsai was upbeat, however, that the consumption upgrade trend among the Chinese middle class and the rising urbanization and consumption demand from lower-tier cities give Alibaba opportunities for growth.

Tsai said Alibaba's robust growth is due to the sheer size of the Chinese middle class, with more than 300 million living in large cities.

"This affluent middle-class population is almost as large as the entire U.S. population, and their consumption needs and wants are approaching developed market levels," Tsai said.

Outside of major metropolitan areas, China has more than 150 cities with at least 1 million people, Tsai said. Those lower-tier cities and nearby towns have over 500 million people combined and a consumption economy of $2.3 trillion, Tsai said.

Alibaba's gross merchandise value of its Tmall platform increased 34% year over year, driven by increased user numbers and higher average spending, the company said.

The platform underwent an upgrade in July to provide customized store experience for users, better content distribution and links to offline stores, executives said.

Furthermore, Alibaba's cross-border e-commerce platform Tmall Global may be merged with Kaola as is eyeing an acquisition of its smaller rival from NetEase for $2 billion, according to media reports. An Alibaba spokesperson said the company would not comment on market rumors when asked about the acquisition.

Alibaba managed to improve its operating margin to 21% of revenue in the first quarter, compared to 10% in the prior-year period. CFO and Head of Strategic Investments Maggie Wu attributed the improved margin to the stickiness of the Alibaba ecosystem. Referrals from digital payment app Alipay led to strong user acquisition in the lower-tier cities during the 618 shopping festival held in June.

The company acknowledged that its core commerce segment, which includes Taobao, Tmall and its other retail businesses, remained the key growth driver. Reported revenue was 99.54 billion yuan, up 44% year over year from 69.19 billion yuan from the prior-year period.

Its other businesses in cloud computing, digital media and entertainment, and innovation initiatives remained loss-making. Among these divisions, cloud computing recorded the strongest growth, with a 66% increase in revenue on an increase in average revenue per customer.

As of Aug. 14, US$1 was equivalent to 7.02 yuan.