Alibaba Reaches 1.3 Billion Annual Active Consumers, Russian Invasion In Ukraine Sends Asia Equities Lower

Key News

Asian equities were a sea of red overnight as Russia began an offensive in Ukraine, citing support for breakaway eastern provinces, but launching airstrikes as far away as Kyiv. Alibaba reported Q4 2021 earnings overnight, falling short of analyst expectations for revenue growth due to a high base of Q4 2020.

The Russia debacle highlights that foreign investors’ dumping of China stocks to avoid geopolitical risk in 2021 was misguided. Stepping back, all the political and national security emphasis on China over the last four years has been somewhat misplaced. While China has not explicitly condemned the attack, there is apt to be little support from China on this blatant act of aggression. Yes, Russia has raw materials that China and many countries want, but Russia is not a globalized economy like China. Yes, China would prefer Ukraine not join NATO, but China does not want a full-scale conflict in Eastern Europe. There is far more for China to lose than gain by supporting Putin in an invasion of Ukraine.

The Hang Seng Index lost -3.21% overnight as few sectors were spared from a downdraft, including tech as the Hang Seng TECH Index fell -4.33%, weighed down by Alibaba’s Hong Kong-listed shares. However, data from the MSCI China All Shares Index (below) suggests a rosier picture. Volumes surged +53.89% from yesterday in Hong Kong as investors rushed to pare down risks.

Shanghai, Shenzhen, and the STAR Board fell -1.70%, -2.36%, and -1.31%, respectively, overnight on volumes that increased by +30.84% from yesterday. Interestingly, the information technology sector was a bright spot on the Mainland as investors continue to digest positive earnings from semiconductor companies.

Alibaba Q4 Earnings Review

• Revenue +10% year-over-year (YoY) to RMB 242.6 billion ($38.1 billion)
• Annual Active Consumers +3.7% quarter-over-quarter (QoQ) to 1.3 billion
• Non-GAAP Net Income -25% YoY to RMB 44.6 billion ($7.0 billion)
• Net Income Margin 18.4%

While headlines are screaming that Alibaba is seeing the slowest year-over-year growth in its history as a publicly-traded company, we must remember that this is compared to Q4 2020, which was perhaps the best quarter in Alibaba’s history. Q4 2020 was the height of China’s strong recovery from the pandemic. Due to the consumer slump in China in the second half of 2021, we knew the company’s results would be disappointing. China’s zero covid policy has led to lower consumer confidence that has bled into online consumption. Nonetheless, the company is still reaching record sales, though year-on-year growth has taken a hit. 2020 Singles’ Day sales were only slightly higher than they were in 2020, but still reached another record high.

During the company’s earnings call, CEO Daniel Zhang laid out a clear plan for dealing with slowing growth and reaching peak E-Commerce penetration. The company’s plan includes increasing the value extracted per user and relying on international markets, which include France, Spain, and Turkey, to reach its goal of 2 billion users. Company management was especially positive about the grocery and food delivery segments, which have continued to benefit from covid restrictions. Interestingly, Alibaba is less exposed to the new guidance on service fees from the National Development & Reform Commission (NDRC) than Meituan as its service fees were already far lower than the latter. Ali Cloud, a key growth driver, is more diversified than its competitor Baidu and now boasts 50%+ of revenue sourced from non-internet sector clients, whereas Baidu’s cloud services are heavily concentrated from a client perspective in the media/internet industries. More to come on this topic!

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.33 versus 6.31 yesterday
• CNY/EUR 7.06 versus 7.15
• Yield on 1-Day Government Bond 1.70% versus 1.55% yesterday
• Yield on 10-Year Government Bond 2.79% versus 2.79% yesterday
• Yield on 10-Year China Development Bank Bond 3.06% versus 3.06% yesterday
• Copper Price +0.69% overnight