BABA's Q3 quarterly report as a whole is very beautiful, reflecting BABA's strong product and organizational innovation, but Zhang Yong said on the phone that the epidemic brought great challenges to the quarter and suppressed the stock price.

BABA handed in his report card for the third quarter of fiscal 2020 before the US stock market opened on Feb. 13 (corresponding to Q4 in 2019, which is defined below by natural season).

Revenue reached 161.4 billion yuan, slightly exceeding Bloomberg's consensus forecast of 159.5 billion yuan, compared with 117.278 billion yuan in the same period last year, up 38% from a year earlier.

In terms of business, core business revenue is 110.4 billion, up 36% from the same period last year, and the growth rate continues to slow on a large base; cloud computing revenue is 10.7 billion, up 62% from the same period last year, exceeding 10 billion yuan in a single quarter for the first time; large entertainment revenue is 7.3 billion, up 14% from the same period last year; and innovative business revenue is 1.8 billion, up 40% from the same period last year.

Non-gaap net profit rose 56% year-on-year to 46.49 billion, another quarterly high.

In addition to the record quarterly performance, BABA needs to mention again here in the organizational structure adjustment of 2019Q4 that BABA will focus on promoting the three major strategies of globalization, domestic demand, big data and cloud computing after this adjustment.

Domestic Retail platform: driven by Innovation

Steady growth of users, live broadcast and double 11 pull GMV

The overall penetration rate of e-commerce is increasing, and the mutual penetration of BABA and Pinduoduo into each other's user camp is also continuing, so from the active consumer data, the three e-commerce companies are now able to maintain an upward trend. Active consumers in BABA Q4 increased by 18 million month-on-month, of which about 60 per cent came from less developed areas.

In terms of growth rate, the month-on-month growth rate continues to slow. By comparison, the active consumers of Pinduoduo Q3 increased by 53 million month-on-month, and the month-on-month growth rate maintained an increase for two consecutive quarters after the 2019Q1 "bottomed out". This rate is very frightening. If it continues to maintain four or five quarters, the annual active consumers may be able to catch up with BABA.

In terms of GMV, Tmall's physical GMV grew by 24%, continuing the slowing trend. FMCG and consumer electronics products are still the fastest growing categories, while double 11GMV is up 26% year-on-year, which has a certain pulling effect.

In the context of huge volume and intensified competition, a slowdown in growth is inevitable, but BABA promotes the increase of GMV and conversion rate through live broadcast, new product creation, and cross-selling strategies, which plays a great role in boosting, and also shows BABA's strong innovation and operational ability. GMV and MAU generated by 2019Q4 and live streaming on Taobao all increased by 100% compared with the same period last year.

The revenue growth of domestic retail platform slows down, and the trend of commission slows down obviously.

The domestic retail platform is BABA's cash cow. In the current quarter, customer management revenue of 61.2 billion (which can be simply understood as advertising) grew by 23%, and commission income was 23.4 billion, 16% year-on-year, a combined year-on-year growth rate of 21%.

The 21% growth rate of domestic retail customer management and commission income continued to slow this quarter. In the area of customer management income, on the one hand, the above innovations have brought about a continuous increase in user flow and participation, and there is sufficient room for improvement in advertising inventory, but on the other hand, affected by macro factors, BABA has taken the initiative to slow down the rising trend of monetization in recent years. At the same time, from the perspective of commission income, the growth rate is declining relatively fast, and there may also be the competitive impact of Pinduoduo's lower fees at the merchant end.

In terms of organizational structure, BABA's adjustment in Q4 should also tap the potential of monetization to better defend Pinduoduo: the retail business of the front desk and the marketing center of BABA's mother Jiang Fan are uniformly placed under Jiang Fan's management, enlarge the available resources and remove mutual consumption within the group as far as possible, and the future between GMV and advertising traffic will be more healthy.

New Retail: the Strategic position of Box Horse has been lowered

New retail business (Hema, Tmall Import, Yintai, Tmall supermarket) Q4 revenue of 25.8 billion, an increase of 128% over the same period last year, continued to maintain rapid expansion. The number of box horse stores increased from 170 at the end of Q3 to 197 at the end of Q4, a net increase of 27. With the wild running of box horses from sacrificing their lives to protecting their lives, although the number of stores is still growing, box horses begin to pay more attention to fine operation, and the format of box horse stores is also exploring the direction of differentiation in small stores.

In the organizational structure adjustment of Q4, Box Horse has been transferred from the new retail business group to B2B business group, along with the International Trade Division, 1688, Village Amoy, Retail, and Express, which means that the strategic position of Box Horse in the new retail route has been downgraded. In the future, it may focus more on B2B digital transformation and supply chain business model. The highlight of Q4 "Old City Renewal" is the cooperation between Tmall supermarket and RT-Mart, using the inventory of RT-Mart to fulfill Maochao's order, which is delivered in half a day in a range of 3 to 20 kilometers, as well as the basic logistics capability of rookies. it fully reflects BABA's ecological ability.

Local consumer service: the fierce competition with Meituan will continue

Consumer services (ele.me, word of mouth) Q4 revenue of 7.58 billion, an increase of 47% over the same period last year. At present, BABA's market share in local life is still being squeezed by Meituan, life is difficult, and the pattern is difficult to change for the time being. Alipay is currently the main helper of ele.me, accounting for 48% of the new users acquired by ele.me in 2019.

In the long run, BABA's investment in this business will continue, with the help of new retail, entertainment and other ecological offensive, is still expected to maintain market share. The trillions of market space for the local living business is also vast enough to accommodate two players.

Cloud computing: e-commerce on the cloud, milestones

Aliyun's revenue reached 10.7 billion in the current quarter, an increase of 62% over the same period last year, which is still on the track of rapid growth. Overall, Aliyun's business revenue is expected to maintain high growth with the increase in domestic cloud computing penetration and single-customer payment.

Before the Singles Day holiday, BABA migrated the main systems of core e-commerce to BABA public cloud. Aliyun withstood the test of a peak of 540000 orders per second, with no data interruption 24 hours a day. It reflects Aliyun's strong technical strength and network security capability, and is expected to produce a huge demonstration effect.

Profitability

BABA has the ability to make a high profit in terms of huge economies of scale, with an EBITA rate of 31% this quarter, slightly higher than the previous quarter.

In the core business, 2019Q4's "four new businesses" (loss from big to small for local services, lazada, new retail, rookie) lost 8.2 billion, expanding month-on-month. On the other hand, the loss of big entertainment has expanded, and the loss of innovative business has not improved significantly.

Summary

The overall financial report of Q4 is still a good report card, but compared with 2019Q4, the market is actually more concerned about the performance of Ali 2020Q1. Although the e-commerce business is "online" on the surface, BABA will inevitably be affected because of the decline in shopping demand and the impact on logistics capabilities. At the same time, BABA takes the initiative to assume social responsibility, including waiving all Tmall merchants' annual fees for platform services in the first half of 2020, as well as a variety of assistance to small and medium-sized enterprises and strong donations, etc., will also affect Q1 performance, but it also shows BABA's courage to take responsibility and strong business strength, which will greatly improve the value recognition of businesses and consumers.

BABA said at today's performance presentation that the main business was affected by the epidemic in February. From a qualitative point of view, the epidemic has affected China's economy as a whole, especially the retail and service industries, but the demand for products and services is still there. It's just factories and companies that are delayed because of the epidemic. It is difficult to accurately predict the impact of the epidemic on BABA this quarter. Overall income is bound to have a negative impact, and business based on physical production will have negative growth, but is optimistic about the overall consumption trend in China.

Finally, in terms of valuation, the unexpected external environment of the epidemic caused an one-off income impact, which is actually quite limited from the perspective of DCF, and it is not difficult to see from BABA's recent stock price performance. Returning to the fundamentals of the company, BABA's e-commerce business still has absolute advantages in terms of people, goods, and markets. At the same time, the layout of new retail, entertainment and financial, payment, logistics and other infrastructure can consolidate BABA's long-term competitiveness in the core business ecology and technology fields, and ensure long-term growth space.