Alibaba is welcoming a dual primary listing, bringing both joy and concerns. The joy comes from Alibaba gaining an important chip in the capital market competition. The concern lies in the tightening of the Hong Kong stock market, which has accelerated the clearance of many poor-quality stocks. With Alibaba's performance under the spotlight, can it satisfy investors? @FinanceNews Original Author | Yan Zhao Editor | Jueying Recently, Alibaba has once again come under the spotlight due to multiple "good news." Firstly, Alibaba announced the completion of its dual primary listing on the Hong Kong Stock Exchange and the New York Stock Exchange. Secondly, Alibaba's market value on the US stock market surpassed that of Pinduoduo again. Thirdly, the State Administration for Market Regulation announced that it had supervised Alibaba Group to complete a three-year rectification with "good results."

Regarding this, some industry insiders analyzed that this might be a prelude to Alibaba entering a "new era." Especially after Alibaba's dual primary listing takes effect, it sends a positive signal at the capital level. Another viewpoint is that with the "double insurance" of listing, Alibaba will gain an extra chip at the capital level, further distancing itself from the "Chinese concept stock panic" of recent years.

However, despite Alibaba's continuous "good news," its recently released Q2 financial report for fiscal year 2025 has exposed the pressure it faces in terms of operation and management. This pressure has become even more apparent as Alibaba receives more attention in the capital market. Therefore, it may be too early to say that Alibaba is about to enter its "second spring."

01 Implementation of organizational reform hindered, loss of e-commerce fundamentals

One of the most notable events for Alibaba in recent years was the "1+6+N" organizational reform led by Daniel Zhang, Alibaba Group's Chairman and CEO, in March 2023. However, this ambitious organizational reform encountered setbacks just a few months later, signaling its demise.

Firstly, as the soul of this reform, Daniel Zhang stepped back from the center of power. Notably, he resigned from his positions as Chairman and CEO of Alibaba Group, as well as Chairman and CEO of Alibaba Cloud Intelligence, in June and September 2023, respectively, announcing his withdrawal from the front line of core businesses.

Secondly, plans for the spin-off and listing of Alibaba Cloud, Hema Supermarket, and Cainiao Logistics, which are the backbone businesses of the 1+6+N structure, were successively halted by Alibaba due to "various uncertainties," "postponement of plans," and "inability to realize value for shareholders." This indicates that Alibaba's ambitious organizational reform may have been hindered.

Analysis suggests that the demise of the 1+6+N organizational reform is primarily attributed to the pressure on growth faced by Alibaba's six core businesses, which were once considered its backbone. Therefore, the new management team, led by Joe Tsai and Simon Wu, has had to adjust its development strategy to explore more possibilities for Alibaba's future growth.

Taking Alibaba's latest financial results for the first quarter of fiscal year 2025 (covering the three months ended June 30, 2024) as an example, revenue reached RMB 243.24 billion, an increase of 4% year-on-year from RMB 234.156 billion in the same period last year. However, net profit attributable to ordinary shareholders decreased by 29% year-on-year.

Clearly, this is a performance report with slightly increased revenue but a significant decline in net profit, far below investors' expectations. Moreover, amidst Alibaba's overall underperformance, its core e-commerce business, represented by Taobao and Tmall, has shown signs of weakness.

According to the first-quarter financial report, despite covering the "6.18" shopping festival, Taobao and Tmall's combined revenue decreased by 1% year-on-year in the quarter. While revenue from China's wholesale commerce increased by 16% year-on-year, revenue from China's retail commerce decreased by 2%. Additionally, Taobao and Tmall were the only business group among Alibaba's six major business groups to experience negative revenue growth.

The only bright spot in the e-commerce segment was the more than threefold year-on-year increase in new 88VIP members, contributing to a slight 1% year-on-year increase in customer management revenue, which accounts for 70% of Taobao and Tmall's total revenue.

However, analysis suggests that this growth came at the cost of profits, achieved through offering benefits such as free shipping on returns and increasing repurchase rates to 88VIP members. Consequently, adjusted EBITA (Earnings Before Interest, Taxes, Depreciation, and Amortization) decreased by 1% year-on-year.

Furthermore, direct sales revenue, which ranks second only to customer management revenue, also decreased by 9% year-on-year. Specifically, revenue from Tmall Supermarket, Tmall Global, and other direct sales businesses decreased by 9%, dragging down Alibaba's overall performance.

Moreover, when compared horizontally, according to Sandalwood e-commerce monitoring data, Taobao and Tmall accounted for 45% of the e-commerce market share in 2023, significantly lower than the over 70% they once held at their peak, indicating significant market share erosion by competitors.

Undeniably, consumers today prefer Pinduoduo for low prices and JD.com for quality and speed, leaving Alibaba's e-commerce business in an increasingly awkward position due to its mediocre pricing and delivery speed.

02 Pressure on other business groups, difficulty in finding a second growth curve

In addition to its core e-commerce business, Alibaba's other business segments are also under pressure. Alibaba Cloud, which Alibaba has long regarded as its second growth curve, has failed to shoulder the responsibility of driving performance.

Firstly, in the entertainment segment, Alibaba Digital Media and Entertainment Group (ADME) has not shown significant improvement since its establishment in 2013. Key events include the acquisition of Youku Tudou (parent company of Youku), the integration of Alibaba Pictures, the shutdown of Xiami Music, and the overtaking of Youku's traffic by Mango TV. In the first quarter of fiscal year 2025, ADME generated revenue of RMB 5.581 billion, representing a sluggish growth rate of only 4%.

Taking Youku, a representative product, as an example, according to the "QuestMobile 2023 Content Videoization and Commercialization Insight Report," Youku's monthly active users (MAUs) stood at only 230 million, significantly lower than iQIYI's 473 million and Tencent Video's 416 million. Even Mango TV, with 230 million MAUs, is hot on Youku's heels. In terms of paying subscribers, Tencent Video reached 117 million in Q3 2023, while iQIYI reached 107.5 million in the same period. In contrast, Youku has not disclosed its paying subscriber numbers for over three years.

Analysis suggests that Youku's low ranking in active users is primarily due to its position in the mid- and long-video segment, where it faces competition from platforms with stronger content advantages, such as iQIYI and Tencent Video. Coupled with insufficient content differentiation and shortcomings in content production, Youku, despite its advantages in youth-oriented content, has failed to capitalize on them and is even gradually being surpassed by Mango TV.

Secondly, in the local services segment, Alibaba's first-quarter results showed increased revenue but no increase in profits, with continued losses and no signs of self-sufficiency. According to the financial report, driven by growth in orders on Ele.me and Amap, the local services group's revenue increased by 12% year-on-year to RMB 16.229 billion. The group's adjusted EBITA loss narrowed from RMB 1.982 billion in the same period last year to RMB 386 million due to improved unit economics and expanded transaction volumes on Ele.me. However, losses on the scale of billions of yuan remain a burden on Alibaba's performance.

Thirdly, Cainiao, which has withdrawn its IPO plans, has also struggled to develop smoothly. According to the latest quarterly financial report, Cainiao's revenue increased by 16% year-on-year to RMB 26.811 billion but remained unprofitable. Although the second-quarter financial report downplayed the situation, Cainiao's adjusted loss widened dramatically by 321% to RMB -1.342 billion in the first quarter of 2024, with cumulative losses exceeding RMB 7 billion before its IPO, indicating significant development challenges.

Cainiao's difficulties stem partly from its heavy investment in cross-border logistics infrastructure, which is costly and has hit a growth bottleneck. Data shows that Cainiao handled a total of 1.5 billion cross-border parcels in fiscal year 2023, a decline of over 10% from 1.68 billion in fiscal year 2022.

Moreover, in addition to cross-border business, Cainiao's last-mile logistics represented by Cainiao Stations and Cainiao Countryside, while core strategic businesses, lag behind other segments such as cross-border and supply chain businesses.

Lastly, Alibaba's earlier international business layout remains unprofitable, with losses continuing to widen. Financial data shows that in the second quarter, Alibaba's International Digital Commerce Group (AIDC) generated revenue of RMB 29.293 billion, an increase of 32% year-on-year. However, adjusted EBITA losses widened to RMB -3.706 billion from RMB -420 million in the same period last year. This indicates that Alibaba's international business is still in a "burning money" mode and may struggle to emerge from its difficulties in the short term.

In addition to these challenges, Alibaba has continued to invest heavily in Alibaba Cloud for technology research and development and marketing promotion. While its overall growth rate has slowed significantly in recent years, its performance contribution is not commensurate with its strategic position within Alibaba.

Data shows that in the first quarter, Alibaba Cloud's revenue increased by 6% year-on-year to RMB 26.549 billion, with AI-related product revenue experiencing triple-digit growth. Although Alibaba Cloud's revenue growth resumed in the first quarter of fiscal year 2024, this growth came at the cost of significant price cuts and profit sacrifices.

For example, following Alibaba Cloud's 2024 strategic conference earlier this year, where it announced price cuts across its cloud product line, on April 8, Alibaba Cloud officially announced price reductions across its entire overseas market, covering core cloud products deployed in 13 global regions and over 500 product specifications, with an average price reduction of 23% and a maximum reduction of 59%. In AI products, Alibaba Cloud significantly reduced prices for nine main large models under Tongyi Qianwen during the reporting period.

While Alibaba Cloud was the first among internet cloud service providers to achieve profitability in its early years and has resumed growth year-on-year and quarter-on-quarter, its contribution to Alibaba's revenue remains only 11%. Therefore, Alibaba Cloud is unlikely to become Alibaba's performance pillar or second growth curve.

It is worth noting that since Alibaba first disclosed its cloud service revenue in 2015, Alibaba Cloud has consistently maintained year-on-year revenue growth rates exceeding 100%, with its revenue scale expanding from RMB 1.271 billion to the ten-billion level.

However, Alibaba Cloud's revenue growth began to decline from double-digit to single-digit in 2022. Although its performance has fluctuated in recent years, its growth has slowed significantly over the long term, accompanied by a decline in market share.

According to the latest data from Canalys, Alibaba Cloud still holds the top position with a 37% market share, but this share has declined by 2%, followed closely by Huawei Cloud and Tencent Cloud. Analysis suggests that Alibaba Cloud's declining market share is due to the rapid rise of second-tier cloud service providers such as China Telecom.

03 The "new policy" faces a crucial test, and the future of the "Four Dragons" is uncertain

After the era of Daniel Zhang came to an end, Simon Wu emerged to implement his "new policy." In mid-November 2023, Simon Wu participated in Alibaba Group's quarterly earnings call as CEO for the first time and officially announced the first batch of strategic innovation businesses: 1688.com, Xianyu, DingTalk, and Quark.

These strategic innovation businesses are reportedly operated as independent subsidiaries and will break free from their previous group-wide positioning constraints, with Alibaba committing to continuous investment over a 3-5 year period.

However, the development of these strategically elevated businesses has not been smooth. Taking Xianyu as an example, although Alibaba has repositioned Xianyu as a "young people's interest trading community" rather than just a second-hand e-commerce platform, its current development is concerning.

In fact, Xianyu has made significant moves in 2024, including overhauling its user incentive rules, relaunching its PC platform, and announcing the implementation of seller commissions starting September 1, 2024. However, Xianyu has faced numerous crises due to internal governance issues, overshadowing its optimization efforts. For example, Xianyu has frequently been accused of facilitating obscene transactions through coded language and has become a hotbed of consumer complaints in recent years.

It is worth noting that Xianyu's so-called transformation into an "interest trading community" is not a novel concept. When Douyin transitioned into e-commerce, it proposed the concept of interest-based e-commerce and achieved results, while Xiaohongshu's current "seeding" capabilities far surpass those of other competitors.

Observation suggests that Xianyu's anxiety stems from its inability to demonstrate effective oversight amidst vast amounts of transaction information and a complex online environment. In the view of industry insiders, Xianyu's long-standing issues with difficult-to-ban obscene transactions and its reputation as a "troubled spot" have become entrenched.

On the one hand, the low barriers to entry for sellers, requiring only a mobile phone number, Taobao, or Alipay account for registration and login, contribute to this problem. On the other hand, there are significant deficiencies in the platform's review and punishment mechanisms.

Similarly, Alibaba's DingTalk, which the company holds high hopes for, is facing competition from both WeChat Work and Feishu due to changes in the market landscape. Moreover, as the era of intelligence arrives, Alibaba's strategy of integrating cloud and collaboration tools has yet to be validated in terms of commercialization and scalability.

In contrast, WeChat Work, based on the personal WeChat ecosystem, has a relatively complete ecosystem. Due to its integration with personal WeChat, WeChat Work's commercialization has been accelerating in recent years, offering significant potential for future growth.

Feishu, backed by the internet giant ByteDance in the new era of the internet, excels in product experience and user reputation. In contrast, DingTalk, which is often criticized as a "supervisor" tool for bosses, appears awkward.

According to the latest data from QuestMobile, a third-party agency, WeChat Work had 153 million monthly active users in March 2024, representing a year-on-year growth of 24.3%, far exceeding the industry's overall growth rate of around 16%. This suggests that DingTalk, which previously had a first-mover advantage in scale, is being caught up by WeChat Work.

On the whole, Alibaba has fallen behind in both e-commerce and innovative business. It's worth noting that in the second quarter of 2024, Pinduoduo's revenue and net profit increased by 86% and 144%, respectively, while Alibaba's growth rate is not on the same scale.

Despite Pinduoduo's recent stock price drop below Alibaba's due to its slightly lower-than-expected revenue in the first half of the year and executives' comments about unsustainable profit growth, this may be a deliberate move by Pinduoduo to manage investor expectations for higher-quality growth. Alibaba's true value in the capital market will only be tested by investor confidence and attitudes after its dual primary listing.

04 Retreating from the low-price segment, caught between a rock and a hard place

Signs indicate that Alibaba is weakening its low-price strategy and even retreating from the low-price segment. Firstly, on Taobao and Tmall. In mid-July, Taobao announced it would optimize its "refund only" policy, giving merchants more autonomy in after-sales service based on a new experience score system. Meanwhile, Tmall announced the full cancellation of annual fees for merchants from September 1.

This change in Taobao and Tmall's operating rules is seen as a signal that Alibaba is abandoning the low-price competition. Meanwhile, Pinduoduo is moving in the opposite direction.

According to Pinduoduo executives at the earnings call, the company's future profitability is unsustainable as it plans to further increase subsidies to merchants and indirectly benefit consumers. While Pinduoduo claims to be improving its platform ecosystem and pursuing high-quality development, it is essentially competing with Taobao and Tmall for users and low prices.

Additionally, rumors circulated that Taobao's low-price version, Taobao Lite, would be discontinued, although officials denied this, stating that "Taobao Lite will continue to develop while increasing the full supply of mobile Taobao to serve its original market users." However, as Alibaba's Four Little Dragons innovative business strategy becomes clearer, Taobao Lite's position becomes increasingly awkward. Signs suggest that Alibaba has retreated from the low-price segment.

In the premium segment, JD.com and Tmall are neck-and-neck competitors. The industry continues to debate which model is superior. From a model perspective, JD.com's official self-operated brand model and Tmall's B2C platform model inviting merchants each have their advantages and disadvantages. While JD.com's model is heavier, giving the platform more control over brands and products, Tmall's lighter model lacks control over merchants.

As some industry experts note, Alibaba's vast merchant base spreads out the risk of individual merchant fluctuations, and these "flowing soldiers" support Alibaba's "ironclad camp."

From a service perspective, JD.com operates its logistics and platform services, while Tmall relies on Cainiao Network for last-mile logistics. Each has its strengths and weaknesses. After nearly 20 years of competition, it's clear that neither platform has a clear advantage.

Therefore, the variable in Alibaba's premium segment may not be JD.com but Pinduoduo, which is pursuing high-quality development, and emerging e-commerce platforms like Douyin, Kuaishou, WeChat Video, and Xiaohongshu, as well as overseas platforms like SHEIN, Temu, and TikTok.

Alibaba's e-commerce business has reached a crucial crossroads. However, Alibaba is caught between a rock and a hard place in making a choice.

Daniel Zhang's era at Alibaba marked its "biggest transformation" that ultimately stalled with Zhang's departure and the shelving of spin-offs for multiple groups. The "Alibaba New Deal" under Joseph Tsai and Simon Wu is still in its infancy, and its effectiveness remains to be seen.

Overall, Alibaba faces crises on all fronts. Whether in B2B or B2C products, domestic or international markets, premium or low-price segments, traditional Taobao and Tmall businesses or innovative "Alibaba Four Little Dragons" businesses, Alibaba finds itself squeezed between competitors and challenges.

It's thought-provoking why Alibaba, once an unstoppable business empire, hasn't improved despite management changes and platform upgrades, but instead, its cracks are widening. This reflects Alibaba's "midlife crisis" and the industry's confusion in the internet age marked by impatience and anxiety.

Investors in Alibaba are undoubtedly most concerned about this issue and seek answers. With the dual primary listing in place, Alibaba has gained an additional chip in the capital market. However, can the struggling company provide investors with certainty and continue to win their favor?

References:

1. "Alibaba's Big Adjustment: No Split of Alibaba Cloud, Introducing Strategic Innovative Businesses, the 'Four Little Dragons'" - China Business Network 2. "After Becoming the Largest User Platform, How Much Room for Growth Does DingTalk Have?" - Songguo Research 3. "Twenty Years of Alibaba: From the Top of the World to the Starting Line" - Yingran Entertainment 4. "What Does Alibaba's Dual Primary Listing in Hong Kong Mean?" - Shenghuobang 5. "Cainiao Returns to Alibaba, Daniel Zhang's Reform Falters" - Changgeng Technology 6. "Net Profit Drops by 27%: Alibaba's First-Quarter Earnings Report Is Heart-Wrenching" - Kung Fu Finance 7. "Youku Rushes to Go Public, Making Three Major Cuts" - Shentong Business