Research published by Blue Lotus Research on November 17, 2023

 

(6 Pages, 4 graphs and tables)
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BABA reported C3Q23 revenue, non-GAAP operating profit and GAAP net income in-line, 6% and (7%) vs. our est., and in-line, in-line and (14%); Instead of appointing capable management to oversee key subsidiaries, BABA backpedalled to call off its spin-off plans; We cut TP from US$ 127 to US$ 72, and downgrade to SELL.   The malaise today is an aftermath of overexpansion since IPO Following BABA’s IPO in 2014, with no competitors in sight, BABA embarked on an overexpansion that saw it to expand to (1) control of money flow (AntFin) and information flow (AliCloud) on top of merchandise flow (Taobao/Tmall), (2) buy up offline retailers, (3) buy up downstream (logistics), (4) buy up upstream (Youku/AutoNavi). The resulting conglomerate not only raises alert with CPC and runs afoul with trustbusters, but also piles up deteriorating assets.    Managing by committee won’t work Inviting founders back is a wrong move. Most co-founders (the 18 Arhats), like Roman Senators, are capable of defending Rome’s tradition but not addressing its problems. BABA today is a rare Internet platform with diminishing interest from its spiritual leader. Jack Ma’s sale of shares bodes ill for its participation of BABA’s future reforms, at a time when we notice a general dearth of capable management across the board, which is not surprising given BABA’s excessive footprint but is a problem if demonstrated talent is not promoted.   TikTok/ByteDance threats BABA more than Tencent Monetizing traffic has been the corner stone of the TikTok/ByteDance platform while creating traffic is not, which makes it more threatening to BABA.   What can turn us positive? First, Taobao/Tmall need capable management to defend against TikTok/ByteDance, PDD and JD. Further, BABA needs to resolve with government on businesses which (1) pose security uncertainties, (2) invite antitrust actions. Lastly, BABA, separate or as a whole, must be managed by people with high aspiration for success and corresponding incentives. (TBC)

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