Blue Lotus

July-August 2022
Shawn Yang, managing director at Blue Lotus Capital Advisors, discusses Alibaba’s recent quarterly earnings as well as its application for primary dual listing in Hong Kong with CNBC and Bloomberg on Aug. 5th and Jul. 27th,respectively. We still maintain a HOLD rating for Alibaba due to the general weak demand and competitive landscape.

CNBC interview on Aug 5th
Q: Do you think growth is going to pick up in the next quarter. And to what extent?
Yang:I think the good thing is that Alibaba tells investors that June is definitely better than April and May. And July is better than June. So I think people are slightly more positive to it after hearing that because a lot of people worry that COVID will continue to hit the macro economy and BABA’s performance. It seems that the second quarter would be the worst quarter. And things are getting a little bit better.
Q: Basically, the real pressure is coming on the Chinese e-commerce side. There, BABA is facing a lot of competition from Pinduoduo and JD.com and TikTok’s parent company ByteDance. Is that going to slow down the pace of any sort of recovery we're going to see going forward and how do you see BABA’s fighting back?
Yang: I think the latest challenge is still from Douyin, as you said that's probably the TikTok in China. So l think these years the latest trend is that BABA is losing market share in terms of GMV to Pinduoduo and JD in previous years. But this year I think more brand advertisers are shifting their ads budget to Douyin, because this is an open platform with a lot of traffic. Therefore, more brands advertisers are willing to allocate their budgets. The money that you spend on Douyin could also lead to sales to other platforms, including Alibaba, which I think is a negative read-through to BABA’s advertising business. But the other thing is that even for Douyin, the growth is also slowing down. So probably this year, we are still going to see the competition, but next year we hope that the competition could be eased a little bit.
Bloomberg interview on Jul 27th
Q: What's the significance you see in Alibaba doing this?
Yang:I think there are a couple of considerations behind. The first one is definitely to hedge the risk, as you said that there has always been risks that it is going to be delisted from the US market. So by a dual primary listing, Alibaba is becoming a more independent entity in Hong Kong stock market. And secondly, I think it's going to diversify its investor base. There will be more Chinese mainland investors who can invest Alibaba through the Shanghai-Hong Kong stock connection program. In sum, it definitely hedges the risks and also attracts more investors with diverse backgrounds. That is the two key points for Alibaba.
Q: Does this potentially open the gateway to a better outlook for Alibaba? Would they be considering what Chinese regulators and the government will be wanting them to do in terms of bringing the business in more of an alignment with that set of priorities.
Yang: In terms of the regulations, I think that for the second half of this year we are going to see an easing regulatory environment. Partly I think it’s because China is more focusing on economic development or the economic recovery. But I think we still have a hold rating to Alibaba, because we still have concerns of the general weak demand and also the competitive landscape. It seems that Alibaba’s performance in the latest promotion 618 season this year is relatively weak. And some business, like core eCommerce and cloud, the growth is still slowing down.
Q: So what could be the next catalyst for Alibaba now?
Yang: I think some investors probably are a little bit more positive to its international business because Alibaba has some management change to the international business and they basically have some interesting movements. For example, they are introducing more brand merchants to both Aliexpress and Lazada. They are also creating more synergy between Aliexpress and Lazada. But I think this is still early movements. People are still waiting to see the numbers, for example, whether this change could bring upside to the GMV and revenue growth of international business. People actually still want to wait and see.
Q: So what does this also signal for the broader Chinese companies that are listed in the US? Some people say that this really makes the ADR market here irrelevant over time.
Yang: I think that you can see that basically, Hong Kong investors will be more active. But if you just look at Alibaba, I think the daily trade volume in Hong Kong is only about like 20% to 30% of the US. I think that both US market and Hong Kong market are heavily dominated by institutional investors. So l think they have been following these companies for quite a long time. So the advantage or disadvantage is that they will have a very deep understanding of all these companies. But going forward, I think there will be more Hong Kong investors in this ADR market.
Q: Do you think in the mid and long term it's sort of the writing on the wall that signifies the beginning of the decoupling when it comes to these Chinese companies reallocating their focus and prioritizing that focus back on mainland China and the access to mainland Chinese investors. Do you see this as a beginning or what some analysts say it is already the process of decoupling between China and the US in terms of the shifting focus for these companies?
Yang: I think that this is only a result in terms of the broader geopolitical picture. So it's only the result. I think it totally depends on what is the general geopolitical picture, so it is very difficult to say that. But I think most of the companies have very simple purposes that is to hedge the geopolitical risk and try to attract as more investors as possible. Whether the Hong Kong market is going to be rising with more bargaining power. I think probably yes. But again, I think there are still lots of variables or changes, depending on the general picture of the geopolitical relationship.