Alibaba revenue beats, but investments prolong margin squeeze

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Alibaba Group Holding Ltd, China’s biggest e-commerce firm, topped first-quarter revenue estimates on Thursday, but said investments in its food delivery business would continue to weigh on profits.

The company said it had formed a holding company for local services and food delivery firms and Koubei, for which it had received over $3 billion in new investment commitments, including from SoftBank Group Corp and Alibaba itself.

Alibaba’s US.-listed shares rose about 4 percent in pre-market trade, as investors reacted positively to the better than expected revenue growth.

Revenue rose 61 percent to 80.9 billion yuan ($11.77 billion) in the April-June period, compared with analysts average estimate of 80.7 billion yuan, according to Thomson Reuters.

Net income attributable to shareholders, however, fell 41 percent to 8.7 billion yuan, or 3.3 yuan per share, partially due to one-off costs related to share-based compensation following a fundraising round by Ant Financial, Alibaba’s payment affiliate.

While revenue growth has accelerated since Alibaba’s 2014 stock exchange listing, costly investment in offline retail, logistics and cloud computing has squeezed profit margins - which for Alibaba, are typically well above 20 percent.

In April-June, Alibaba’s gross margin was 11 percent versus 29.2 percent a year earlier, its lowest margin since listing.

Going forward, executives said profits would continue to be impacted by investments in new businesses, partly due to the consolidation of Koubei and expenses related to its newly-created local services unit.

“This investment into the local services area, combined with the consolidation of Koubei ... will result in slower overall gross profit in near term,” said Alibaba chief financial officer Maggie Wu on a call with analysts.

The local services business is one of several large investments the company has made in recent months.

April-June saw Alibaba lead a $1.38 billion investment in Chinese logistics firm ZTO Express (Cayman) Inc and commit $320 million to a Thai e-commerce project. It also invested in sports content, microchips, facial recognition technology and mobile payments in India.

Analysts are confident in Alibaba’s ability to monetize its investments but expect slim profit margins for the time being.

“To build up the new assets, the company is likely to finance that with some of the profit from other assets as well as its balance sheet. As a result, we may see margin pressure in the near term,” analyst Tian Hou at TH Data Capital said in a pre-earnings research note.

Excluding one-off items, the company earned 8.04 yuan per share, or $1.22 per share, missing the average estimate of 8.15 yuan per share.

Sales at Alibaba’s core e-commerce business rose 61 percent to 69.2 billion yuan, compared with a 58 percent rise in the same quarter a year earlier.

Revenue at its cloud computing business nearly doubled to 4.7 billion yuan, while entertainment unit revenue rose 46.4 percent to 6 billion yuan.

Alibaba’s core businesses include online marketplaces Tmall and Taobao and payment platform Alipay. Like most Chinese e-commerce firms, revenue is typically higher in April-June versus the previous three months due to a mid-year sale that peaks on ‘lucky date’ June 18.

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