Summary. 1QFY20 achieved all-round beat, with strong core commerce and margin surprise. We view Alibaba as our top pick, backed by solid earnings growth, reasonable valuation and multiple catalysts (incoming investor day, dual listing in HK, share split, etc.). We slightly raised its adj. net profit by 1.2%/1.4%/2.6% in FY20/21/22E, and lifted SOTP-based TP to US$224.
- 1QFY20 strong beat. 1QFY20 revenue surged 42% YoY, 3% above consensus. Non-GAAP net profit grew 54% YoY, 22% above consensus, for higher-than-expected core commerce margin, less loss from DME, and other income. Alibaba will also see lighter sales pressure from Altaba (only 22mn ADSs held as of 9 Aug, vs. 261mn disposed plan).
- Core commerce: solid CMR, with stepping-up low-tier cities penetration. 1QFY20 OMS revenue grew 26% YoY, in line with our estimates. Customer management rev (CMR)/ commission rev grew 27%/23% YoY, respectively. CMR was slightly above expectation, and commission deceleration has been anticipated by market for Tmall Supermarket 1P business. Market focus lies on recommendation feeds monetization, low-tier cities competition and 1P business outlook. Recommendation feeds are yet to expand, for macro headwinds. We keep confidence in Alibaba's commerce secular growth and gain shares, mainly on 1) stepping-up low-tier cities competition to acquire users; and 2) 1P business expansion as another topline driver (still small portion).
- More positive on its margin trend. 1QFY20 total adj. EBITA margin was 30%, in which Core commerce/ Cloud/DME/Innovations EBITA margin was 41%/-5%/-35%/-153%. Margin beat on better-than-expected core commerce and narrowing DME net loss. Looking ahead, we turn more positive on Alibaba's margin outlook, for higher operating leverage, manageable investment in new initiatives and lower content spending.
- Maintain BUY. Given solid 1QFY20 results, we slightly raised its adj.net profit by 1.2%/1.4%/2.6% in FY20/21/22E, and lifted SOTP-based TP to US$224.1 from US$218.4. Our new TP represents 35x/26x FY20/21E P/E. Further catalysts: 1) incoming investor day; 2) feeds monetization update; and 3) synergies from sub segments.
