We expect BABA to deliver solid 2QFY20E result in Nov, with in-line topline growth but better-than-expected margin. Core commerce maintained strong momentum, and market eyes on low-tier cites competition and upcoming “11.11” Festival. Maintain BUY with TP and earnings unchanged.
- Expecting solid 2QFY20E. We forecast a 36% YoY revenue growth to RMB116.2bn in 2QFY20E, and expect adj. EBITA at RMB30.5bn and adj. EPADS at RMB10.8. We think solid topline growth is well-anticipated, but margin improvement might see upside surprise, mainly on less ecommerce promotion in 3Q19 and manageable investment in new initiatives.
- Core Commerce: strong momentum to continue. We expect BABA’s OMS revenue to grow 25% YoY in 2QFY20E, in which Customer management rev (CMR)/ commission rev to grow 26%/22% YoY. Given that BABA was not aggressive in feeds monetization expansion, more eyes will focus on its low-tier cities penetration and content features. Despite fierce competition, we keep confidence in BABA’s secular growth and share gains, backed by: 1) ample room for its user expansion and ARPU improvement in low-tier cities; and 2) more cross-selling opportunities and ecosystem synergies to unlock its growth potential.
- Positive on margin outlook. We expect its adj. EBITA margin at 26% in 2QFY20E (-4ppts QoQ, -1ppts YoY), slightly above consensus, and core commerce EBITA margin will beat expectation (forecasting 39%), for its modest promotion and limited campaigns in 3Q19, coupled with improved efficiency. We expect its cloud EBITA margin to be stable QoQ, and net loss margin of DME and Innovation Initiatives could slightly widen QoQ in 2QFY20E.
- Maintain BUY. We kept our financial forecasts unchanged, with SOTP-based TP of US$224.1 (26x FY21E P/E). We view Alibaba as our top pick, backed by solid earnings growth and reasonable valuation. Further potential catalysts: 1) upcoming “11.11” Festival; 2) dual listing in HK; and 3) ecosystem synergies.
