Alibaba Earnings Top Views Despite Slowing Economy in China

Revenue rises 32%, helped by increase in users, continuing surge in mobile revenue

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Despite robust results, Alibaba continues to face challenges, such as intensifying competition from smaller e-commerce companies. PHOTO: REUTERS

By 

GILLIAN WONG in Beijing and

RICK CAREW in Hong Kong

Updated Jan. 28, 2016 8:15 p.m. ET

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Alibaba Group Holding Ltd. posted stronger-than-expected earnings in its latest quarter despite a slowdown in China’s economy, highlighting the resilience of Chinese consumers.

The company also reached a roughly $900 million deal to sell its stake in Meituan-Dianping, China’s largest provider of food delivery, movie-ticketing and other on-demand services, according to people familiar with the situation.

Shares of Alibaba fell 1.5% to $68.51 in morning trading in New York. The stock had fallen, before the earnings report Thursday, more than 30% over the past year amid concerns about the deceleration of China’s economy, which saw its growth rate moderate to 6.9% last year, the weakest annual pace in a quarter century.Despite robust results, Alibaba continues to face challenges. For example, the company has to find ways to maintain and accelerate growth in revenue and the value of transactions made on its trading platforms when it is already the dominant player in China’s e-commerce sector, with 80% of the market. It also is facing intensifying competition from smaller but more rapidly-growing e-commerce companies, in particular JD.com Inc., a longtime rival that has been slowly gaining ground in some areas.

But Alibaba said Thursday that its net profit for the three months ended December more than doubled to 12.5 billion yuan ($1.9 billion), including a gain from the sale of its movie-related businesses. Excluding that gain, the company said its profit rose 25%, boosted by improvements in its ability to increase the amount of money it earns from each transaction hosted on its marketplaces.

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Revenue rose 32% to $5.3 billion, helped in part by blockbuster sales during Singles’ Day, China’s online shopping festival in November.Alibaba said sales that day increased 54% from a year earlier, better than what many analysts had expected.

Executive Vice Chairman Joe Tsai said on a conference call that Alibaba was well-positioned to benefit from China’s shift from an investment-driven and manufacturing-heavy economy to one that is fueled by consumption and services.

“Consumption as a share of [gross domestic product] is becoming higher so we benefit from that,” Mr. Tsai said. He said that the massive shift of users accessing the Internet on mobile devices continues to help boost the use of e-commerce. “Underlying our business is a very significant secular trend, and that is really decoupling from the larger economy.”

Many analysts have said the selloff in Alibaba’s shares was unjustified because China’s online retail sector remains a rare bright spot in the slowing economy and that overall consumption remains solid. Nomura Securities analysts expect China’s overall online shopping market to grow at a 33% compound annual growth rate between last year and 2017. The Boston Consulting Group believes affluent shoppers under the age of 35 and Internet surfers will push China’s consumer market up to $6.5 trillion in sales by 2020, an increase of 54% from 2015.

Still, Alibaba faces intensifying competition in the race to provide China’s smartphone users with offline services such as dining reservations, takeout delivery and movie-ticket bookings.

Asked on the conference call about Alibaba’s plans to sell its stake in Meituan-Dianping, Mr. Tsai said Alibaba’s own online-to-offline operations, called Koubei, is doing well. “We believe a better allocation of our capital is to put our resources into Koubei and exiting Meituan is just a matter of time.”

In the latest quarter, Alibaba reported 407 million annual active buyers, up 22% from a year earlier. Mobile monthly active users increased 48% to 393 million, fueling a near tripling of its mobile revenue.

As Alibaba’s user base grew, the company managed to increase its monetization rate—the rate at which the company is able to make money from transactions hosted on its marketplace. The company said the blended monetization rate of its China retail marketplaces rose to 2.98% from 2.7% in the year-ago quarter. Its gross merchandise value—a measure of total value of e-commerce transactions on its platforms—increased 23% to $149 billion in the fourth quarter.

“These are pretty strong results,” said Henry Guo, a senior research analyst with Summit Research Partners LLC in New York.

“Based on the company’s large market share and user base, we can still see strong momentum in the company. It continues to be dominant in China despite the slowdown,” Mr. Guo said.

He said Alibaba is more representative of everyday consumer spending, which hasn’t been significantly affected by the slowdown in the broader economy.

“Investors’ concerns on economic impact on Alibaba’s quarterly results (are) likely overdone,” Mr. Guo said.

This year, Alibaba plans to refocus efforts on expanding its reach in China’s top-tier cities, Chief Executive Daniel Zhang has said. Analysts have read the repositioning as Alibaba’s efforts to better fend off competition from JD.com.