Lower income triggers fall in Alibaba shares

Alibaba Group Holding Ltd saw its shares tumble 3.16 percent in New York on Thursday to close at $172.23, as the Chinese internet giant reported its first profit slide in several quarters despite top-line revenue growth.

The company’s net income dropped 41 percent to 8.7 billion yuan ($1.26 billion) in the quarter ended June 30, Alibaba said. A one-off payment related to a share-based compensation plan for its financial arm Ant Financial Services Group dented margins, according to the company.

Without the one-off cost, net income would have risen 33 percent, according to the company. But that would still have been the slowest growth in at least three quarters, as profit had grown by 35 percent, 36 percent and 146 percent in each previous quarter respectively.

However, quarterly revenue surged 61 percent yearon-year to reach 80.9 billion yuan, bolstered by strong momentum from its Chinabased core commerce businesses, encompassing its iconic Tmall and Taobao marketplaces, as well as online delivery vehicle Ele.me.

Alibaba’s core business segment, which contributed 86 percent of overall revenue, also gained 61 percent from a year ago. Given the relative slowdown in growth of annual active users, the rise indicated Alibaba is making more money from each customer.

Investment bank Jefferies maintained a buy rating for Alibaba, citing solid gross merchandise volume and customer growth, with improving monetization. But the bank also highlighted uncertainties relating to integrating various acquisitions as potential risks.

The internet giant con- firmed it had established a new entity to combine its local services platform Koubei and food delivery firm Ele.me, in a bid to compete head-to-head with dining app Meituan-Dianping backed by archrival Tencent Holdings Ltd.

“While we expect investment in user acquisition to be offset by operating leverage, investment in new initiatives, including food delivery and the consolidation of Koubei, could weigh on profit growth in the near-term,” said Karen Chan, an equity analyst at Jefferies Hong Kong Ltd.

Alibaba’s cost of revenue soared to 54 percent from 35 percent a quarter earlier, an indication of the surging cost of user acquisition in a market with high internet penetration and a relatively digitally savvy population.

Investment spending and margin pressure were worse than expected, while the slowdown of user traffic and online gross merchandise volume, as well as lowering appeal among brands and merchants all raise concern, said Alicia Yap, an analyst at Citigroup Global Markets Asia. The company lowered the price target on Alibaba to $221 from $240, maintaining a buy rating.

Shi Jialong, an equity analyst at Nomura Securities, also lowered the company’s target price, citing “not only a ramp-up in investments but also regulatory risks related to the payment and internet finance industry, which could hurt Alibaba’s main business and its option value in Ant Financial”.