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What next for Alibaba investors as the ecommerce giant battles coronavirus?

By Lawrence Gash

E-commerce giant's share price up 20 per cent in three months, but Chinese virus may stop its rise

What's next for Alibaba? Shares in the Chinese ecommerce giant Alibaba have seemed unstoppable of late. However, they have just fallen 1.01 per cent on Hong Kong’s Hang Seng Index to stand at 215 HKD ($27.6, £21.2).

The fall has come despite the company reporting strong third-quarter earnings, and it's all down to the impact of the coronavirus - not the company's financials. Alibaba, which is responsible for businesses including AliExpress.com and Ant Financial, reported Q3 net income of 52.3bn yuan ($7.5bn, £5.7bn) or 19.55 yuan per share, an increase from 33.1bn yuan or 12.64 yuan a year previously. Its adjusted earnings per share rose from 12.19 yuan to 18.19 yuan.

This figure was far higher than the average analyst estimate for earnings per share, which FactSet put at 15.91 yuan. However, thecompany warned of the ongoing “negative impact” of the coronavirus on operations, which appears to have spooked the market.

The Covid-19 Effect

Alibaba’s chief financial officer, Maggie Wu, admitted: “Our overall revenue growth rate, we believe, will be negatively impacted for the March quarter.”

Millions of Chinese people remain in effective lockdown due to the novel coronavirus, now named Covid-19. which will affect a number of Alibaba businesses. Wu told investors that the virus will hit demand.

Not only is Covid-19 expected to trigger a decline in consumer spending, but it is also expected to hamper Alibaba’s logistical capabilities as more than 15 major cities are under quarantine. There has been a delay in employees returning to work after Lunar New Year, meaning that merchants can't ship orders. Packages go undelivered and travel plans made through Alibaba's business have been cancelled. The company has offered full refunds for these. Its restaurant booking business has also been impacted.

Alibaba’s revenue from local services increased 47 per cent in the last quarter and its retail marketplace business grew 36 per cent, meaning that the effect of the epidemic is likely to sting. These two divisions account for over half of Alibaba's revenue.

It's unclear how much other divisions - such as the fresh food delivery business, where business has picked up as virus-hit consumers stay home - will be able to compensate for the downturn.

Black swan or dying swan?

Daniel Zhang, Alibaba CEO, has described the epidemic as a "black swan event". By this he means that it is both serious and could not have been predicted.

That phrase gives us a short term warning about the financial performance of the company, but the long-term outlook may be brighter. AS a widely diversified conglomerate with a market capitalisation of around $588bn, Alibaba’s situation is by no means hopeless, and nor does its share price reflect pessimism. Indeed, while its share price did fall to as low as 200HKD in January following the outbreak it is up by almost 20 per cent since the firm’s November IPO.

Other factors at play

Beyond the immediate epidemic the conglomerate’s share price will also be affected by whether or not it is able to secure a place in a stock connect programme linking Hong Kong with investors in mainland China. As yet Alibaba is blocked as the programme excludes firms with secondary listings and weighted voting rights. With an update expected on February 17 some current investors hoping for a flood of mainland Chinese interest could soon be in for a big surprise, or disappointment.

Trends and Rivals

In 2019 Alibaba raised more than $12.9bn in Hong Kong’s largest initial public listing in nine years. Through its AliExpress platform the company is looking to compete with Amazon for the European e-commerce market while also diversifying beyond its core business.

Alibaba’s sister company Ant Financial, is the world’s most valuable private tech unicorn with a valuation of more than $150bn. Facilitating mobile payments through its Alipay wallet Ant has more than 1.2 billion accounts, a quarter of which are outside of China. Indeed, following such success, the subsidiary is now looking to invest beyond the Chinese mainland, for example in the rapidly growing Indian food delivery start-up Zomato.

For investors, the question will be whether they want to hold on for the ride, and whether Alibaba's temporary weakness will leave other players the space to take advantage. In a black swan event such as this, it's a very difficult call to make.

However, Alibaba is not without its competitors with firms such as Baidu and Tencent keen to stake their claim in the ever-evolving technological revolution in China. Tencent along with the American firm Walmart are currently battling Alibaba for the top spot in the Chinese logistics and e-commerce space. JD has impressed with its relatively new standalone logistics department, which differs from Alibaba’s model of using third-party delivery services. While the company is still only a 10th the size of Alibaba, it is certainly challenging the giant and is expected to grow in market share in the years to come.

FURTHER READING: China: major online retailer JD Raises over $200 million to Invest in Logistics Tech

FURTHER READING: TechAlibaba’s $150bn tech unicorn quashes IPO speculation

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