Alibaba Group Holding Limited (BABA) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's conference call. [Operator Instructions] A third-party translator will provide interpretation for the call. Please note that the interpretation is for convenience purposes only. In the case of any discrepancy, management's statement in the original language will prevail. I would now like to turn the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.

Thank you. Good day, everyone, and welcome to Alibaba Group's conference call. With us are Joe Tsai, Chairman; Toby Xu, Chief Financial Officer. This call is also being webcasted from the IR section of our corporate website. Now let me quickly cover the safe harbor. Today's discussion may contain forward-looking statements. Forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For more details of these risks and uncertainties, please refer to today's announcement as well as our annual report and other documents filed with the U.S. SEC or announced on the website of the Hong Kong Stock Exchange. Any forward-looking statements that we make on this call are based on assumption as of today, and we do not undertake any obligation to update these statements, except as required under applicable law. Today's discussion is for information purpose only and does not constitute an invitation or offer to acquire, purchase or subscribe to any securities. I will now hand over to Joe for his opening remark.

Thank you, Rob. Earlier today, we announced that our logistics subsidiary, Cainiao Smart Logistics Network is withdrawing its IPO and listing application on the Hong Kong Stock Exchange. We also announced that Alibaba Group plans to offer to minority shareholders of Cainiao an opportunity to sell their shares to Alibaba for a total potential consideration of up to USD 3.75 billion. Alibaba Group owns approximately 63.7% of the fully-diluted equity interest in Cainiao. This takes into account of vested equity under Cainiao's ESOP plan. I would like to make a few remarks relating to this announcement, and then we will open up for questions. There are two important considerations for withdrawing the final IPO. The first is a strategic consideration. And the second relates to the stage of Cainiao's IPO process. On the strategic front, as you know, Cainiao provides uniquely tailored logistics services to Alibaba's domestic and international e-commerce businesses. Over the last several months, as we evaluate our China and international e-commerce businesses, we came to the conclusion that in order to provide the most competitive consumer experience, it is crucial that we achieved deep integration between Cainiao's operations and our e-commerce businesses. From Alibaba Group's perspective, our priority is clear. We want to win in e-commerce by regaining market share and driving growth. And in addition, we see an emerging opportunity for Cainiao to make sustained infrastructure investments to expand its global logistics network and become a leading platform to serve customers from around the world. The execution of this expansion plan requires patient capital and long-term horizon. As a result, we decided that we should eliminate the distractions of Cainiao becoming a public company and empower Cainiao's management to focus on achieving synergies with our e-commerce businesses and executing Cainiao's long-term global expansion plan. Our second consideration is the stage of the IPO process. We're at a juncture that today -- as of today, the financial information and our prospectus on filed with the Hong Kong Stock Exchange has expired. This requires us to decide whether we keep the IPO application active or not. Given Cainiao's strategic role and future plans within Alibaba Group, and given the challenging IPO market conditions, it has become clear to us that taking Cainiao public now or in the foreseeable future, would not be consistent with our group strategy nor would any achievable valuation in an IPO reflect what we believe to be the strategic value of Cainiao at this point. So next, I want to address Alibaba's considerations for offering to purchase Cainiao's shared from minority shareholders and employees. With the change in IPO plans, we believe it is important to stabilize the morale of Cainiao employees to ensure smooth operations. Alibaba will offer to purchase the vested equity interest held by Cainiao employees. We believe that this, coupled with additional retention incentives would address the issue of workforce stability. Alibaba's purchase offer also addresses any uncertainty that Cainiao's minority shareholders have, given the expectations of a longer investment time horizon with a path to liquidity that will be further extended. The offer to minority shareholders provides a liquidity opportunity to those investors who invested from since about 8 to 10 years ago. These investors have the option but not the obligation to accept our offer. Given the strategic importance of Cainiao to Alibaba and the significant long-term opportunity we see in building out a global logistics network, we believe this is an appropriate time to double down on Alibaba's investment in Cainiao. The offer price values Cainiao at USD 10.3 billion. This is what we and our advisers believe to be the current fair value of the company. Alibaba's Board of Directors have approved the offer after determining that the valuation is fair to the shareholders of Alibaba. Finally, I would like to say a few words about Alibaba's overall restructuring plan, which we first announced last year in March. And then we followed up by proposed capital markets transactions announced in May. The plan for restructuring Alibaba announced last year had three elements: number one, a management reorganization to increase the competitiveness of our businesses; number two, a proactive capital management approach to return value to shareholders; and number three, market conditions permitting, using capital markets to unlock the value of our subsidiaries. Unfortunately, we do not believe market conditions currently or in the foreseeable future would allow us to optimize value for our shareholders via capital markets transactions. However, the management reorganization resulted in more nimble and efficient decision-making. And we have seen a major positive impact on our business. We're confident that the effects of this reorganization will be reflected in Alibaba's operating and financial metrics in the future. On the capital management front, we have made significant progress in exiting noncore investments and capital returns through dividends and share buybacks. This focus on capital efficiency and return to shareholders will continue without change. Now I would like to open up the floor for any questions. Thank you.

Thank you, Joe. Today's Q&A session, you are welcome to ask questions in English. Please keep yourself to no more than one question at a time to give more people the opportunity to ask questions. Please also limit your questions to today's announcement. Thank you.

[Operator Instructions]

The first question come from Colin Sebastian.

Rob, Joe and Toby. Question for me, I guess, is, can you talk about how the change in strategy here might help accelerate or build on the momentum that you're -- that you have in the international commerce segment. Is that part of the strategic plan here on the global logistics side?

Yes. The international commerce is a really important part of our business. It's part of our core, as I said, we have two core businesses, one is e-commerce and the other one is cloud computing. So the international e-commerce is part of the core of e-commerce. And there's -- I think we have been pretty consistent in executing the strategy of growing that business, especially the cross-border component, which is represented by our business in AliExpress. And in most recent quarters, we have talked about growing AliExpress through a model that helps us to grow even faster. That model is called Choice, where we source products from -- directly from factories, and we have them in our warehouse, which makes it more efficient for us to control the inventory as well as the logistics experience to consumers. So Cainiao fits in as part of that experience because Cainiao provides the logistics end-to-end service, including fulfillment, line haul, delivery services to the end consumer around the world. And it is partly for that reason, the reason that we want Cainiao to even more fully integrate into our cross-border e-commerce business that we believe some of the alignment that would need to be made in the Cainiao business. And partly for that reason, we decided that the management should focus on the business rather than being distracted by an IPO.

Next question comes from Rob Sanderson.

So Joe, one of the interesting, I think, opportunities for Cainiao as a stand-alone is just to facilitate cross-border e-commerce potentially beyond the Alibaba ecosystem. Obviously, this is one of the real interesting growth areas in global e-commerce today. With this sort of -- I guess, decision to keep Cainiao in-house. Should we -- should investors sort of expect Cainiao now is to be more of an enabler for AliExpress and some of the other Alibaba international businesses? Or do we still see an opportunity to -- for third-party participants as an enabler for third-party platforms?

Well, yes, Cainiao already have third-party participants. Cainiao is out there getting business independently from third-party customers in multiple areas, including the international business. And -- but I think in the near term, you will see Cainiao working much more closely with our AIDC business, especially the cross-border business. they really work hand-in-hand. And we want to treat them -- the e-commerce part and the logistics part as one holistic P&L, if you will. So that we can have better control of both the cost structure, the pricing as well as the customer experience and competitive landscape.

Okay. The next question comes from Youssef Squali.

So 2-part question. One, Joe, so as part of the capital market transactions, part of that number 3, can you just provide us with an update what's left? If there is anything still left to look out to, there was even a talk of maybe a [indiscernible]. And then I guess you talked about extended path to liquidity for Cainiao. Can you maybe expand a little bit more on that? Is this an opportunity where you guys are planning on doubling down on investments. You also mentioned patient capital for patient investors. Just maybe if you can provide more color on that, that would be helpful.

Yes. I think just -- rather than looking at what -- if we want to restart any type of market transactions or asking what's left and what's not left. I think the overall environment for doing capital markets transaction in order to unlock value for shareholders is just not there in this part of the world. And markets are pretty depressed. There's also lack of liquidity. So for us, it doesn't make sense for us to kind of continue to sort of grind into these capital markets deals if they -- it doesn't achieve the purpose of unlocking value for shareholders, all right? So I think that's kind of our perspective right now. To your question of -- Cainiao's longer-term investment plans, we're in the process of developing these plans. I think, I've referred to Cainiao's plan to double down in building out a global logistics network. And so that -- it has the ability to deliver packages from anywhere to anywhere within 72 hours. I think this is their vision, this is their goal. And that requires a very substantial level of investment in different parts of the world. And also in different parts of the logistics value chain. In that effort, Alibaba is going to -- Alibaba as a group, with our strong balance sheet and cash flow generating capability, we're going to fully support Cainiao to make those investments. And I talked about patient capital because these investments take a long time for them to come to fruition. And we take a very long-term perspective on the prospect of global e-commerce. It is already a very significant market today, and we see a lot of players in the market being very aggressive. But in the future, this is even going to be a bigger market, and we definitely want to participate in it.

The next question comes from Jasmine Bai.

So yes, thank you for mentioning that you've already been doing quite actively on your capital allocation, for example, we also noticed there recently has been some offloading of your shares or assets already holding in hands, for example, on BiliBili, I guess. And I think that's also something which investors are paying a lot of attention to and care about. So do you mind share with us a little bit more color on what's the consideration out there for time line or progress of further capital allocation concerning the assets that you hold in hand, especially, I would want to ask since you are also a shareholder of some express delivery companies, I know mentioning specific names may not be very appropriate, but I will want to understand since right now, Cainiao is not going public anymore. Are you considering -- maybe on doing -- offloading on such express delivery companies as well? Yes. That's my question.

Yes. I would say our holdings in express delivery companies are considered strategic to us. So right now, we don't have any plans to make any changes there. I mean we have a lot of other noncore investments that we could look at. But definitely not things relating to the express delivery companies. The -- as you referred to -- recently, we have announced a sale of our states in BiliBili. We've also sold another stake in XPeng Motors. So that's progressing really well. The capital allocation question is, once we receive the proceeds from these sales, what do we do with it? And I think you will get more updates from us on that front because, we have now committed to tell investors at the end of every quarter. Within 1 or 2 days, at the end of every quarter, we're going to provide details on our buyback program, how much money we spent buying back, how many shares we bought back, and what is the accretive impact of those buyback activities. So that's going to be on a quarterly basis. And with respect to the quarter that's ending in March, you will get a report from us very early April on that. And then in May, we're going to have an earnings call -- earnings report relating to the full year results of fiscal '24. And at that point, you will hear from us about dividends. So the next few months there will be more detail about our return of capital to shareholders that are going to come up.

From Charlene Liu, HSBC.

Hello, can you hear me?

Yes.

Perfect. Can I -- can you discuss if regulation has a role in a decision to not go ahead with the IPO? And separately, can you elaborate on your latest observation on the regulatory environment in the markets, where Alibaba operated and that would include both domestic market and international markets.

Right. Regulation plays no role in our decision to withdraw from the Cainiao IPO, this is purely an internal strategic decision, okay? And your next question is about regulatory landscape, can you be more specific? Which part of the -- there's lots of regulations around the world that we're subject to.

I think more generally, I mean, obviously, I think the first thing that comes to mind is Europe, we're seeing probably some regulations tightening there. And U.S., obviously, is not specific to e-commerce per se, but then I think Europe will be the market that I have in mind.

In e-commerce?

Correct. Yes.

Applicable to the e-commerce?

Yes, correct.

We -- I think we find from a business standpoint, in e-commerce, Europe is a very interesting market for us. It's a market where customers have the ability to spend. It's a market where average order values are significant enough so that they can cover the cost of logistics. And so we're interested in that market. Having said that, we -- the European markets and the demand of European consumers, the standards are quite high. Regulations relating to the quality of products, the authenticity of products are something that we pay a lot of attention to. And we have established a very good compliance structure to make sure that we operate legally in all the jurisdictions where we operate in Europe.

Our next question comes from [indiscernible] of [indiscernible] Securities.

My question is about domestic markets. And as we can see, domestic logistics is getting highly competitive, and our competitors are reducing the threshold of free shipping? And how Cainiao compete with it?

So Cainiao has a network of work that -- Cainiao works with all the courier service providers. And Cainiao also has its own courier service provider network. And -- so I think the domestic logistics market is a very, very competitive and all the players are trying to lower their cost and try to be as efficient as possible. And Cainiao is no different in continuing to improve their operating efficiency so that they can lowest -- provide the lowest cost possibility to deliver packages. Toby, do you have anything to add to that?

Yes. Sure. I think in China, the competition is fierce, right? Because everybody -- all the players are enhancing the efficiency, reducing the cost. But free shipping is normally just embedded in the e-commerce not necessarily -- there's a financial model, a business model for other logistic companies. For Cainiao, I think the [indiscernible] has also enhanced the efficiency, reduce the cost sort of like using the Chinese -- in the Chinese sort of user cases. In meantime, all these capabilities building up using the Chinese -- China's user case will also enable them to sort of like expand their network in the global market and apply the product -- and the product in their systems in the global market as well. So actually, those will actually help, although the competition is there, but this will also help Cainiao to build up its capability.

And the last questions come from Kenneth Fong, UBS.

Hello. Can you hear me?

Yes.

Joe, Toby, Rob. I have two questions. One is on AIDC fundraising. So with Cainiao doing this kind of a share repurchase. How should we think about AIDC side? Or should we expect fundraising to continue over there? Or is this more like a separate issue? And the other thing is on the Cainiao repurchase. In terms of time line, when should we expect the share repurchase to complete? And then financially, how should we think about from the modeling point of view?

I think for your first question, we have not commenced any fundraising for AIDC, and we will update the investors when we have news. And secondly is about the transaction to complete. We aim to complete a share purchase before June, July time. Of course, subject to the procedures and conditions set forth in our offer to Cainiao minority shareholders.

And the financial impact, Toby?

Sorry. And the financial intake wise, I think -- the share purchase actually will not have significant impact on AGH's financials as we already consolidated Cainiao, and we will fund the share repurchase from existing liquidity of Alibaba Group. And the alignment of Cainiao's business to better integrate with Alibaba's e-commerce platforms actually will enhance the competitiveness and growth prospects of our e-commerce businesses.

Okay. Thank you, Toby. That's end of today's call, and thank you, everyone, for joining the call. If you have any further questions, please feel free to reach out to me and the rest of the IR team. We look forward to speaking with you again in the next earnings call in May. Thank you.

This concludes Alibaba's Group conference call. Thank you for everyone's participation.