Short-to-medium term concerns over China slowdown

“The slowdown of the Chinese economy will make it very hard for Alibaba to succeed in the short-to-medium term,” Gil Luria, director of research at D.A. Davidson, told CNBC. “China has yet to experience a significant business cycle over the last 30 years, which means the outcome of the current slowdown is very hard to predict.”

He explained Chinese consumers have been through a “long stretch of increased consumption” and that it is possible there may be a meaningful pullback on that front as the economy slows.

For months, government data out of Beijing has indicated the Chinese economy is slowing, including last Friday’s much-weaker-than-expected trade data.

Still, domestic consumption remains relatively strong in China for now. In the last three months of 2018, Alibaba’s total revenue grew 41 percent on-year to 117.28 billion yuan (more than $17 billion) and core commerce revenue was up 40 percent to just under $15 billion. On Singles Day — the 24-hour shopping event — Alibaba recorded more than $30.8 billion in sales.

Alibaba Executive Vice Chairman Joseph Tsai said during the most recent earnings call that the company is convinced e-commerce growth and the digitization of retail will continue to outpace the overall Chinese economy. He also addressed potential concerns around the ongoing U.S.-China trade tensions and said Alibaba’s exposure to the “tangible effects of trade tariffs” is small as domestic consumption and corporate transformation are the primary growth drivers for Alibaba’s major businesses.

Still, Alibaba faces stiff competition in China’s domestic market as e-commerce penetration is high in top-tier cities such as Beijing and Shanghai. That’s why the company is expanding into the lower-tier cities or even rural areas where online shopping, according to analysts, is still lagging behind by at least three to five years.

In its most recent quarterly report, Alibaba said about 70 percent of new e-commerce users came from the lower-tier cities.

“It is time-consuming and costly,” Danny Law, a Hong Kong-based analyst at brokerage Guotai Junan, told CNBC, referring to the process of acquiring new users. He added that e-commerce players are also trying to uncover greater value from existing customers by getting them to spend more and with increasing frequency.

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