Squeezed margins, ‘new retail’ and possible Ant Financial IPO – five takeaways from Alibaba’s Q3 earnings
Logistics, new retail and digital entertainment businesses “highly strategic” to company’s future growth, says chief financial officer
1. Alibaba stake in Ant Financial paves the way for payments company to go public
Alibaba Group Holding, which owns the South China Morning Post, said late on Thursday that it would gain a 33 per cent stake in finance affiliate Ant Financial in exchange for certain intellectual property rights it owns that are related exclusively to Ant Financial – a move widely regarded as clearing the road for an Ant Financial initial public offering. Ant Financial might not be allowed to go public while New York-listed Alibaba holds intellectual property rights tied directly to its services, according to industry insiders.
This move also allows both to further align their business interests in the long term. After Ant Financial was spun off as a separate company in 2011, it had to pay royalty and technology service fees to Alibaba equalling 37.5 per cent of its pre-tax profits, which means that it was in Alibaba’s interest to maximise Ant Financial’s short-term profits. An equity stake in Ant Financial is a sign that Alibaba wants long-term shareholder value.
However, when pressed for further details regarding Ant Financial’s potential IPO during Alibaba’s earnings results conference call on Thursday, Alibaba chief financial officer Maggie Wu said there were currently no concrete plans.
2. Investments in logistics, entertainment and offline commerce weigh on margins – but Alibaba is not worried
Alibaba reported US$23.3 billion in net profit, which translates to just 36 per cent year-on-year growth – its slowest compared with the past three quarters, where net profit growth figures had at least doubled. Several business units, including the group’s loss-making logistics arm Cainiao, its recent new retail investments in offline retail operators such as Sun Art Retail and Intime, as well as continued spending in original content acquisition for its digital entertainment unit have put pressure on the company’s profit margins.