Brief Growth Ideas: Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results and more

In this briefing:

1. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results
2. Market Largely Untroubled by Kao’s Troubles
3. Zee Entertainment- Present Mess Seems to Be of Short Term in Nature
4. Baidu (BIDU): The Change Amounts to Business Suicide, Disappointing Existing Users and Clients

1. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results

A set of generally solid Q3FY19 earnings results from Chinese e-commerce giant Alibaba Group Holding (BABA US) also yielded some interesting insights into the company’s two main logistics-related ventures (CaiNiao Network and on-demand food delivery specialist ele.me).

Unfortunately, the information we can glean from BABA’s Q3FY19 results suggests CaiNiao and ele.me are either growing slower or generating significant losses — or both.

In our view, the main logistics takeaways from BABA’s results are:

1. Alibaba’s ‘Core Commerce’ revenues continue to grow faster than express delivery. For the seventh consecutive quarter, Alibaba’s ‘core commerce’ grew much faster than China’s parcel delivery market, outgrowing parcel volume by 8% and parcel delivery revenue by almost 18%. At the margins, China’s express delivery firms are being bypassed by new modes of fulfillment, in our view. 
2. CaiNiao Network’s 15% growth in Q3FY19 is disappointing. Revenue at Alibaba’s CaiNiao Network grew by just 15% Y/Y in the December quarter, to 4.5 bn RMB. In other words, CaiNiao grew even slower than overall Chinese express delivery revenue in the December quarter (+17% Y/Y). That’s disappointing for a company that enjoyed an equity valuation of US$20 bn when Alibaba upped its stake to 51% in late 2017.
3. The reporting segment that includes ele.me barely grew from Q2FY19 to Q3FY19. Alibaba’s ‘Local Consumer Services’ segment had revenue of 5.2 bn RMB in Q3FY19, representing Q/Q growth of just 2.7%. It’s unclear how much local services venture Koubei contributed to this, as Alibaba only began consolidating its revenues some time in December.
4. It looks like losses from CaiNiao & ele.me continued to pile up in Q3FY19. Although it’s not an ‘apples-to-apples’ comparison, EBITA losses from the group of companies that includes CaiNiao and ele.me expanded from 5.8 bn RMB in Q2FY19 to over 8.2 bn RMB in Q3FY19.  This suggests the deep losses from this group (which were equivalent to about 15% of BABA’s core ‘marketplace’ EBITA in Q2FY19) aren’t going away soon.

2. Market Largely Untroubled by Kao’s Troubles

After an article appeared on Nikkei Asian Review on 29^th January 2019 stating that Kao Corp (4452 JP) is going to miss its revenue and profit projections for FY2018E, we witnessed no panic in the market. Kao Corporation shares opened trading at JPY 7,621.00 per share up by 0.1% from the previous close price of JPY 7,610.00. The price increased further to JPY 7,657.00 before decreasing towards the day’s low of JPY 7,521.00 and it closed at JPY 7,583.00 which was about 0.4% down from the previous day’s closing price. However, the volume traded had an impact because of this news. For the past 3 months, the average daily volume traded has been around 1.73m shares a day, but declined 27.2% on 29^th Jan 2019.

This news came to light from a third-party source, but Kao responded to it on its investor relations website saying:

“The article in the Nikkei on Jan. 29 regarding the earning forecast consolidated results, is not based on any announcement made by Kao Corporation.”

In their latest release to their investor relations website, Kao Corporation keeps quiet on its ability to meet its 2018E guidance.

This has been happening at Kao for the past few years. Each time a news article has been released regarding Kao’s annual results, by a third party a few days prior to the official announcement.

3. Zee Entertainment- Present Mess Seems to Be of Short Term in Nature

Zee Entertainment Enterprises (ZIN) in the last two trading sessions has corrected by almost 13% over an allegation by a media house that has suggested a link of the Essel Group, the parent company with a firm that is being probed by Serious Fraud Investigation Office over deposits worth Rs. 32 bn during demonetization.

However, the company has denied any link with the firm and has blamed some “negative forces” that are behind the fall to hinder the strategic sale of Zee Entertainment, the crown jewel of the group, so that the parent, Essel group can reduce the debt burden that has accumulated over the years due to some bad calls.

We provide the details in this report.

4. Baidu (BIDU): The Change Amounts to Business Suicide, Disappointing Existing Users and Clients

• Baidu’s new methodology directs the large majority of search results to its in-house functions, especially to its blog function BJH (百家号).
• Baidu began to hide websites of search results after the change above was widely criticized. However, as a result, users can hardly find authoritative websites.
• Because of these changes, it is hard for users to find useful content.
• We believe Baidu is giving up its existing advantages for users and clients.
• We also believe that users will choose to leave if the platform tries to choose content for them. If users leave Baidu, advertisers will follow them.