Brief Hong Kong: China Tower Corp: Trading Idea Before Lock-Up Expiry and more

In this briefing:

1. China Tower Corp: Trading Idea Before Lock-Up Expiry
2. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results

1. China Tower Corp: Trading Idea Before Lock-Up Expiry

China Tower Corp, the owner and operator and telecommunication tower network in China, listed on August 8th last year. Over the past six months, the stock has returned 35% with the addition of a number of global investors to its share registry.

• As it heads into lock-up expiry in Feb, in this insight we would like to examine China Tower’s performance since listing.
• We note that China Tower has delivered a decent set of results for 3Q2018 and it will be a key beneficiary of China’s push into 5G built-up with little uncertainty.
• The current valuation of the company was still lower than international tower providers.
• With the improving operating metrics and stable income, we believe there are still upsides for China Tower Corp post-lock-up expiry. 

Our previous coverage on China Tower Corp

• China Tower Corp IPO: An Elephant Still Growing
• China Tower Corp (中国铁塔) IPO: Fairly Valued For One Doing National Service
• China Tower Corp (中国铁塔) Post-IPO: Lacklustre Trading Interest but Looking Forward to 1H Results

2. 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.