Alibaba Group Holding Ltd (BABA) ADS EACH REPR 8 SHARES SPON

Alibaba's revenue of $30.7bn rose 7% in the fourth quarter. Alibaba's China e-commerce platforms, Taobao and Tmall, saw revenue rise 4% to $12.9bn, as consumer retention and order frequencies improved. That was the result of higher investment in price cuts and customer service.

The much smaller Cloud Intelligence business saw growth of 3%, The international ecommerce business grew 45% to $3.8bn. Growth was driven by AliExpress. The group’s logistics division, Cainiao, saw a 30% increase, with revenue reaching $3.4bn.

Despite the higher revenue, operating profit fell 3% to $2.0bn, reflecting higher costs. Increased investment in Alibaba Cloud also meant free cash flow fell by 52% to $2.1bn. There was net cash of $47.2bn as at the end of March.

The group announced a two-part dividend, with a final amount of $1.66 per ADS.

The shares fell 5.4% in pre-market trading.

Our view

Alibaba is China's largest e-commerce business. While there are green shoots of improvement, overall progress is sluggish. There’s a less-than-ideal economic climate and stiff competition for the group to contend with.

The path to a sustained demand rebound is unclear. And that's partly why the group's making inroads to spin off various businesses, which could unlock value. This includes separate IPOs of its various divisions. We are however relieved to hear that the cloud business is no longer on the auction lot. This would have marked the loss of a growth opportunity (more on that later). The wider attempts to streamline the business are still the right moves in our view.

The Chinese giant is responsible for multiple businesses across e-commerce, digital media and entertainment, logistics and cloud computing, to name just a few.

The biggest segment, by some way, is China Commerce. Which includes Taobao, China's largest shopping website, and TMall, which sells higher-end and branded goods. Recent marketing initiatives have helped a bit, but we have some concerns as to how long this can offset the impact of a faltering economy.

Alibaba also houses the impressive AliExpress, which connects global consumers to a vast marketplace, where they can buy directly from manufacturers all over the world. We think the international markets represent an exciting opportunity for the Group. It's been doubling down efforts to expand in South Asia, an area with good growth potential. And so far, the Group's doing a good job at expanding overseas.

The cloud business is an area of great excitement, but as of yet, there hasn’t been a high-octane lift off. This is partly because of stiff competition, as well as a Chinese crackdown on tech. It’s still early days, and if the bears are wrong, there could be substantial opportunity ahead. Please remember there are no guarantees.

A shining positive is Alibaba's cash generation - it has billions of free cash flow pumping round the business each quarter. This gives it enormous flexibility in tough times, as well as the ability to throw money at expansion efforts. It also allows potential for substantial share buybacks but remember no shareholder returns are guaranteed.

If international expansion efforts take off at the required speed, Alibaba could unlock enormous growth, but that remains a very big 'if'. It's still dwarfed by the Chinese operations, which we think will be a bigger driver of sentiment in an increasingly challenging short-term. Another potential catalyst to look out for is movement, if any, in external fundraising efforts from the newly independent business units.

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