Kate Lin: Welcome to Morningstar. The market has been reacting to two things with Alibaba its weaker position in the mainland’s ecommerce scene and some of the unfavorable regulatory changes. In this new operating environment, how well will this wide moat company defend its competitive advantages? We’re talking to Chelsey Tam, Senior Equity Analyst at Morningstar.
Chelsey Tam: Hello, Kate.
Lin: The market is eyeing intensifying its competition that faces Alibaba. Which of the business segments of Alibaba do you think are most threatened?
Size: Well, out of the different segments I think the ecommerce market is the most important profit contributor for Alibaba, and that segment is the most under challenge, I would say.
Lin: yeah. So, you mentioned there is competition with ecommerce. But Alibaba retains its wide moat rating. why?
Size: Well, we actually think that it will still be able to maintain its network effect because of a few reasons. One is that we see that the retention on the platform is still very good. For example, for the core user, which make up about 70% of the GMV (gross merchandise value), they had about 90% retention on the platform. And also, right now, Alibaba has the highest GMV on a per user basis, above JD.com (09618, JD), above Pinduoduo (PDD). And we also see that it has a really comprehensive product offering in terms of stock-keeping unit (SKU). So, they have branded goods, they have customer-to-customer (C2C), business-to-customer (B2C). And I think that they will still be able to remain relevant in the long term.
Lin: So, looking ahead, what do you think is the outlook for Alibaba’s economic moat?
Size: Well, we are assigning a negative moat trend rating for Alibaba. Although we give it a wide moat, one of the main reasons is that it has the highest margin compared to other platforms, the best in terms of profitability, and it’s proven for many, many years, unlike other peers.
We are seeing more competition, not just coming from old rival JD but also coming from Pinduoduo and also, the short-form video platform like Douyin (the Chinese version of the short video app TikTok) and Kuaishou (01024). And actually, Tencent (00700), also wants to grab some share in the ecommerce market as well. So, because of that and the decentralization of ecommerce, we are assigning a negative moat trend rating to this company.
Lin: Thank you so much, Chelsey. For Morningstar, I’m Kate Lin.
George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.