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Alibaba - CEO Zhang stepping down to focus on cloud business

Alibaba is to replace Daniel Zhang, who is currently both Chairman and CEO, with appointments of senior executives already at the Group...

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Alibaba is to replace Daniel Zhang, who is currently both Chairman and CEO, with appointments of senior executives already at the Group. Eddie Yongming Wu, Chairman of two of the firm's e-commerce subsidiaries, is to become Chief Executive Officer. Joseph C. Tsai, currently Executive Vice Chairman, will step up to Chairman with both moves becoming effective in September.

Daniel Zhang will continue to lead Alibaba Cloud Intelligence Group as Chairman and CEO. He commented "It has been an incredible honour and privilege to lead Alibaba Group as CEO over the past eight years and Chairman over the past four years. This is the right time for me to make a transition, given the importance of Alibaba Cloud Intelligence Group as it progresses towards a full spin-off."

The shares closed down 4.5% on the day of the announcement.

View the latest Alibaba share price and how to deal

Our view

Single-digit revenue growth isn't what investors of Alibaba expect from what's meant to be a growth stock. Trouble is stemming from lacklustre growth in the core Chinese Commerce business. Alibaba is China's largest e-commerce business, and there are concerns the weak performance is a sign of a broader weakening in consumer spending in the region. The path to a demand rebound is unclear. And that's partly why the group's making inroads to spin off various businesses, which could unlock value.

Perhaps the biggest move is the formal approval to spin off the cloud services division, by distributing stock to shareholders. The decision to move longstanding CEO and Chairman across to this division demonstrates Alibaba's firm intent to get this done. Meanwhile, Eddie Yongming Wu's forthcoming appointment as CEO should be a good fit for the Group's narrowed focus on e-commerce in the wake of the proposed restructuring.

On balance, we think streamlining and focussing the business is no bad thing. The biggest segment, by some way, is China Commerce. China Commerce includes Taobao, which is China's largest shopping website, and TMall, which sells higher-end and branded goods. It's this area that suffered from weak demand last quarter. This could remain subdued and will depend on the shape of China's economic recovery.

There are challenges. Supply chain and logistics are still tricky, despite some things easing. We're also mindful of stiff competition in the sector and a government tech-crackdown. There's no denying Alibaba's huge scale, but we are in the midst of a lull. The extent and depth of this is hard to map until wider economic conditions are more stable.

The worst of the effects for profits are being offset by cost cutting efforts. This is admirable, but not a permanent solution. Volumes will have to pick up the slack eventually.

And keeping sales on an upwards trajectory well into the future is the responsibility of international markets. The group's responding to the slowdown in its domestic market by doubling down efforts to expand in South Asia, an area with good growth potential.

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.

Alibaba's scale and usership base is formidable and it has the foundations to do well. However, there are some very real headwinds blowing.

If international expansion efforts take off at the required speed, Alibaba could unlock enormous growth, but that's a very big 'if'. Sentiment in the short-term is likely to be swayed by movement, if any, in external fundraising efforts from the newly independent business units.

Alibaba key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 21st June 2023