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Alibaba is about to gain e-commerce in China's small cities

Photography by Alessio Lin

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Alibaba Group Holding

closed the first quarter of its fiscal year with a strong performance at the annual 618 Shopping Festival in early June. Consumers in small Chinese cities will probably be decisive in determining whether this will continue for the full year 2020.

The story back. The festival, a series of promotional events taking place from June 1 to 18, was launched by Alibaba's rival

(symbol: JD) to commemorate the company's launch on June 18, 1998. It quickly became one of the largest online shopping events in China, with Singles Day in November. Many other e-commerce platforms, including Alibaba, are now offering promotional prices during the month.

During this year's 618 event, the gross volume of merchandise sold through the Alibaba Tmall platform increased 38.5% from the previous year, compared with 27% on JD.com. Sales benefited from Alibaba's efforts to expand into lower-tier cities – the new battleground for e-commerce while big cities are saturated.

Juhuasuan, an Alibaba chain that targets smaller city customers and who are more price sensitive, has attracted 80% more new customers during the 618 promotions compared to last year. The volume of transactions in small towns has doubled.

What's up. In a note on Friday, Morgan Stanley analyst Grace Chen reiterated that she was optimistic about Alibaba 's performance during this exercise. Some fear that Alibaba's aggressive plans to expand into lower-tier cities will reduce margins, but Chen believes the company has the skills and processes to control this.

According to Chen, Alibaba sales rose 38 percent year-on-year to 112 billion yuan ($ 16.3 billion) in the April-June quarter. Adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, is expected to reach 29.7 billion yuan, up 12 percent, she said.

Alibaba plans to release its results on August 22.

Look forward. Chen expects Alibaba to invest more in service activities in lower-tier cities. This approach may be more difficult than selling physical goods, as market dynamics and consumption patterns may be different from those in Beijing. However, it has identified local services as an essential element in Alibaba's efforts to expand in these markets.

The overall effort, she said, will help Alibaba achieve long-term sustainable growth.

Virtually all analysts who cover Alibaba's stock price it as Buy or equivalent. The average target share price over the next 12 months is $ 218, about 29% higher than Friday's closing price of $ 169.07. Chen has an overweight rating for Alibaba and a target price of $ 207.

Write to Evie Liu at evie.liu@barrons.com

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