Alibaba Pictures: Bigger Than Netflix for Investors?

A subsidiary of the Chinese e-commerce giant, Alibaba Pictures Group Ltd (SEHK: 1060) is an online media group whose scope of business ranges from film production to an online ticketing platform.

Acquired by Alibaba Group Holdings Ltd (NYSE: BABA) (SEHK: 9988) in 2014, Alibaba Pictures was rebranded from ChinaVision Media Group, a Hong Kong-listed media company. Since then, the company has embarked on vigorous acquisitions to expand its business coverage.

Its subsidiaries include Youku Tudou Inc, one of the largest online video platforms in China with a subscription-based business model similar to that of Netflix. It also owns Tao Piao Piao, the second-largest online film ticketing platform in China.

However, the still ongoing expansion has not guaranteed Alibaba Pictures a steady growth in income. The group has been running a net loss since it was acquired by Alibaba.

Indeed, investors have detected signs that the group’s loss is narrowing year-on-year, from RMB 1.6 billion (US$225.9 million) for the financial year ended 31 March, 2018 to RMB 497 million one year later.

But there is enough evidence showing that the net loss will once again come back to haunt investors.

Just earlier this month, the company issued a profit warning to shareholders, stating that its net loss for the financial year ended in 31 March, 2020 could range from RMB 1.1-1.2 billion.

Is Covid-19 to blame for the loss?

In the profit warning letter, Alibaba Pictures cited complications around profit in China’s entertainment industry since 2019.

It also cited the impairment provisions made by the group for certain receivables and investment projects amounting to RMB 800 million.

Despite Covid-19 leading to the shutdown of cinemas across mainland China since January, it was the last straw that broke the camel’s back.

The country’s film and entertainment industry had already been struggling in 2019. According to a report by National Business Daily, China’s box office saw the first slump in nine years in H1 2019, down by 2.7% year-on-year.

The number of audiences at cinemas decreased by 90 million people in the first half of 2019 compared to a year earlier.

This also had a drastic impact on the revenues of film production companies, with six major firms reporting a loss in market value totaling RMB 7.4 billion.

Uncertain financials

The group has been delivering swinging revenues in the past few financial years. In 2019, despite reporting narrowing net loss, Alibaba Pictures’ total revenue has in fact shrank from around RMB 3.3 billion one year earlier to RMB 3 billion, a fall of 10%.

A large part of the narrowing loss can be attributed to less sales and marketing expenses. And the net loss figure also received some boost from non-operating income.

In other words, it is not easy to determine whether revenue will eventually resume stronger growth and make a turnaround on its red ink in the coming years.

In 2017 and 2018, the group said it had devoted a large portion of assets setting up its online ticketing business.

But amid industry headwinds and fierce market competition with companies such as MaoYan Entertainment (who also has a larger share of the market), it is uncertain when the group is able to deliver positive income.

A possible comeback?

As part of the note to reassure investor confidence, the group added:

“Despite the impacts arising from the slowdown of operation across the industry and the outbreak of COVID-19, the Group has adequate inventory of films and TV dramas and sufficient cash reserves. […]

 It remains optimistic on the operations in each segment of the Group for the financial year ending March 31, 2021 through further collaboration with the digital media and entertainment business group of Alibaba Group Holding Limited…”

But surprisingly, neither Alibaba Pictures’ online video platform (Youku Tudou), or the commercial media business managed to offset part of the group’s loss.

Investors, on the other hand, did not appear completely convinced. On 14 April, the trading day after the group issued the profit warning, its share price dropped by 5%.

Since then, the share price has slightly picked up, at HK$1.03. But overall, the stock has lost almost 30% of its value since the start of the year.

The performance of Alibaba Pictures’ shares may be on par with competitors such as Maoyan Entertainment (SEHK: 1896), which has declined 30% year-to-date, or iQiyi Inc (NASDAQ: IQ), which has lost 28.7% year-to-date.

However, the industry is not dominated by a loss-making sentiment. In fact, according to data from the China Internet Network Information Center (CNNIC), as of March 2020, online retail sales of tangible goods grew 3% yearly for the first two months of 2020.

iQiyi has even declared that its Q1 2020 net revenues are expected to increase by 2-8% compared to the same period last year.

Foolish takeaway 

It is probably more apt to understand Covid-19 as the red herring in Alibaba Pictures’ profit warning in April.

There are broader concerns around the health of the group’s business and profitability, especially in the face of its industry competitors delivering more positive results in the first quarter of 2020.

Investors should not regard the current share price as an attractive entry point. Returns from the shares could only come when these concerns are addressed and when there is more transparency in the group’s reporting.