Strategy Note /
China

Alibaba 'Technology Tree' to Keep Growing with Support from Chip Arm Pingtouge

  • In the fourth quarter of 2020, Alibaba Cloud's adjusted-EBITA turned positive for the first time

  • Pingtouge's appearance was the result of market progress and self-improvement through massive R&D spend

  • Even though many have accelerated Pingtouge's development, it still faces risks from rising costs and competitors

Alibaba 'Technology Tree' to Keep Growing with Support from Chip Arm Pingtouge
EqualOcean
8 April 2021
Published byEqualOcean

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The world-famous e-commerce company, Alibaba Group, founded a Cloud-integrated subsidiary in 2018, Pingtouge, specializing in AI chips for various applications.

The largest chipmaking project of Alibaba Group (BABA:NYSE), Pingtouge engages with core developments in Internet functions and Cloud services, assisting the Hangzhou-based e-commerce giant to strengthen its presence in the technology market. 

On July 24, 2020, Pingtouge announced that it had developed the country's first full-chain smart contract processor customized to power AntChain's business as a primary chip infrastructure provider. Thus far Pingtouge has achieved significant results in improving semiconductor chips. For instance, on July 25, 2019, the company released its RISC-V processor, the XuanTie 910, for a handful of applications including autonomous driving.

Here, we discuss the rationale behind creating Pingtouge, the place of the chipmaker in Alibaba's growing ecosystem and the main risks facing the company. We are bullish on Alibaba, and its chip project is one of the reasons for our positive stance.

Financial analysis

According to Alibaba's latest financial statements, there has been a dramatic upward trend in its profits. Specifically, from 2018 to 2020, the growth rate of its revenues was about 86.58%. Relating to the revenue structure, its core segments include Tmall, Taobao and Cainiao, accounting for around 85.94% of 2020's total. Moreover, when compared with Alibaba's different sectors by adjusted-EBITA, only the core commerce sector had positive values during these three years. In other words, the core commerce sector's profits offset other sectors' losses. 

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In assessing Alibaba Cloud, we notice its progressive gains in 2020, overturning losses through successful business operations. In the last two years, especially after Pingtouge was founded, Alibaba Cloud had higher costs overall. Nevertheless, in the fourth quarter of 2020, this sector eventually yielded positive results, proving that the former input was worthwhile. 

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Pingtouge's inevitable appearance

Why did Alibaba decide to establish Pingtouge? There are four main reasons worth highlighting.

 Firstly, Alibaba's e-commerce business is gradually reaching its ceiling. By the second quarter...

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