UPDATE 2 – Alibaba Results Beat Cloud and E-commerce Growth Estimates

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SHANGHAI, Aug 15 (Reuters) – China’s Alibaba Group Holding Ltd. reported better-than-expected quarterly revenue and profit on Thursday, helped by growth in its e-commerce and cloud computing businesses.

The results show that the company is managing to exceed expectations despite having to face an increasingly competitive e-commerce industry and a more challenging macroeconomic environment.

Alibaba’s revenue rose 42% to 114.92 billion yuan ($16.3 billion) in the first quarter ended June 30, from 80.92 billion yuan a year earlier.

Analysts had expected revenue of 111.73 billion yuan, according to IBES data from Refinitiv.

U.S.-listed shares of the company, which primarily makes money by selling advertising and promotional services to third parties through websites Taobao and Tmall, rose 3% to $166.72 in pre-market trading.

The world’s two largest e-commerce sites, Taobao and Tmall, initially gained popularity as the internet and mobile phone usage exploded in China.

But both Alibaba and smaller rival JD.com are trying to diversify their businesses amid slowing e-commerce revenue growth in their domestic market, partly due to saturation in markets in China’s largest cities.

JD reported better-than-expected second-quarter revenue Tuesday, helped by stronger online retail sales.

In response to market saturation with services in wealthier parts of the country and growing competition from startup Pinduoduo, Alibaba is targeting consumers in smaller towns.

It also entered into a partnership with Starbucks to supply coffee.

Faced with a slowdown in growth in its core e-commerce business, Alibaba has begun diversifying into cloud computing and digital entertainment, and has made major management changes.

CEO Daniel Zhang is expected to formally take over from founder Jack Ma as chairman in September, while the Chinese giant has appointed CFO Maggie Wu as head of its strategic investment unit.

It also expanded the number of its brick-and-mortar Hema stores to 150 by the end of the June quarter. In June, Alibaba said the stores would operate as a standalone business unit.

Revenue from the cloud computing business increased 66% to 7.79 billion yuan, while revenue from the core trading business increased 44% to 99.54 billion yuan.

Net income attributable to ordinary shareholders was 21.25 billion yuan.

Excluding positions, the company earned 12.55 yuan per American Depository Share. Analysts had expected 10.25 yuan per ADS, according to IBES data from Refinitiv.

Alibaba is planning a Hong Kong listing to replenish funds that have been depleted by investments aimed at staving off threats from rivals such as food delivery company Meituan, the sources said.

Reuters reported in June that the company had filed a confidential IPO in the city that could raise up to $20 billion.

Alibaba has not yet commented on the reports of such plans, but investors are closely watching as increasingly violent demonstrations in Hong Kong affect the city’s image as Asia’s largest financial centre.

The Hang Seng Index has fallen about 12% since late July, when protesters occupied Hong Kong International Airport. ($1 = 7.0414 Chinese yuan) (Reporting by Akanksha Rana in Bengaluru and Josh Horwitz in Shanghai; Editing by Sriraj Kalluvila, Saumyadeb Chakrabarty and Jan Harvey)