It is expected that the growth of core e-commerce business will slow down and the momentum of new business development is good.

3QFY22 performance outlook: we expect the company's 3QFY22 revenue to be + 11% to 244.6 billion yuan compared with the same period last year, which is about 3% lower than market expectations. The overall adjusted EBITA is 40.8 billion yuan, corresponding to a year-on-year decline in adjusted EBITA profit margin of about 11 percentage points to 16.7%, mainly due to investment in strategic sectors and slowing down in core e-commerce business growth. In terms of segment, we expect core business / cloud computing / digital media entertainment revenue to grow by 10%, 24% and 5% respectively over the same period last year, accounting for 88%, 8% and 3% respectively.

Consumption downturn superimposed merchant support policies, core e-commerce business performance is expected to be weak: according to the NBS,10 month / November social consumer goods retail sales growth rate of 4.9% last year 3.9%, optional consumption clothing shoes and hats zero year-on-year growth rate of-3.3% Acme 0.5%, we calculated that the total online retail sales of physical goods for the same period reached 8.77.4% year-on-year growth respectively In view of the fact that BABA already has a large share in the market, we believe that China's retail market GMV will be in line with the industry trend, while due to the continued promotion of merchant support policies, CMR is expected to still lag behind the GMV growth rate. We expect CMR (including commission) revenue to grow by 1 per cent year-on-year (VS grew 14 per cent year-on-year in the first two quarters), slowing further. We expect the growth rate of other retail income in China to slow to 20% year-on-year during the quarter, mainly due to low consumption and Gao Xin retail sales for the first anniversary, according to CNCIC,10 month / November retail sales of the country's 100 key large retail enterprises are-5.9% and 9.8% respectively compared with the same period last year. On the international business side, EU tariff adjustment may affect the progress of Express to some extent, and exchange rate fluctuations in Turkey will also have an impact on Trendyol, and we expect sector revenue growth to slow to 22% year-on-year during the quarter.

Cloud computing is expected to slow down due to macro and regulatory impacts, and the trend of enterprise digital transformation builds a long-term driving force for growth: we expect Aliyun's revenue to grow by 24% year-on-year during the quarter, which is slower than that of the previous quarter. At the same time, the decline in plate income growth and nail losses will also have a certain impact on profits. On the one hand, the public cloud is affected by the termination of cooperation by the head Internet customers and the regulation of the online education and game industry, on the other hand, due to the macro headwind, the hybrid cloud sector faces some resistance to the budget and project progress of the digital transformation of government and enterprises. We believe that short-term challenges have not changed the general trend of digital transformation in traditional industries. According to the Internet Society of China, the scale of China's digital economy accounted for 39% of GDP in 2020, helping the digital transformation of traditional industries is becoming an important driving force for Aliyun's growth. CICT expects China's cloud computing market to grow at a compound rate of 37% in the next five years and will exceed 1 trillion yuan by 2025.

Taote and Taocai are making good progress, and are expected to gradually contribute more incremental users: Amoy and Taocai are an important combination of BABA's service to sink the market. Amoy provides consumers with cost-effective source of good goods. Amoy has built an efficient and low-cost self-service implementation network the next day. The development momentum of users of Taobao and Taocai is good. According to BABA Investor Day, by the end of September, the annual active consumers of Taobao and Taocai reached 270 million, which was + 200% compared with the same period last year, and the average daily transaction order volume was + 400% compared with the same period last year. Users who use Taobao, Taote and Taocai at the same time buy an average of 1.8 times more days per year than users who only use Taobao. According to QuestMobile,11 monthly Taoxue MAU has exceeded 150 million (87.28 million of VS in the same period last year), October Taobao vegetable WeChat Mini Programs MAU reached 28.75 million. We believe that both Taote and Taocaicai are in the early stage of user accumulation, and the contribution of GMV is not significant at present, which is expected to gradually help the group to obtain more incremental users.

Investment advice: maintain a buy-A rating with a 12-month SOTP target price of US / Hong Kong stocks to US $196 / HK $191. In the short term, weak consumption under the macro headwind and fierce competitive environment are a drag on the company's performance, but the company maintains a long-term commitment to strategic areas, in addition, multiple engines such as cloud computing and overseas operations are also expected to support its long-term sustainable growth. We expect FY22/23 revenue to be 852.9 billion yuan / 995.3 billion yuan and the adjusted overall net profit to be 137.1 billion yuan / 165.8 billion yuan.

Risk tips: tighter regulation of the industry; slower growth of retail revenue in China; and higher-than-expected investment in strategic investment, dragging down profit margins.