Business in China: Consumption and logistics are gradually picking up, and the decline in CMR is expected to narrow. On the retail side, according to the National Bureau of Statistics, Social Zero increased 3.5% year-on-year in January-January 2023. Based on cumulative year-on-year growth estimates, online retail sales of physical goods increased 5.3% year-on-year in January-January, and recovered month-on-month. On the logistics side, according to the National Post Office, the volume of express delivery services above scale in January and February 2023 fell 17.6% year-on-year and increased 32.8% year-on-year respectively, and express delivery recovered at an accelerated pace in February.
Looking ahead to the 23Q4 fiscal quarter, we expect Alibaba's commercial GMV in China to narrow as consumption recovers marginal improvements and the decline in CMR is expected to narrow. We expect Taotao to continue to increase its investment, focusing on user product experience and business empowerment.
Cloud Computing: Public clouds are growing healthily, and emphasis is placed on technological breakthroughs. Looking ahead to the 23Q4 fiscal quarter, we expect Alibaba Cloud to increase slightly year-on-year. Among them, public cloud is expected to grow healthily, and hybrid cloud revenue may still decline. In the future, Ali will focus on technological breakthroughs and actively invest in new technology fields. In terms of generative AI, it will make every effort to build its own AI pre-training big model and provide computing power support for various model applications on the market.
AI is deployed in all directions, and we look forward to further implementation. 1) In terms of model base, in September 2022, Ali released the latest “generic” big model series. Among them, the general model layer includes three types of models: generic - M6, general meaning - aliceMind, and general meaning - CV, covering multi-modality, natural language processing, computer vision, and the professional model layer penetrates e-commerce, medical care, law, finance, entertainment and other industries. 2) In terms of the open source ecosystem, in November 2022, Alibaba launched the AI big model open source community “Magic Match” ModelScope, which aims to lower the application threshold of AI. In March 2023, Alidamo Academy launched the “Big Text Generation Video Model” on the “Magic Up” ModelScope. 3) In terms of computing power, in August 2022, Alibaba Cloud launched the “Flying Computing Platform” and launched two hyperscale intelligent computing centers, with a total computing power scale of 15 EFLOPS, making it the world's largest intelligent computing platform. It can increase the utilization rate of computing resources by more than 3 times, AI training efficiency by 11 times, and inference efficiency by 6 times. 4) In terms of application, Tmall Genie recently demonstrated a voice assistant similar to the “Ali version of ChatGPT” using the voice of a talk show actor in place of “bird bird split bird” as an example. Furthermore, the 2023 Alibaba Cloud Summit will be held on April 11. Alibaba Cloud CEO Zhang Yong and CTO Zhou Jingren will all attend. We expect more major developments to be announced at the conference.
Initiate organizational transformation and establish six major business groups. On March 28, Zhang Yong, Chairman of the Board of Directors and CEO of Alibaba Group, issued a letter from all employees “Only Self-Transformation Can We Create the Future”, announcing the launch of “1+6+N” organizational transformation. Alibaba Group will establish six major business groups and multiple business companies, including Alibaba Cloud Intelligence, Taobao Tmall Business, Local Life, Rookie, International Digital Commerce, and Big Entertainment, and may independently finance or go public in the future.
We believe that this adjustment will 1) create a more agile organizational form at the organizational management level, stimulate innovation vitality, and improve operational efficiency. 2) At the valuation level, the independent listing of several major businesses may lead to company valuation repairs.
Reiterate the “buy” rating. We expect revenue for the 2023-2025 fiscal year to be $8667/9418/$101.2 billion; net profit from non-GAAP to the mother will reach $1370/1527/167.5 billion. Based on core e-commerce 10x 2024e P/E, cloud computing 5x 2024e P/S, entertainment 2x 2024e P/S, and innovative business 2x 2024e P/S, maintaining the target price of Alibaba Hong Kong stock (9988.HK) of HK$140/US stock (BABA.N) of $143, the “buy” rating was reiterated.
Risk warning: The impact of industry policies on business has exceeded expectations, progress in e-commerce and cloud computing has fallen short of expectations, and changes in the macro-environment have exceeded expectations.