BABA released FY2023Q2 results, achieving operating income of 207.18 billion yuan in the quarter, + 3.2% year-on-year; adjusted EBITA 36.16 billion yuan, + 29.0% EBITA GAAP homing net profit of 34.35 billion yuan, + 12.6% year-on-year. We believe that under the uncertainty of the epidemic, the company's core business shows operational resilience, continues to reduce costs and efficiency to improve profitability, the long-term competitive advantage remains stable, and the "highly recommended" investment rating is maintained.

China Business: CMR is still under pressure and EBITA is back to positive growth. The revenue of FY23Q2 China Business was 135.43 billion yuan, down 0.5% from the same period last year, of which customer management income was 66.5 billion yuan, down 6.5% from the same period last year. Taobao Tmall GMV decreased compared with the same period last year, mainly due to repeated epidemic, reduced consumer demand and continued market competition. In terms of new business, Taote and Taocai maintained rapid growth, with an increase of more than 40% in GMV and 60% in GMV for M2C goods in September. At the same time, the company optimized its pricing and customer acquisition strategy, reduced procurement, performance and operating costs, and achieved remarkable results in reducing losses. The losses of Taote and Amoy were significantly narrowed compared with the same period last year. In terms of direct business, revenue reached 64.73 billion yuan, an increase of 6.4% over the same period last year, mainly due to strong growth in box horse revenue, while stores achieved healthy same-store sales growth and significantly reduced losses. On the profit side, the Chinese business sector reached 43.98 billion yuan in EBITA, an increase of 6.4 per cent over the same period last year.

International business: the impact of overseas epidemics and policies continues, income growth is still slow, profitability is improving. The FY23Q2 international business segment achieved revenue of 15.75 billion yuan, an increase of 4.3% over the same period last year. International retail revenue increased 3.5% compared with the same period last year, and total orders decreased by 3% compared with the same period last year. Among them, orders decreased due to the lifting of the COVID-19 epidemic and the recovery of offline channels; Trendyol e-commerce and local life business grew strongly, with order growth exceeding 65% year-on-year. International wholesale business revenue increased by 6% compared with the same period last year, mainly from the contribution of value-added services income. In terms of profitability, FY23Q2 International Business adjusted EBITA to-960 million yuan, profit margin increased 10.3pct compared with the same period last year, mainly due to the improvement of Lazada operational efficiency and value-added services, resulting in a substantial improvement in profitability.

Cloud business: continuous optimization of customer ecology, driving revenue growth and profit improvement. The revenue of FY23Q2 cloud business reached 20.76 billion yuan, an increase of 3.8% over the same period last year, of which the revenue of customers in the non-Internet industry grew strongly, up 28% from the same period last year, accounting for 58%. The revenue of Internet customers decreased by 18% compared with the same period last year, mainly due to the influence of individual head customers. Currently, cooperation with overseas cloud has been stopped, and this impact is expected to gradually decrease in the future. In terms of profit, it achieved adjusted EBITA of 430 million yuan, an increase of 9.6% over the same period last year. With the continuous expansion of the scale of cloud service customers in finance / telecommunications / public services and the continuous optimization of Aliyun's self-developed technology, the cloud business is expected to achieve sustained revenue growth and further profit improvement.

Investment advice: income is still under pressure due to the impact of macroeconomic and epidemic uncertainty, but at the same time, the company is always committed to improving business quality, reducing costs and improving efficiency, and profitability can continue to improve. We believe that BABA's long-term business competitiveness in China remains stable, and is optimistic that the future rapid development and profit improvement of cloud computing, international business, local life and other businesses will contribute to the company's income and profit increment, giving the company 15 times the annual NON-GAAP net profit of FY2023, corresponding to the target price of HK $122.3, maintaining a "highly recommended" rating.

Risk hints: macroeconomic risks; the duration of the epidemic exceeds expectations; industry competition intensifies.