FY2023Q2, the company's core e-commerce GMV and CMR, the decline narrowed month-on-month. Although consumption is still uncertain in the short term, the long-term consumption market is expected to pick up with the improvement of the macro environment and the optimization of prevention and control policies, and the growth rate between GMV and CMR is expected to narrow. On the profit side, the company achieved an adjusted EBITA of 36.16 billion yuan (YoY+29%) in the quarter, reducing costs and increasing efficiency continued to exceed expectations. Taote, Taocai and box horses reduced losses by 4.9 billion yuan, international business by 1.5 billion yuan, and local life by 3 billion yuan. As the company as a whole enters the stage of high-quality growth, reducing costs and increasing efficiency will continue to be implemented as a long-term strategy, which is expected to bring continuous improvement on the profit side. In addition, the company added an additional $15 billion buyback plan, demonstrating long-term development confidence. Looking to the future, the recovery of the macroeconomic and consumer market is expected to lead to e-commerce performance repair, cloud computing, innovative business is also expected to bring incremental contribution, thus becoming the catalysis of the company's stock price upward. We believe that the company remains an important player in China's long-term digitization process, maintaining a relatively optimistic attitude towards the company's medium-and long-term digital business service capabilities, and maintaining its "buy" ratings for Hong Kong and US stocks.

Performance overview: the profit side continues to exceed expectations, expanding the scale of buybacks to strengthen long-term development confidence. FY2023Q2, the company achieved operating income of 207.18 billion yuan, an increase of 3.2% over the same period last year; adjusted EBITA 36.16 billion yuan (YoY+29%), Margin 17% (YoY+3pcts), better than market expectations; GAAP net loss of 20.56 billion yuan, mainly due to losses on equity investment; Non-GAAP net profit of 33.82 billion yuan (YoY+19%), Non-GAAP net interest rate of 16% (YoY+2pcts). As of November 16, the company had completed approximately $18 billion of its original $25 billion buyback program. In addition, the company will add an additional $15 billion to its buyback program and extend its validity until the end of March 2025. In terms of dual major listings, due to the need to submit a new employee stock ownership plan, the listing will be later than the original plan (end of 2022).

Chinese business: core e-commerce continues to repair, reduce costs and increase efficiency to strengthen profit improvement. ① according to data from the National Bureau of Statistics, online retail sales of physical goods in July-September 2022 were + 6%, 7%, 8%, and the net zero market showed a slow recovery trend. However, affected by weak consumer demand, epidemic disturbance and continued competition, the GMV of physical goods online on Taobao and Tmall (excluding unpaid orders) declined in single digits compared with the same period last year, and the month-on-month decline narrowed; double 11 achieved GMV unchanged from the same period last year. FY2023Q2, the company achieved customer management income of 66.5 billion yuan (YoY-6.5%). The growth rate between CMR and GMV is mainly due to the impact of logistics and the increase in return rate, which affects commission income; in advertising, the cash efficiency of recommendation advertising decreases, but search advertising still maintains positive growth. Although consumer demand is still uncertain in the short term, it is expected that FY2023Q3 GMV and CMR will still decline compared with the same period last year, but with the long-term recovery of consumption brought about by the improvement of the macro environment and the optimization of prevention and control policies, and superimposing the company's exploration of more monetization methods, the growth rate between GMV and CMR is expected to narrow. ② core users maintain high stickiness, and wallet share is solid: as of FY2023Q2, about 124 million AAC in Taobao and Tmall spend more than 10,000 yuan per year, and the retention rate is 98%. The number of VIP members remains 25 million, and the core users' mind and wallet share remain stable. ③ new business: FY2023Q2, Taobao and Taote M2C goods payment GMV grew by more than 60% year-on-year, and Taocai GMV grew by more than 40% year-on-year. While the new business contributes to growth momentum, it continues to significantly reduce losses. This quarter, Taote, Taocai and Hema have reduced losses by a total of 4.9 billion yuan. We estimate that FY2023Q2 Taote and Taobai have a cumulative loss of about 5 billion yuan. As the company as a whole enters the stage of high-quality growth, reducing costs and increasing efficiency will continue to be implemented as a long-term strategy, which is expected to bring continuous improvement on the profit side. ④ FY2023Q2, China's commercial realization of adjusted EBITA 43.98 billion yuan (YoY+6%), Margin 32% (YoY+2pcts). Excluding the loss reduction impact of new business, we estimate that the core business EBITA fell by about 4.4% compared with the same period last year and increased by about 1.6pcts. Although CMR short-term pressure affects the core e-commerce profit performance, but in the new business and international business, local life and other sectors profit improvement trend, the company's overall EBITA is expected to remain stable compared with the same period last year.

International business: Trendyol grew strongly and overall losses narrowed sharply. 1) International retail: FY2023Q2, the company achieved international retail revenue of 10.74 billion yuan (YoY+3%), and the overall order volume decreased by 3% compared with the same period last year, mainly due to the devaluation of the euro, the rise in logistics costs, and the recovery of offline life in Southeast Asia. Among them, Trendyol orders increased by more than 65% year-on-year, partially offsetting the decline in orders for Lazada and Express. 2) International Wholesale: FY2023Q2, the company achieved international wholesale income of 5.01 billion yuan (YoY+6%), mainly benefiting from the 16% year-on-year increase in Alibaba.com transaction volume. 3) FY2023Q2, the international business realized adjusted EBITA-960 million yuan, the loss narrowed by 61% compared with the same period last year (YoY+10pcts), mainly due to the narrowing of losses of Lazada and Trendyol.

Other businesses: continuous adjustment of cloud customer structure, outstanding performance of rookies and local life. 1) Cloud: FY2023Q2, the company achieved cloud business revenue of 20.76 billion yuan (YoY+4%), mainly driven by the healthy growth of public cloud revenue, partly offset by the decline in hybrid cloud revenue. Among them, the demand of non-Internet industries such as finance, telecommunications and public services grew steadily, with revenue up 28% year-on-year, and revenue contribution increased to 58% (month-on-month + 5pcts). Customer income in the Internet industry decreased by 18% year-on-year, mainly due to the decline in revenue from head customers and online education customers, as well as weak demand in the Internet industry as a whole. FY2023Q2, cloud business realization has adjusted EBITA 430 million yuan, Margin is 2% (YoY+0pcts), profitability remains robust. 2) Cainiao: FY2023Q2, Cainiao achieved an income of 13.37 billion yuan, an increase of 36% over the same period last year, mainly due to the increase in income from domestic consumer logistics services and international compliance solutions, of which the proportion of external customer income increased to 73%. The adjusted EBITA became a regular employee, reaching 130 million yuan, and Margin was 1% (YoY+4%). 3) Local life: FY2023Q2, the income of local life reached 13.07 billion yuan (YoY+21%), mainly due to the strong growth of Gaode orders, the improvement of ele.me AOV and the improvement of subsidy efficiency; the adjusted EBITA-3.49 billion yuan, the loss narrowed by 47% compared with the same period last year, mainly due to the improvement of ele.me UE and the continuous improvement of business efficiency.

Risk factors: risk of business adjustment caused by policy regulation; risk of financial business regulation; risk related to data security; risk of decline in performance caused by slowing penetration of e-commerce industry and higher-than-expected competition in e-commerce platform; risk of decline in performance caused by slowdown in macroeconomic growth; risk that local epidemic repeatedly affects performance decline due to higher than expected; profit drag on the layout of outbound investment Sino-US friction factors affect business development and stock price fluctuations, and the risk of delisting of US stocks.

Profit forecast, valuation and rating: taking into account the relatively mild recovery in consumption, as well as the company's continued efforts to reduce costs, efficiency and business losses, we slightly downgrade the revenue forecast of BABA Group for the fiscal year 2023-2025 to 863.4 billion yuan / 933.4 billion yuan / 995.5 billion yuan (the previous value is 8,828 shock 951,713 billion yuan), compared with the same period last year. Slightly increase the forecast of net profit (Non-GAAP) for the fiscal year 2023-2025 to 131.1 billion yuan / 155.4 billion yuan / 168.8 billion yuan (the previous value is 1,282 Universe 1483 Universe 162.8 billion yuan), which is-4% higher than the same period last year. The current price corresponds to the company's Hong Kong stock PE (Non-GAAP) 11x/9x/8x. We believe that since 2022, the Internet industry policy has continued to send a positive signal, superimposing expectations of fundamental repair in fiscal year 2023, and the company's valuation suppression is gradually easing. We are optimistic about the company's continued leadership in the process of digital intelligence in China. Based on SOTP, only considering the valuation of the company's main business, Chinese business refers to the valuation of domestic platform e-commerce companies (the average value of JD.com Group's main business, Pinduoduo's e-commerce business is about 20x PE). Considering that BABA's long-term growth rate is expected to be relatively low, we value Chinese business FY2023 8x PE. Cloud computing AWS valuation (8-10x PS), taking into account the growth rate and EBITA Margin differences, we give cloud computing business FY2023 4x PS valuation, superimposing international business, Cainiao and other business valuation, according to which we give the company FY2023 US stock target price of US $129US / ADR, Hong Kong stock target price of HK $126per share, maintaining the company's Hong Kong stock and US stock "buy" rating.