Key points of investment

For 20 years, Ali has been a leading e-commerce and cloud computing leader in China. Taotian Group is Ali's core asset, accounting for about 40% of revenue, contributing to Ali's main profit. In 24H1, self-reform+competitive improvement, Taotian GMV's growth rate picked up more than expected. We estimate that FY25/26/27 achieved revenue of 1005.5/1108.8/1209 billion yuan and non-GAAP net profit of 157.3/180.1/202.4 billion yuan. FY25non-GAAP net profit was estimated 12 times, with an overall valuation of HK$2052.3 billion, target price of HK$106, current price space of 27.4%, maintaining a “buy” rating.

GMV: Growth is picking up, reforms are gradual, and the external environment is improving marginally.

The 24Q1 and 24Q2 Taotian GMV achieved double-digit and high-single-digit growth respectively. The growth rate was significantly faster than Taotian's performance in 22 and 23. At the same time, it was also in line with the growth rate of the physical e-commerce market, and the performance exceeded expectations. We attribute GMV's performance above expectations mainly due to its own reforms and improvements in the external competitive environment. In terms of its own reforms, 24H1 Taotian has more effectively enhanced price competitiveness through low-price markets such as “10 billion subsidies” and “Ao Factory”, and better served core consumers such as 88VIP by improving the user experience. In terms of the external environment, the downturn in the growth rate of live e-commerce is the most obvious improvement in the external competitive environment. The slowdown in low price competition shows the rationality of operations after each company hits the boundary of ability. In the future, if each company gradually explores the boundaries of its own ability, e-commerce competition may become more orderly.

Commercialization: TR has a lot of room for improvement. It relies on commissions in the short term, and watches advertisements in the long term.

Compared with major competitors, Taotian's TR is lower, while the user quality is the highest, and TR growth potential is high. 1) Commission:

The growth is certain. Compared to its peers, Taotian did not charge 0.6% payment of service fees, 100% commission, Taobao live streaming commission, etc. Currently, Taotian is beginning to supplement such commission revenue. According to our estimates, the potential increase in technical service fee revenue is tens of billions of dollars. 2) Advertisement: Site-wide promotion increases the penetration rate of paid traffic, and progress or exceeds expectations. We believe that the essence of sitewide promotion is that the platform sells free traffic and paid traffic together, which can effectively increase the penetration rate of paid traffic and increase the number of sellable advertising spots. We have observed that at present, the “Express Bus” and “Gravity Rubik's Cube” have been integrated into the Vientiane Platform Unbounded operation interface along with “Full Site Push”, and progress has exceeded expectations. We believe this move is conducive to simplifying streaming operations and increasing the penetration rate of “Full Site Push” usage.

Finance: There is plenty of room for profit improvement.

1) CMR: Currently, Taotian's annualized CMR level has not returned to its 21-year historical peak. If TR only returns to the previous level, CMR can reach a new high. We believe that TR still has room for improvement, so CMR has great potential for growth. 2) EBITA: Historically, the EBITA/CMR ratio of Taobao's Tmall core trading platform remained around 73%, while the current EBITA/CMR of Taobao Group is only 60% +. If the operation and construction of Aotian's core platform enters a stable period in the future, Taotian EBITA has a lot of room for improvement, which is estimated to increase by about 7 billion dollars (10% *CMR revenue) in a single quarter.

Investment advice

The main business has improved, undervalued, high dividends, and high expected returns. Judging from the valuation and shareholder returns, it is currently at a dividend repurchase rate of 9 times the PE valuation +9.4%, and the undervalued high dividend provides the lower limit of expected return. From a fundamental perspective, Taotian is in a critical period of improvement in its main business. 24H1's main business GMV's performance has exceeded expectations. If its own reforms and improvements in the external environment continue, it provides upward flexibility in expected returns. We estimate that FY25/26/27 achieved revenue of 1005.5/1108.8/1209 billion yuan and non-GAAP net profit of 157.3/180.1/202.4 billion yuan, corresponding to the current PE share price of 9.4/8.2/7.3 times. We valued FY25 non-GAAP net profit 12 times, with an overall valuation of HK$2052.3 billion (RMB: HKD exchange rate of 0.92), target price of HK$106, current price space of 27.4%, maintaining a “buy” rating.

Risk warning

1) Consumption recovery fell short of expectations; 2) Competition in the e-commerce industry intensified; 3) Commercialization progress fell short of expectations.