Investment advice

We have seen that after going through organizational changes and strategic trade-offs, the market share of its core business stabilized, and losses in other businesses exceeded expectations, compounded shareholder returns and catalyzed entry into the Hong Kong Stock Connect. We are optimistic about Ali's subsequent performance.

rationales

Take the lead in organizational change and promote strategic trade-offs. In March 2023, Ali promoted organizational changes aimed at enhancing business flexibility and agility to better adapt to the new macro environment and competitive trends. From a strategic perspective, Ali is more daring to subtract: focusing on core business, focusing on consumers, Taobao and public clouds. We believe that this strategy reflects the company's active search for change in the current environment, breaking away from path dependency, and adhering to long-term correct things.

The core business is progressing positively. It is expected that 2HFY25 may be significantly catalyzed, and other businesses will continue to reduce losses:

1) After Taotian Group implemented the “user first” strategy, we observed a series of improvements in traffic distribution, merchant and product evaluation, membership system, and user service. Coupled with the deceleration of Douyin e-commerce growth, Ali's e-commerce share stabilized; with additional software technical service fees and advertising products being put into use, we expect customer management revenue to reach a 10% year-on-year growth rate starting 4Q24.

2) After adopting a strategy focusing on public clouds, we believe that 2HFY25 revenue is expected to return to double-digit year-on-year growth, mainly due to active pricing strategies, the nearing end of product structure optimization for private clouds and hybrid clouds, and the contribution of AI incremental demand. The increase in the share of public clouds is also expected to drive up profit margins.

3) Local lifestyle, entertainment, and other businesses have significantly reduced losses. The company said that these businesses prioritize commercialization and achieve break-even within the next 1-2 years. We expect FY25 to adjust EBITA losses for these businesses to reduce losses by more than 12 billion yuan and improve the group's ROIC.

To increase shareholder returns, it was catalyzed by entering Hong Kong Stock Connect after the double major listing. Since FY24, Alibaba's shareholder returns have increased significantly. We expect that Ali's net shareholder return will exceed 8% after deducting equity incentives in '24, and maintain a high shareholder return for the next 2-3 years. Furthermore, after completing its dual major listing, Ali is expected to enter Hong Kong Stock Connect. We estimate that the potential increase in long-term southward capital will exceed HK$130 billion.

Profit forecasting and valuation

Currently, the company's US and Hong Kong stocks are trading 8/7 times the non-GAAP price-earnings ratio for the 2025/2026 fiscal year. We maintain revenue and profit forecasts, maintain target prices of $112 and HK$109 for US stocks and Hong Kong stocks, and maintain an outperforming industry rating. The non-GAAP price-earnings ratio for the 2025/2026 fiscal year was 11/9 times, with room for 34% and 34% respectively.

risks

Macro consumption uncertainty; regulatory policy risks; increased e-commerce competition; progress in commercialization falls short of expectations; progress in entering Hong Kong Stock Connect falls short of expectations.