Alibaba is expected to benefit from the addition of rapid inclusion rules to the Hong Kong Stock Connect Index mechanism. It is expected to be included in the Hong Kong Stock Connect Index on September 10, which is expected to bring about improved liquidity. The company's main e-commerce business is mainly aimed at stabilizing its share, and the performance of non-e-commerce businesses is expected to continue to improve. Combined with high shareholder returns, the low valuation is highly recommended.
With the addition of quick inclusion rules to the Hong Kong Stock Connect Index, Alibaba is about to enter the Hong Kong Stock Connect Index, which is expected to improve liquidity.
On September 4, 2024, Hang Seng Index issued an announcement to add rapid inclusion rules to the Hong Kong Stock Connect Index. For securities eligible for southbound interconnection transactions due to the transition from secondary listing to primary or dual primary listing, Hang Seng Index Limited will quickly include and review the securities. On the first day of eligibility for connectivity, if the total closing market value of the eligible securities ranks in the top 10 of the existing monthly constituent stocks, the securities will be included in the index or explained separately in the next regular adjustment. As of the latest closing date, according to Wind, Alibaba ranked 6th in market capitalization among all Hong Kong stocks, and is expected to be included in the Hong Kong Stock Connect on September 10 when the index adjustment results take effect. It is expected that passive funds on related topics after Alibaba's entry into the stock market will form purchases due to adjustments in constituent stocks, and at the same time, southbound capital may be actively allocated, which is expected to lead to improved liquidity.
The company's fundamentals improve share stabilization+high shareholder returns, and the low valuation reaffirms its strong recommendation. 1) Looking at fundamentals, Alibaba's organizational optimization & user-first strategic adjustments fundamentally drive the recovery of the main e-commerce business. The 2024H1 GMV growth rate recovered to close to physical online retail sales, and the market share stabilized; looking ahead to Taotian's future growth, watching live e-commerce traffic peaking and slowing competition at low prices will bring about a pattern improvement. In the long run, Taobao Tmall's sufficient product supply and rich brand resources and strong genuine product guarantee will continue to support steady growth. It is expected that by 2026, Ali's growth rate will gradually remain at the same level as the e-commerce industry and market. The share ratio will gradually stabilize. In terms of commercial monetization, from a macro perspective, competition among oversupply merchants is gradually accepting lower ROI, and there is plenty of room for platforms to increase their monetization rate. From a company perspective, Ali's launch of a new sitewide advertising tool is expected to increase the monetization rate, as well as an increase in software service fees by 0.6%. The additional advertising commission revenue will offset the increase in platform user investment to a certain extent, which is expected to drive Taotian Group's profit improvement in the next year. 2) In terms of shareholder returns, the company continues to increase repurchase dividends, and it is estimated that the return on shareholders for FY2025 is expected to reach 7% or higher.
Investment advice: We are optimistic about Alibaba's e-commerce growth resilience and international and cloud business growth potential. We expect FY2025-2027 non-GAAP net profit to be 154, 174.6, and 195.9 billion yuan, giving FY2025 non-GAAP net profit 12 times PE, corresponding to the target price of HK$106 per share. The low valuation reaffirms our strong recommendation.
Risk warning: macroeconomic risks; increased competition in the industry.