Key points of investment

We believe that Alibaba, as a leader in domestic internet e-commerce and cloud computing, is facing triple marginal changes now that the “1+6+N” Group was spun off for the first year, the three-year rectification was completed, and it was first incorporated into the Hong Kong Stock Connect: the core business, Taotian GMV, has returned to growth, international e-commerce revenue continues to rise rapidly, and the balance of losses in other businesses is imminent. Overall, it is at a point where fundamentals are adjusted, valuation is cost-effective, capital oriented, and has medium- to long-term allocation value.

Taotian: GMV regains growth with both internal and external repairs, and an increase in TR can be expected.

① With the implementation of the logic of live e-commerce peaking and internal strategic adjustments, Taotian's GMV share is expected to rise steadily.

External environment: Macro consumption is weak, e-commerce penetration is slowing down. In 17~23, Taotian GMV's share was squeezed by the strong rise of Pinduoduo and Doukuai live e-commerce. We believe that the logic of live streaming e-commerce peaking at its peak since '24 will gradually be implemented or left room for traditional shelf e-commerce: the leading broadcast effect of live e-commerce declined, the supply chain layout was relatively weak and difficult to squeeze out profits, and Doukuai placed a strategic focus on increasing the GMV share of the shelf market.

Internal strategy: Taotian adopts the path of “user experience first → platform traffic growth → merchant return → bilateral prosperity to drive up GMV scale”. A number of user experience measures are proposed for ordinary users and high-value 88VIP users and adhering to this strategy, including introducing a new store rating system to encourage merchants to enhance service and pallet quality, optimizing the “only refund” policy to balance the rights of merchants and users, and enhancing 88VIP member price+service+logistics experience to retain high-value core user assets.

② The new service fee rules bring increased commissions+sitewide promotion to leverage the advertising budget of small and medium-sized businesses, and the TR increase is imminent.

Starting in 24Q3, Alibaba will increase commissions for Taotian and reduce annual fees for Tmall merchants, or increase commission increases and monetization rates. The new advertising product “Full Site Promotion” implemented in April '24 uses a payment/exemption linkage mechanism powered by an AI model to revitalize global traffic. The aim is to follow the industry's new competitive main line to shift the focus of merchants from “heavy operations” to “heavy goods”; effectively help small and medium-sized merchants increase their ROI, attract small and medium-sized businesses back into the market, and ultimately increase the platform's advertising monetization rate. However, the subsequent effects of “full-site promotion” mainly depend on the effective connection of traffic channels, optimization of user data recognition for more than 6 months, and the willingness of small and medium-sized merchants to return to the market.

AIDC: High revenue growth, continuous layout in all categories, omnichannel, and multiple regions.

After 22 years, the cross-border e-commerce industry is dominated by refined development trends. Among them, the US and Europe are the main export destinations, focusing on Southeast Asia's growth potential under favorable policies. By type, although B2B is not currently the mainstream model of cross-border e-commerce, small B customers are shifting to retail platforms due to the increase in transactions in emerging markets and B-side competition, and B2C has great potential for development and the share of scale is gradually increasing. Looking at the sub-model, full hosting is suitable for factories at low prices, and the profit ceiling is obvious. Semi-hosting has rich product SKUs, which is beneficial to the development of merchants who are good at supply chain management and the platform to save on contract fulfillment costs.

When the Four Little Dragons went overseas, the TikTok Shop focused on Southeast Asia; Shein leveraged its self-operated advantage based on the fast fashion category; Temu focused on Europe, America, Japan, and South Korea with low cost hosting. AIDC's all-category+omni-channel+multi-platform and regional layout. Among them, AliExpress mainly drives high revenue growth, Southeast Asia's Lazada turned losses into profits, and Turkey's Trendyol has high potential. AliExpress's dominant regions are Russia, Spain, and Brazil. Revenue growth is mainly due to the launch of the cost-effective Choice service, which can provide low-cost boutiques+faster execution times+merchant traffic empowerment. The service contributed nearly 70% of AliExpress's order volume.

Cloud computing: AI's big model catalyzes high computing power needs+public clouds to open up new growth points first.

China's cloud computing industry maintained high growth vitality. The market size grew from 322.9 billion yuan to 616.5 billion yuan in 21-23, with a CAGR of 38.18%. CR3 concentration has declined, and competition in the industry is becoming increasingly fierce. Public clouds account for more than 70% of the cloud computing market, and IaaS is the main player in the public cloud market. As the leader of IaaS in the Asia-Pacific region, Alibaba Cloud still ranks first in the public cloud IaaS and PaaS market share despite being impacted.

The double-digit revenue growth of Alibaba Cloud FY25Q1 public cloud products drove revenue growth on the revenue side, and profit margins continued to be significantly optimized. Alibaba Cloud is implementing scale effects to dilute costs through continuous capital investment and continuous price reduction, while adhering to an AI-driven, public cloud priority strategy. The large AI model's requirement for high computing power opens up demand space for cloud computing that can naturally integrate and schedule heterogeneous computing power. At present, Alibaba Cloud has formed the most complete full-stack AI infrastructure and has become a public foundation for China to polish the big AI model. In October '23, 80% of the nation's technology companies and half of the largest model companies ran on Alibaba Cloud.

Profit forecasting and valuation

We are optimistic that Alibaba will focus on the core business of e-commerce and cloud computing after this round of strategy rationalization. The domestic Taotian business is expected to guarantee share and raise TR; international e-commerce is driven by AliExpress Choice to maintain high growth; cloud computing benefits from public clouds and continuous optimization of profit levels driven by AI models. We expect FY2025/FY2026/FY2027 to achieve operating income of 1012.553/1098.371/1196.813 billion yuan, an increase of 7.58%/8.48%/8.96%, and achieve net profit to mother of 104.519/121.772/167.878 billion yuan, an increase of 30.78%/16.49%/37.82%. The corresponding PE is 14.56X/12.50X/9.07X, maintaining the “buy” rating.

Risk warning

The domestic e-commerce competition pattern has deteriorated, international e-commerce development falls short of expectations, and the loss reduction of non-core businesses falls short of expectations.