It covered Alibaba's Hong Kong stocks for the first time, giving it a “buy” rating. The company's generous shareholder return measures have made it a “bond” type of stable asset, and the potential stabilization of the competitive pattern of domestic e-commerce business and loss reduction in non-core businesses may support it to achieve a steady compound profit growth rate in the medium term and provide cash flow for continued shareholder returns.

The restoration of domestic demand and the potential stabilization of the competitive landscape are the core drivers

Looking ahead to 2025, we believe that domestic demand recovery and sector competition will be the core factors that determine the valuation of e-commerce platforms, including Alibaba. 1) Stimulated by a complex external environment and active fiscal policies, e-commerce platforms may show endogenous growth momentum along with macro-domestic demand recovery, which is expected to deliver better profit releases than expected by the market; 2) The e-commerce sub-sector is currently the only sub-sector in the major Internet sub-sectors that has not yet formed a stable competitive pattern. Considering that Internet user traffic competition lacks the influence of new variables and is becoming increasingly stable, we believe that if the upstream supply-side inventory level is optimized and the mismatch between supply and demand is further narrowed, it may stabilize the competitive pattern among midstream e-commerce platforms and drive up the e-commerce sector's valuation center (see Meituan's long-term PE ratio was fixed from the bottom 11.7x (February 1) to 24.4x (October 4)).

Strong shareholder returns provide some support for valuation

With a strong repurchase policy and dividend policy, Alibaba has become the leading company on the Internet with the strongest returns to shareholders. At the same time, in horizontal comparisons, it is not inferior to those with high dividend targets in Hong Kong stocks. In the past 5 years, the bottom of Ali's rolling PE over the next 12 months was 7 times. At that time, the competitive landscape in the industry showed no signs of stabilizing, and Ali itself was undergoing changes in management and organizational structure. With the current strong shareholder return support, we believe that the company's current valuation level has good defensive attributes (the company's PE corresponding FY25 Huatai forecasts non-GAAP profit of about 10.0x as of November 13).

How we differ from the market view

Some investors believe that the stabilizing e-commerce competition pattern lacks supporting factors. However, we believe that the fundamental reason that the pattern may stabilize is that the Internet user traffic pattern in China is becoming more and more stable, so the differences in marketing efficiency between e-commerce platforms are narrowing, and the added value provided to merchants is gradually converging. On this basis, along with changes in upstream inventory levels, if the mismatch between supply and demand narrows, we believe that the shift in merchant business focus will further drive the user mentality boundaries of various e-commerce platforms to become more clear and the competitive pattern stabilizes.

Profit forecasting and valuation

Our target price based on SOTP estimates is HK$133.9, corresponding to FY25/26/27 non-GAAPPE 14.8/12.6/11.3x. We expect Alibaba's FY25-27 non-GAAP net profit to be 157.8/187.1/209.7 billion yuan, yoy-0.4/+18.6/ +12.1%, respectively. The company is expected to achieve steady profit growth in FY26. The main driving force is that domestic e-commerce monetization rates are expected to rise steadily, and losses are reduced in international e-commerce and non-core businesses.

Risk warning: advertising commercialization falls short of expectations; GMV growth slows; competition intensifies.