The domestic e-commerce market share is stabilizing, and the monetization rate is expected to rise steadily. Previously, fierce competition in the e-commerce industry led to a decline in Alibaba's e-commerce market share and monetization rate, causing the company's domestic e-commerce business valuation to be suppressed. We believe that the company's monetization rate is expected to gradually reverse the downward trend starting from FY25Q2, mainly due to (1) Alibaba's full-site promotion products were launched in August. We believe that this move will help expand the size of advertisers and increase the share of paid traffic, which is expected to drive overall GMV growth and increase the monetization rate; (2) Starting September 1, Taotian Group will begin charging 0.6% of software service fees for each completed order. At the same time, it has previously abolished Tmall's annual software service fee of 0.03-0.06 million, which is expected to contribute an increase of nearly 100 million yuan CMR revenue. Therefore, we suggest focusing on Taotian Group's overall promotion of products and the driving effect on the take-rate. This move is expected to support Taobao's commercialization to improve cash and increase platform profits, provide ammunition for its C-side subsidy investment, reduce market concerns about the company's profit level, and help stabilize the platform's competitive landscape and promote valuation repair.

The cloud business and international e-commerce business provide new momentum for growth, and non-core businesses are expected to reduce losses at an accelerated pace. After Cloud Intelligence Group adopted a strategy focusing on public clouds and eliminating the impact of the private cloud and hybrid cloud base, we believe that the year-on-year revenue growth rate of this business is expected to gradually return to low double digits, and profit margins are also expected to gradually increase. The international e-commerce business is expected to benefit from AliExpress's Choice UE model optimization and Lazada's profit release to gradually reduce losses, and revenue will maintain a high growth rate. Furthermore, the company's management said that after evaluation, most non-core loss-making businesses will continue to achieve break-even within 1-2 years and gradually begin to contribute to large-scale profitability. Currently, the market generally gives Alibaba a zero valuation for its loss-making business. We believe that if the above businesses reduce losses and achieve profits one after another, it will increase the company's valuation and push the group's overall valuation center upward.

Shareholder returns are high, and entering Hong Kong Stock Connect has led to a marginal improvement in capital. Since FY2024, Alibaba's shareholder returns have increased significantly. We expect Ali's net shareholder return after deducting equity incentives to exceed 8% in 2024, ranking first among Hong Kong stocks, and is also expected to maintain a high shareholder return for the next 2-3 years.

Furthermore, Alibaba has successfully entered the Hong Kong Stock Connect list in September. According to the weighted average calculation of the market capitalization of similar Internet companies, we expect Alibaba to welcome more than 100 billion Hong Kong dollars in southbound capital, which will drive a significant improvement in the company's financial aspects and market sentiment.

Investment advice: The inflection point of the company's core domestic e-commerce business is approaching, and the gap between CMR revenue and GMV growth is expected to gradually narrow. Driven by improved operating efficiency, many businesses will achieve break-even and gradually contribute to profits. We expect FY2025-2027 to achieve revenue of 1.03/1.14/1.25 trillion yuan;

Adjusted net profit of 160.465/180.523/199.839 billion yuan; corresponding PE was 9.8/8.7/7.9 times, respectively, maintaining a “buy” rating.

Risk warning: macroeconomic uncertainty, increased competition in the e-commerce industry, the increase in monetization rates falling short of expectations, industry regulatory policy risks.