CICC: Maintains Alibaba-W outperform industry rating with a target price of HKD 172

According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that Alibaba (09988, BABA.US) is currently trading at 18/16 and 12/10 times FY27/FY28 non-GAAP price-to-earnings ratios in the Hong Kong and U.S. markets, respectively. The firm basically maintains its revenue forecasts for FY27/FY28, and considering the improvement in e-commerce and flash sales operational efficiency, it has raised its non-GAAP net profit forecasts for FY27/FY28 by 9% and 2% to RMB 99.6 billion and RMB 149.9 billion, respectively. The firm uses a sum-of-the-parts (SOTP) valuation, assigning a 7x P/E to the e-commerce business (excluding flash sales) and an 8x P/S to the cloud computing business for FY27, maintaining target prices of USD 178 and HKD 172 for the U.S. and Hong Kong stocks, respectively, with an outperform rating, indicating an upside potential of 60% and 81% compared to the current stock prices in the Hong Kong and U.S. markets.

CICC's main views are as follows:

Forecast for 1QFY27 non-GAAP net profit to exceed consensus expectations

The firm expects Alibaba's 1QFY27 revenue to grow by 9.4% year-on-year to RMB 270.8 billion, with adjusted EBITA of RMB 25.85 billion and non-GAAP net profit of RMB 25.16 billion. The profit exceeding consensus expectations is attributed to better-than-expected overall profits from e-commerce and flash sales.

Accelerated growth in cloud computing revenue exceeds expectations

The firm expects total cloud computing revenue and external revenue in 1QFY27 to grow by 45% year-on-year, with the growth rate exceeding expectations mainly driven by MaaS business, product price increases, and further improvements in penetration rates. The year-on-year growth rate of cloud revenue is expected to be sustainable; the firm anticipates that the EBITA margin for cloud computing in 1QFY27 will increase to 11.8% quarter-on-quarter, maintaining a long-term profit margin target of 20%. The company plans to adjust its accounting standards to enhance business synergy and transparency, with Tmall Genie being incorporated into cloud computing. Since most of Tmall Genie's services were previously used by Alibaba Cloud or sold externally through Alibaba Cloud, the impact on revenue recognition for Alibaba Cloud is minimal. Additionally, costs related to model training and the Qwen APP will be separately broken out from other business segments. The firm expects losses from other businesses in 1QFY27 to narrow to RMB 16.9 billion quarter-on-quarter, mainly due to a decrease in customer acquisition costs for the Qwen APP.

E-commerce profits and flash sales losses perform better than expected

The firm expects e-commerce customer management revenue to decline by 7.5% year-on-year in 1QFY27, mainly due to some merchants subsidizing to offset revenue. Excluding this impact, customer management revenue is expected to grow by 1-2% year-on-year, with the slowdown in line with the online physical retail data from the National Bureau of Statistics, and the monetization rate remaining stable. The firm anticipates that core e-commerce (excluding flash sales) EBITA will decline by 3.1% year-on-year, with the gap in growth rate compared to customer management revenue narrowing from the previous quarter, which is better than market expectations, reflecting the platform's continued optimization of subsidy allocation. The firm expects flash sales EBITA losses to be RMB 10.4 billion in 1QFY27, with a further narrowing of UE losses while maintaining market share. The firm believes the company will continue to focus on high-ticket and non-food retail sectors, continuously optimizing subsidies to enhance the efficiency of group capital utilization.

Risk Warning: Uncertainties in the macro economy and regulation, risks of intensified competition, and AI progress not meeting expectations