CICC: Maintains Alibaba-W outperforming 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-W (09988, BABA.US) is currently trading at 20/20 times FY27 and 13/13 times FY28 non-GAAP price-to-earnings ratios in the Hong Kong and US stock markets. The firm raised its FY27 and FY28 revenue forecasts by 1% and 3% to CNY 1,150.1 billion and CNY 1,334.8 billion, driven by accelerated cloud revenue growth; it also raised its FY27 and FY28 non-GAAP net profit attributable to shareholders by 2% and 5% to CNY 101.4 billion and CNY 157.9 billion, mainly due to improved cloud profits and a clearer path to reducing losses in flash sales. The firm employs a sum-of-the-parts (SOTP) valuation, assigning a 7x P/E to the e-commerce business and an 8x P/S to the cloud computing business for FY27, maintaining target prices of HKD 172 and USD 178 for the Hong Kong and US stocks, respectively, with an outperform rating, indicating an upside potential of 36% and 38% from current prices.

CICC's main points are as follows:

1QFY27 revenue in line, adjusted EBITA above expectations

The company announced its 1QFY27 results: revenue increased by 8.6% year-on-year to CNY 269 billion, with CMR broadly in line with the firm's expectations; adjusted EBITA decreased by only 29.6% to CNY 27.3 billion, due to improved cloud profit margins; capital expenditures surged to CNY 67.7 billion. This quarter's adjustments include merging various e-commerce segments into Alibaba's e-commerce group, integrating Pingtouge into the cloud, and separately listing Qianwen training and the App as AI labs and applications. Free cash flow was -CNY 44.7 billion.

High-margin AI products drive cloud revenue and profit margins

External cloud revenue grew by 45% year-on-year, with AI products accounting for 35% of external revenue and having higher gross margins than the cloud average, driving cloud profit margins up by 4.4 percentage points year-on-year to 11.6%. The firm expects external revenue growth in the September quarter to reach 51%, with continued acceleration in the following two quarters, making the path to achieving the USD 100 billion external cloud revenue target clearer. MaaS ARR doubled from May to CNY 16 billion in August. Driven by economies of scale, AI pricing power, increased AI revenue share, and Pingtouge chips, the firm expects cloud EBITA profit margins to continue rising to 12% in the September quarter. To enhance overall efficiency, spending on model training and Qianwen APP marketing will also be more prudent.

Clear ROIC guidance

The company believes that under a heavy asset model, capital expenditures must be front-loaded. The surge in capital expenditures this quarter is due to delivery rhythms and price increases leading to temporarily high levels. In terms of returns, the company pointed out that servers will break even within three years, with book depreciation over five years and actual usable life being longer, providing at least two years of positive cash flow after breakeven, with ROIC potentially reaching the mid-to-high double digits. The firm believes that the expansion of negative cash flow is a strategic choice for the company to enhance its long-term AI infrastructure advantages.

E-commerce profits stable, instant retail reduces losses

This quarter, CMR under the old caliber increased by 1% year-on-year, with a slowdown consistent with the overall market; the firm expects CMR to marginally improve in 2QFY27. In terms of flash sales, while market share remained stable, improvements in average order value and fulfillment efficiency led to better user experience; the firm expects flash sales losses for the year to narrow by 60% year-on-year Risk Warning: Uncertainty in the macro economy and regulation, risk of intensified competition, and AI progress not meeting expectations