Target price of HK$136! Alibaba's core business is expected to recover, cost reduction and efficiency improvement are underway.

Source: Guohai Securities, Chen Mengzhu

Alibaba is about to release its financial report for the second quarter of 2024 (the first quarter of the fiscal year 2024).

Guohai Securities predicts that Alibaba's FY2024Q1 (corresponding to the natural year 2023Q2) will achieve a total revenue of 221.6 billion yuan (YoY +8%, QoQ +6%). Adjusted EBITA is expected to increase by 13% to 39 billion yuan, with an adjusted EBITA margin of 18%.

Chinese Commerce Business

The impact of the epidemic is receding, and the continuous recovery of consumption combined with the low base of the same period last year is driving the positive growth of retail business.

It is estimated that the revenue of Chinese commerce in FY2024Q1 will increase by 4% YoY to 147.7 billion yuan, of which the revenue of Chinese retail business in FY2024Q1 will increase by 4% YoY to 142.7 billion yuan.

It is expected that the customer management revenue (including commissions) in FY2024Q1 will increase by 7.5% YoY to 77.7 billion yuan. The growth rate of CMR is consistent with GMV, and the main reason for the positive growth is the receding impact of the epidemic combined with the low base of the same period last year.

At the same time, the company continues to invest in pricing power and consumer experience. It is estimated that the adjusted EBITA of Chinese commerce in FY2024Q1 will be 45.2 billion yuan, with an adjusted EBITA margin of 31%.

International Commerce Business

The continuous recovery of overseas markets is driving the growth recovery of the international commerce segment.

It is estimated that the overall revenue of international commerce in FY2024Q1 will increase by 28% YoY to 19.8 billion yuan, of which the revenue of cross-border and global retail business will increase by 38% YoY to 14.5 billion yuan.

It is expected that the revenue of cross-border and global wholesale business in FY2024Q1 will increase by 7% YoY to 5.3 billion yuan, maintaining steady growth.

Overall, high revenue growth combined with prudent investment will further reduce the losses of the international commerce segment. It is estimated that the adjusted EBITA of international commerce in FY2024Q1 will be -900 million yuan, with an adjusted EBITA margin of -5%.

Cloud Computing Business

The business growth is under short-term pressure, and the benefits of cloud product price reductions and AI technology innovation will take some time to show.

It is estimated that the revenue of cloud computing in FY2024Q1 will increase by 3% YoY to 18.2 billion yuan, and the growth rate will still be under short-term pressure mainly due to:

1. The demand for enterprise cloud adoption is still in the recovery stage;
2. The benefits of cloud product price reductions and AI technology innovation will take some time to show.

Since May 7, 2023, Alibaba has lowered the transaction prices of some core products on its official website, which is expected to further stimulate new customer demand and drive the recovery of the cloud computing business growth rate.

In terms of profit margin, it is expected to remain stable with a slight increase. It is estimated that the adjusted EBITA of the cloud computing business in FY2024Q1 will be 400 million yuan, with an adjusted EBITA margin of 2%.

Investment Recommendation

Due to the background of economic recovery and the warming of the consumer market, **Alibaba's core business growth is expected to gradually recover, and cost reduction and efficiency improvement will drive continuous profit release. Alibaba's estimated revenue for FY2024-2026 is RMB 941.8 billion, RMB 1,037.2 billion, and RMB 1,153.8 billion, respectively. The net profit attributable to shareholders is RMB 106.2 billion, RMB 119.2 billion, and RMB 135.0 billion, respectively. The corresponding diluted EPS is RMB 5.03, RMB 5.65, and RMB 6.40, respectively, with corresponding P/E ratios of 16.8, 15.0, and 13.2.

Based on the SOTP valuation method, the target market value for Alibaba in the fiscal year 2024 is RMB 2,624.1 billion, corresponding to a target price of RMB 124 per share in RMB or HKD 136 per share in HKD. We maintain a "buy" rating.