Alibaba Group completes management transition, what is the valuation under the "1+6+N" framework?

Source: Gu Xinyu, Sun Mengqi, Zhao Li from China International Capital Corporation Limited (CICC)

On September 10th, Alibaba Group completed the handover of its management team, also continuing its strategic direction of "1+6+N" architecture adjustment.

Based on the latest business scope of Alibaba's "1+6+N" model, CICC has analyzed the industry landscape and strategies of each business line, and updated the company's valuation.

It is expected that with the stable improvement of Taotian's profits and controllable investment in the other 5+N businesses, the overall profit of the group will maintain a growth rate higher than its revenue.

Positive outlook on Alibaba's financial performance

Alibaba's profit growth rate will continue to exceed its revenue growth rate.

It is estimated that the revenue growth rates for the fiscal years 2024/25/26 will be 12%/10%/9% respectively. After adjusting for stable improvement in Taotian's profits and controllable investment in the other 5+N businesses, the estimated EBITA growth rates will be 24%/17%/14%. The group as a whole will maintain a growth rate higher than its revenue.

Based on the sum-of-the-parts (SOTP) valuation, we maintain a target price of $128 per share for Alibaba's US-listed shares and HKD 124 per share for its Hong Kong-listed shares (9988 HK), with a buy rating. This corresponds to a P/E ratio of 14/13 for the fiscal years 2023/24.

The current price of Alibaba corresponds to a P/E ratio of 8/7 for Taotian's fiscal years 2023/24, compared to an average P/E ratio of 20/16 for Chinese internet companies and 13/12 for comparable e-commerce companies. However, we predict that Taotian's revenue/profit will increase by 10%/11% in 2024, compared to 6%/1% for JD Retail and 19%/21% for Pinduoduo's main platform. Therefore, there is room for valuation improvement.

Key reasons for liking Alibaba

1. Although the competition in the e-commerce industry is fierce and Taobao's market share is declining, under the driving force of user engagement, pricing power, and content strategy, the return of users and the introduction of new advertising products (Wanxiang Taiwuji/Bailing) will benefit CMR's long-term growth rate, which will be faster than GMV.

2. Over the past year, Taobao Live has successively introduced top live-streaming e-commerce anchors. We believe that it has advantages in terms of traffic, user purchasing mindset, and product supply, making it an important platform for daily sales and stable development of anchors/institutions.

3. The international business still has a large market space for penetration. Alibaba's international business can leverage its domestic e-commerce experience and benefit from Cainiao's logistics layout, which will have the opportunity to continuously improve its market share.

4. The existence of multiple new businesses also demonstrates the company's long-term layout. For example, the integration of Fliggy into the "N" category indicates the company's long-term anticipation of the potential of the OTA industry. Fliggy's young users, resources from the Taobao ecosystem, and differentiated pricing products are all important advantages. Another example is Hema, which is a successful case of the new retail model and is expected to turn losses into profits this year.

5. The organizational structure adjustment allows each business to return to its core development, control investment, and continuously improve profit margins.