Date: September 27, 2024
Broker: OCBC Investment Research

Company Overview

Alibaba Group, headquartered in China, is the largest online and mobile commerce company worldwide in terms of Gross Merchandise Volume (GMV). Its key platforms include Taobao Marketplace, China’s largest online shopping destination, and Tmall, the largest third-party platform for brands and retailers. Notably, Alibaba does not engage in direct sales nor compete with merchants. Instead, it monetizes its services by collecting commissions, membership fees, and storefront fees.

Investment Thesis

Alibaba’s dominant position in China’s e-commerce ecosystem, along with its significant investments in research and development (R&D), positions it well to benefit from industry growth and economies of scale. The company’s industry-leading efforts span across e-commerce, B2B services, and cloud services. It targets various large, addressable markets, including overseas e-commerce, new retail, and online-to-offline (O2O) commerce. Alibaba also has affiliations with Ant Technology.

The report highlights a positive outlook on Alibaba’s ability to deliver growth and enhance shareholder value, although there is cautious optimism regarding its execution.

Cloud and AI Strategies

Alibaba Cloud, one of the key growth drivers for the company, presented three pivotal strategies at its annual APSARA conference:

1. Higher Cloud Adoption: Alibaba is focusing on promoting increased cloud adoption among enterprise customers.
2. Large Language Models (LLM) Development: It released the Tongyi Qianwen 2.5 upgrade, which enhances its multimodal capabilities in over 29 languages. It is one of the most powerful open-source models, outperforming competitors like META’s Llama 3.1.
3. International Expansion: Alibaba Cloud is also pushing to expand into overseas markets.

Moreover, Alibaba Cloud has reduced prices by over 80% on selected LLM models to foster enterprise adoption. Its Dingtalk AI Agent is now fully open-sourced, offering various integrations and enhanced capabilities across sectors like sales, HR, finance, and customer services. Dingtalk AI has been adopted by over 2.2 million companies, with 1.7 million active corporate users.

AI Integration and Commerce

Alibaba is integrating artificial intelligence (AI) deeply into its commerce platforms. The company’s marketing arm, Alimama, is driving AI adoption to help merchants create content more efficiently and deploy data-driven marketing strategies. This AI integration allows merchants to optimize their bidding, analytics, and asset management.

One key initiative is the Tongyi Wanxiang Studio, which supports Taobao/Tmall merchants by enabling content creation tools, such as text-to-graphics and graphics-to-video capabilities. This tool helps small and medium enterprises (SMEs) reduce costs while increasing marketing efficiency, reportedly saving over CNY1 billion for over 1 million merchants.

Financial Overview

For the fiscal year ending in March 2024, Alibaba reported revenues of CNY 941.2 billion, a gross profit of CNY 354.8 billion, and adjusted net income of CNY 158.4 billion. Revenue is projected to grow by 8.3% in FY2025 and 8.9% in FY2026, with gross margins slightly declining. Alibaba is expected to face challenges in growing its core commerce business, but AI and cloud innovations are seen as key to sustaining its long-term profitability.

ESG Initiatives

Alibaba leads its peers in managing cybersecurity risks and reducing carbon emissions across its value chain. The company has set ambitious goals, such as reducing its Scope 3 emission intensity by 50% by 2030. Alibaba’s grocery retail operations, such as Sun Art and Freshippo, are particularly carbon-intensive, but the company has conducted lifecycle assessments to address this issue. Additionally, Alibaba faces regulatory risks concerning data privacy, especially given China’s stringent regulations.

Potential Catalysts and Risks

Potential Catalysts:

• Clarity over regulatory headwinds and the narrowing of losses in non-core businesses are seen as potential catalysts for Alibaba in the coming years.
• The inclusion in the Stock Connect program is expected to attract fund inflows.

Investment Risks:

• Regulatory risks related to its operations in China and its US listing.
• A significant slowdown in its core commerce business could impact future growth.

Valuation

Alibaba’s stock is currently trading at a 9.7x forward price-to-earnings (P/E) ratio, which is -1 standard deviation to its historical average. The sum-of-the-parts (SOTP) valuation estimates a fair value of USD 123.40 per share.