Broker: China Galaxy International Securities
Date of Report: September 25, 2025

Alibaba Group Accelerates AI Capex and Cloud Expansion: Strategic Growth, Competitive Positioning, and Financial Outlook for 2025-2028

Introduction: Alibaba Signals Aggressive AI and Cloud Growth

Alibaba Group has set the stage for a transformative decade, spotlighting a dramatic ramp-up in AI-driven capital expenditure and global cloud infrastructure at its 2025 Apsara (Yunqi) Conference. China Galaxy International Securities reiterates its positive stance on Alibaba, raising its target price and earnings outlook on the back of robust AI, cloud, and e-commerce potential.

Alibaba’s Vision: Unprecedented AI Capex and Cloud Ambitions

CEO Eddie Wu unveiled an ambitious three-year capital expenditure plan, committing RMB 380 billion for fiscal years 2026 to 2028, with expectations for further expansion. The company anticipates that the energy consumption of Alibaba Cloud’s global data centers will grow tenfold by 2032 compared to 2022, implying a 26% CAGR over the period. This massive infrastructure build-out is designed to position Alibaba Cloud as a full-stack AI service provider, delivering cutting-edge AI capabilities and developer-friendly services worldwide.
Key AI and cloud drivers include:

• Alibaba’s proprietary large language model (LLM), Tongyi Qianwen, now open-sourced with over 300 vertical models, 600 million downloads, and 170,000+ derivative models.
• A global AI cloud network, supporting a rapidly expanding developer ecosystem.

Alibaba projects its cloud revenue to rise 29% year-over-year in FY2026, reflecting its dominant position in China and growing international reach.

Expanding Large Model Portfolio and Strategic Partnerships

At the Yunqi Conference, management positioned large language models as the next-generation operating system, emphasizing the need for a complete AI ecosystem, from chips and cloud to LLMs and vertical AI applications. Alibaba’s strategic edge in China spans all four pillars.
Recent launches include:

• Seven major large model products, such as the flagship Qwen3-Max and foundational Qwen3-Next.
• An official collaboration with NVIDIA on “Physical AI,” encompassing synthetic data, model training, environmental simulations, and reinforcement learning for applications like automated driving and robotics.

Rising Competition in In-Store and Instant Delivery Businesses

Alibaba has expanded its group-buying in-store business, now covering first- and second-tier cities across Taobao Flash, Alipay, and Amap. Key features:

• No annual entry fee for catering merchants on Amap, plus RMB 1 billion in traffic subsidies, dedicated customer support, and smart cash registers.
• Integration with Ele.me’s logistics and sales infrastructure.

Despite these efforts, Alibaba’s current subsidy levels may not suffice to unseat Meituan Dianping’s leading in-store position. The upcoming Double 11 Shopping Festival is expected to intensify competition, especially in the high-growth instant delivery segment.

Target Price Raised: Financial Forecasts and Valuation Upgrades

China Galaxy International Securities raises Alibaba’s DCF-based target price to HK\$207 (from HK\$152), reflecting:

• Upward revisions to FY2026-2028 non-GAAP EPS by 1.4-3.6% on stronger cloud growth expectations.
• DCF valuation assumptions: WACC at 10.4%, terminal growth at 3%.

Re-rating catalysts include outperformance in e-commerce and cloud revenues, while downside risks stem from competitive dilution, margin pressure from subsidies, and capex impacts.

Alibaba’s Cloud Dominance: Market Share and Segment Valuation

Alibaba Cloud commands a 35.8% share of the Chinese cloud market as of 1H25, far ahead of major rivals like Volcano Engine (14.8%), Huawei Cloud (13.1%), Tencent Cloud (7.0%), and Baidu Cloud (6.1%). Other players, including China Telecom and SenseTime, make up smaller portions.
Segment valuation highlights:

• China commerce: FY2026F Adj. EBITA of RMB 165,603m at 11x multiple.
• International commerce: FY2026F revenue of RMB 154,249m at 3x multiple.
• Cloud: FY2026F revenue of RMB 152,331m at 5x multiple.
• All other segments: FY2026F revenue of RMB 230,572m at 1.5x multiple.
• Ant Group valuation at RMB 500,000m; Alibaba’s 33% stake valued at RMB 165,000m.

The sum-of-the-parts (SoTP) valuation corroborates the DCF-based HK\$207 per share target.

Operational and Financial Performance: Profitability and Cash Flows

Alibaba’s profitability and cash flows remain robust, with operating EBITDA margins expected to rebound after a temporary dip in FY2026. Free cash flow generation is set to strengthen, supporting continued investments and shareholder returns.

Key ratios and cash positions:

• Net cash per share rebounds from RMB 11.95 (Mar-25A) to RMB 33.49 (Mar-28F).
• ROE stabilizes above 12% by Mar-28F, while operating EBITDA margin improves to 18.7%.
• Dividend payout ratio remains steady near 19-20%.

Shareholder Structure and Market Data

• Major shareholders: SoftBank (24.9%), Jack Yun MA (4.8%).
• Free float: 61.3%.
• Market cap: US\$421.7 billion (HK\$3.28 trillion).
• Current price (as of report): HK\$172.0; Target price: HK\$207.0 (20.3% upside).
• ADR: BABA US at US\$176.4; Target US\$212.3.

Risks and Catalysts: What Could Move Alibaba’s Share Price?

Potential upside drivers:

• Stronger-than-expected e-commerce and cloud revenue growth in FY2026.
• Effective cross-selling between instant delivery and core commerce businesses.
• Scaling of AI and cloud offerings domestically and globally.

Risks to monitor:

• Competitive pressure diluting traffic and revenue.
• Elevated subsidies in instant delivery, compressing margins.
• Rising capital expenditure potentially weighing on profitability.

Conclusion: Alibaba at the Forefront of China’s AI and Cloud Revolution

Alibaba’s sharpened focus on AI infrastructure, cloud dominance, and ecosystem expansion sets it apart as a technology bellwether in China and beyond. The group’s aggressive capital investment, strategic partnerships, and innovative product launches underpin a robust growth trajectory into the next decade. Despite challenges in instant delivery and competitive pressure from Meituan, Alibaba’s financial resilience and market leadership support a compelling investment case, with significant upside potential as recognized by China Galaxy International Securities.
For investors seeking exposure to China’s digital transformation and AI cloud revolution, Alibaba remains a top pick with both near-term and long-term appeal.