Date of Report: 30 September 2024
Broker Name: OCBC Investment Research
Alibaba Cloud’s Key Strategies
At the annual APSARA conference, Alibaba Cloud presented three key strategies aimed at driving growth:
- Promoting Higher Cloud Adoption: Targeting enterprise customers to boost cloud adoption.
- Diversified AI Offerings: Expanding its large language models (LLM) and intelligent computing products with a major product upgrade.
- Global Expansion: Strengthening its presence in overseas markets to capture more international opportunities.
Product Upgrade and Offerings
Alibaba Cloud introduced version 2.5 of its LLM, Tongyi Qianwen, which features an expanded model size and enhanced capabilities by 18% compared to version 2.0. This upgrade includes over 100 multimodal functionalities available in more than 29 languages. The LLM is now more powerful and open-sourced to promote industry-wide development.
The Dingtalk AI Agent has also been upgraded and open-sourced, enabling API integration for all LLM providers. The AI agent offers services across multiple business functions, including sales, IT, HR, and customer services, and spans across various industries such as retail, healthcare, and manufacturing. Notably, over 2.2 million corporates have adopted Dingtalk AI, with more than 1.7 million active users as of March.
Alimama, Alibaba’s ad-tech platform, is pushing AI adoption further to help merchants create content more efficiently, using tools for intelligent bidding and enhanced analytics. The Tongyi Wanxiang Studio supports Taobao and Tmall merchants with AI-generated content tools, saving more than CNY1 billion for small- and medium-sized enterprises (SMEs) by generating over 100,000 pieces of content daily.
Positive Catalysts for 2HFY25
Despite mixed quarterly results and slower-than-expected growth in Customer Management Revenue (CMR), several positive catalysts are anticipated for the second half of FY2025:
- Inclusion in Stock Connect: Alibaba’s inclusion in the Stock Connect is expected to bring additional liquidity and investor attention.
- Revenue Growth Acceleration: Management targets a re-acceleration of CMR and Cloud revenue in upcoming quarters.
- Profitability from Non-Core Businesses: Alibaba aims for its non-core, loss-making businesses to break even within one to two years, contributing to overall group profitability.
AI and Cloud Developments
Alibaba continues to invest in its AI and Cloud business, showcasing a commitment to improving ad-tech capabilities and overall platform ecosystems. E-commerce players are benefiting from AI integration, as it enhances algorithm accuracy and improves merchants’ return on investment (ROI).
Valuation
Even after recent share price gains, Alibaba is trading at a forward Price-to-Earnings (P/E) ratio of 9.7x, which is -1 standard deviation below its historical average. Based on a sum-of-the-parts (SOTP) valuation, OCBC Investment Research has set a fair value estimate of HKD 120.00 (9988 HK) and USD 123.40 (BABA US).
ESG Updates
Alibaba has made strides in managing its cybersecurity risks and carbon footprint. As of 2023, it was reclassified under Broadline Retail due to the nature of its product sales. The company leads its peers in cybersecurity practices and has detailed plans to reduce Scope 3 emissions by 50% by 2030, compared to 2020 levels. However, regulatory risks remain a concern, particularly around data privacy, due to strict Chinese regulations. Alibaba’s anti-corruption framework includes whistleblower protection and ethics training for all employees.
Conclusion:
Alibaba Group’s focus on AI-driven innovation, comprehensive cloud offerings, and international expansion underscores its growth potential. Despite some near-term challenges, the company is well-positioned for long-term success, with several catalysts set to drive future performance.
