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Summary of CMB International Securities | Equity Research | Company Update: Alibaba (BABA US)

Core Content

This report provides an equity research update on Alibaba (BABA US) by CMB International Securities (CMBIS). It outlines the company's financial performance, earnings forecast, valuation, and strategic outlook for the upcoming quarters and years, while also addressing market sentiment and regulatory impacts.

Main Views and Key Information

Earnings Forecast (FY22E - FY24E)

• Revenue Growth:

  • 2QFY22E: Expected to grow by +33% YoY.
  • Core commerce: +35% YoY.
  • Cloud computing: +29% YoY.
  • DME (Digital Media and Entertainment): +9% YoY.
  • Adj. net profit: Expected to decline -27% YoY.
  • Adj. EPS: RMB 60.1 (FY22E), RMB 70.7 (FY23E), RMB 86.2 (FY24E).
  • CMBIS has trimmed their FY22-24E earnings forecast by 1% - 2%.

• Valuation:

  • Target price: US$255.4 (down from US$284.7).
  • Current price: US$144.6.
  • 12-month upside: +77.0%.
  • P/E ratio: 15.5x (FY22E), 13.2x (FY23E), 10.8x (FY24E).
  • P/B ratio: 2.1x (FY22E), 1.8x (FY23E), 1.6x (FY24E).
  • Net gearing: Net cash for all periods.

2QFY22E Outlook

• CMR (Core Margin Ratio): Expected to decelerate to +7% YoY, due to soft consumption amid COVID cases, macro moderation, and tightening regulations.
• Taobao Deals and Taocaicai Users: Performing well, but investment in these areas is dampening core margins.
• Adj. EBITA Margin: Forecast at 14% (-6ppts QoQ), mainly due to wider losses in Taobao deals and Taocaicai.
• Core Commerce Adj. EBITA Margin: Expected at 19%, with investment in other China retail sectors.

Walled Garden Impact

• Short-term: Alibaba (especially Taobao Deals) is expected to benefit from incremental traffic and improved user experience due to the dismantling of walled gardens.
• Long-term: Trade-off between incremental traffic and merchants' ads into private domains.
• Integration Challenges: Taobao and WeChat are not fully integrated, making it difficult to convert WeChat users into Taobao buyers.

Stock Performance and Ratios

• Market Cap: US$401,149 million.

• Avg 3-Month Turnover: US$4,369.72 million.

• 52-Week High/Low: US$319.3 / US$144.4.

• Total Issued Shares: 2,718 million.

• Shareholding Structure:

  • T Rowe Price Group: 1.3%.
  • Goldman Sachs: 1.1%.
  • Baillie Gifford: 1.0%.

• Share Performance (vs. Consensus):

  • 1-month: -7.5% (Absolute) / -3.5% (Relative).
  • 3-months: -35.7% (Absolute) / -35.6% (Relative).
  • 6-months: -36.3% (Absolute) / -42.7% (Relative).

• Key Ratios:

  • Core Commerce accounts for 86.8% of revenue (FY22E).
  • Cloud computing is 8.7% (FY22E).
  • DME: 3.8% (FY22E).
  • Adj. Net Margin: 18.6% (FY22E), 18.4% (FY23E), 18.9% (FY24E).
  • ROE: 15.4% (FY24E).
  • Current Ratio: 1.6x (FY22E).
  • Debtors Turnover: 53.8x (FY22E).
  • Creditors Turnover: 181.7x (FY22E).

SOTP Valuation

• Equity Value (US$): 702 billion.
• Total Share Price (US$): 255.4.
• Valuation Methodology:
  • Core Commerce: EV/EBITA (15.0x FY22E).
  • Cloud: P/S (8.0x FY22E).
  • Digital Entertainment: P/S (3.5x FY22E).
  • Innovation Initiatives: P/S (3.0x FY22E).
  • Strategic Investments: SOTP for all investments.

CMBIS Ratings and Recommendations

• BUY: Indicates a stock with potential return of over 15% over the next 12 months.
• HOLD: Indicates a stock with potential return of +15% to -10% over the next 12 months.
• SELL: Indicates a stock with potential loss of over 10% over the next 12 months.
• NOT RATED: Indicates the stock is not rated.
• OUTPERFORM, MARKET-PERFORM, UNDERPERFORM: Reflect industry expectations relative to the market benchmark.

Conclusion

CMBIS maintains a BUY rating on Alibaba (BABA US), despite soft CMR growth and moderate revenue growth in 2QFY22E. The company is expected to benefit from incremental traffic due to the dismantling of walled gardens, although investment in Taobao Deals and Taocaicai may pressure margins. The target price has been reduced to US$255.4, reflecting conservative expectations for growth and profitability. CMBIS views Alibaba's valuation as relatively defensive, with lower P/E and P/B ratios compared to consensus.

The financial performance of Alibaba shows sustained growth in revenue and core commerce, but adj. net profit is expected to decline in FY22E due to increased investment and soft macro conditions. Strategic investments and innovation initiatives are growing, but profitability is under pressure.

CMBIS also provides important disclosures, including potential conflicts of interest due to investment banking relationships, and warnings about the risks associated with investing in securities. The report is intended solely for institutional investors in the United States, and not suitable for general distribution.

This summary reflects the key points from the research report, including earnings forecast, valuation, strategic outlook, and market sentiment.