Quick commerce to drive loss reduction; prioritizing AI business development

Quick commerce to drive loss reduction;prioritizing AI business development Target PriceUS$206.10(Previous TPUS$203.70)Up/Downside61.4%Current PriceUS$127.68 For4QFY26 (March year-end), weanticipateAlibaba Group Holding (Alibaba)willdeliver revenue growth of 2%YoY to RMB241.2bn,3%lower thanBloombergconsensus,owing to the accounting treatment adjustment incustomer management revenue (CMR), and we are looking for adj. EBITA ofRMB4.7bn, down86% YoY due to investment in Quick Commerce (QC) and AIrelated initiatives.However, we expect Cloud Intelligence Group (CIG)toachieve40% YoY revenue growth in 4QFY26E, accelerating from 36% in3QFY26, driven by strong digitalization demand andwe expect the accelerationtrend tocontinueinto1QFY27, supported by price hikes.We are looking for aQoQ narrowing of losses for QC business to RMB18bn in 4QFY26. WhileAlibaba continues to prioritize market share, weexpecttotal lossesinQCtonarrow to RMB44bn in FY27E (FY26E: CMBI estimate of RMB88bn), andtobefurther halvedin FY28E,drivenby optimizationoforder mix and user subsidies,as well asimprovementsin operating efficiency.We believeCIG revenue growthisa key driverof Alibaba’sshare price, and the narrowing losses of QC couldsupport a recovery inoverallnet profit. We remain positive that Alibaba is oneof the key beneficiaries of the AI theme within our coverage universe. We fine-tune our SOTP-based target price to US$206.1(fromUS$203.7).Maintain BUY. China Internet Saiyi HE, CFA(852) 3916 1739hesaiyi@cmbi.com.hk Ye TAO, CFA(852) 3850 5226franktao@cmbi.com.hk Wentao LU, CFAluwentao@cmbi.com.hk Shuyin GUO(852) 3916 3716guoshuyin@cmbi.com.hk Core e-commerce business EBITA to remain flat YoYexcludingimpactfrom QC investment.Within Alibaba’s China E-commerce Group (ACEG),we are looking for 1% YoY growth for customer management revenue(CMR). Alibaba hasmade some changestoaccounting treatment for CMRfrom4QFY26,under which certain marketing investments previouslyrecognizedas selling expensesnowdirectly contra revenue. Excluding thisimpact, weexpect CMR to grow 6%YoYin 4QFY26. Also, excluding QCinvestment impacts, weanticipate core e-commerce adjusted EBITA to bestableYoYin 4QFY26. Stock Data Cloud revenue growth could further accelerate.We expect 40% YoYrevenue growth for CIG in 4QFY26, supported by increased adoption of AI-related products and strong digitalization demand. In addition, we estimateadjusted EBITA of RMB3.8bn for CIGin 4QFY26, translating into a 9.0%adjusted EBITA margin, flat QoQ. EBITAloss of All Others to double QoQ,driven by incrementalinvestment to support AI business growth.We estimate that the adjustedEBITA loss from the AllOthers segment will widen to RMB20bn in 4QFY26(3QFY26: RMB9.8bn),due toincreased investment in Qwen’s promotionalactivities, particularly during the Spring Festival period. While we do notexpect such promotional investment to be sustained, we anticipate thatAlibabawill continue its R&D-related investments to enhance modelcapabilities and support the development of other AI-native applications. Weforecast EBITA loss to reach RMB60bn in FY27E (FY26E: RMB34.6bn). Source: FactSet Revision of forecast and valuation We lower FY26-28E revenue by1%each, mainly to account for the cut in revenue forecastof CMRdue to the change in accounting treatment, and the cutin revenue forecast of AllOthers segment. We lowerFY26E non-GAAP net profit forecast by 9% to factor ingreater-than-expected impact frominvestmentin QCbusiness, as well asgreater-than-expectedinvestment to support the development of AI apps such as Qwen. Valuation: target price of US$206.1per ADS Our SOTP valuationisadjustedtoUS$206.1per ADS from US$203.7, which comprises: 1)US$78.5for ACEG, based on a 12.0x FY28E EV/adj. EBITA and discounted back toFY26 at WACC of 11.0% (was US$77.2based on 12.0x FY28E EV/adj. EBITA);thechange in target valuation per ADSwas mainly due toincreasein earnings forecastdriven bygreatervisibilityof loss reduction for QC business;2)US$12.5for AIDC(unchanged), based on 1.5x EV/revenue multipleon FY26E revenueforecast;3)US$89.9for the Cloud Intelligence Group(was US$88.5), based on an unchanged7.5xEV/revenue multiple on FY27E revenueand discounted back to FY26E at WACC of11.0%;theincreasein target valuation per ADS was mainly due tothe increase inrevenueforecast driven by stronger-than-our previously expected digitalizationdemand;4)US$14.6 for All Others(was US$14.8),based on an unchanged 1.0x FY26EEV/revenue multiple;the change in target valuation per ADS was mainly due tofinetuningin revenue forecast;5)US$10.6per ADS (was US$10.7) for strategic investments with a 30% holding discount.Our new SOTP-based target price translates into22.8x FY28EPE (non-GAAP). Risks 1)Investments for driving business growth pose a more severe impact on margin than weexpect;2)Consumption recovery takes longer than we expect. Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for the c