ZHESHANG SECURITIES·2026-01-05 09:37Investment Rating - The investment rating for Alibaba is "Buy" [5] Core Insights - Alibaba's cloud business is expected to see a significant improvement in profitability as it scales, with a long-term certainty of margin enhancement [2][39] - The company is currently in a high capital expenditure phase, with Q3 2025 capital expenditures reaching 31.428 billion RMB, a year-on-year increase of 85.12% [2][32] - Despite two consecutive quarters of declining free cash flow, Alibaba maintains a strong cash position with 292.3 billion RMB in net cash and liquid investments [2][34] Summary by Relevant Sections Cloud Business and AI Development - Alibaba's cloud business, while currently lagging behind competitors like AWS and Microsoft in EBITA margin, has the potential for significant margin improvement as it grows [2][37] - The launch of the "Qianwen" AI application has seen rapid user growth, with over 30 million monthly active users within 23 days of its public testing [15][16] - The integration of AI capabilities into Alibaba's ecosystem is expected to enhance user experience and operational efficiency across various platforms [21][23] Financial Forecast and Valuation - Revenue projections for FY2026-2028 are estimated at 1,068.23 billion, 1,177.88 billion, and 1,298.12 billion RMB, with year-on-year growth rates of 7.2%, 10.3%, and 10.2% respectively [3][40] - Adjusted net profit for the same period is forecasted to be 119.85 billion, 160.11 billion, and 213.63 billion RMB, with growth rates of -24.1%, 33.6%, and 33.4% [3][40] - The target price is set at HKD 189.09 per share, based on a 12x PE ratio for FY2027 adjusted net profit and a 7x PS ratio for FY2027 cloud revenue [3][40] Capital Expenditure and Cash Flow - The company is committed to high capital expenditures to ensure competitive supply, with plans to invest 380 billion RMB in cloud and AI infrastructure over the next three years [32] - The recent decline in free cash flow, reported at -21.84 billion RMB for Q3 2025, has raised market concerns, but the company’s cash reserves provide a buffer for new business investments [34][34] Competitive Landscape - The competition in the AI and cloud sectors is intensifying, with Alibaba's Qianwen positioned as a strong contender against other AI applications like Doubao [16][18] - The strategic integration of AI into Alibaba's e-commerce and travel services is expected to redefine user interactions and operational efficiencies [21][26]