Investment Rating - The report maintains an investment rating of "Buy" for the company [1][5]. Core Views - The company's Q2 performance shows a quarter-on-quarter improvement, with core games stabilizing after entering a mature phase, leading to a year-on-year revenue decline [1][2]. - The company is optimistic about the future potential of its new SLG games and its long-term operational capabilities, as well as the progress in AI and cloud business product implementations [1][2]. Financial Performance - In H1 2025, the company achieved revenue of 2.685 billion RMB, a year-on-year decrease of 12.05%, and a net profit attributable to shareholders of 509 million RMB, down 19.26% year-on-year [1]. - Q2 revenue was 1.361 billion RMB, down 12.99% year-on-year but up 2.85% quarter-on-quarter, with a net profit of 271 million RMB, reflecting a year-on-year decline of 19.40% but a quarter-on-quarter increase of 13.45% [1][4]. Game Portfolio - The company's core games, "Age of Origins" and "War and Order," have been operational for over six years, each generating over 1 billion USD in cumulative revenue [2]. - New games "Stellar Sanctuary" and "Next Agers" are expected to drive revenue growth, with the former being a sci-fi simulation and SLG game, and the latter combining various gameplay elements [2]. AI and Cloud Business - The company has launched the AI application avavox, which can generate voice responses in 30 seconds and is designed for various business scenarios [3]. - The cloud business is expanding with new enterprise-level products and solutions, aiming to enhance the company's integrated "cloud + AI" capabilities [3]. Profitability and Cost Management - The gross margin for H1 2025 was 59.83%, a decrease of 2.48 percentage points, primarily due to a higher proportion of lower-margin AI/ICT operations [4]. - The sales expense ratio improved to 14.56%, down 3.46 percentage points, attributed to reduced advertising and promotion costs [4]. Earnings Forecast and Valuation - The company forecasts net profits of 1.15 billion RMB, 1.71 billion RMB, and 2.02 billion RMB for 2025, 2026, and 2027, respectively, with corresponding EPS of 0.59 RMB, 0.87 RMB, and 1.03 RMB [5]. - The target price has been adjusted to 20.01 RMB, reflecting a 23x PE valuation for 2026, up from a previous target of 19.13 RMB [5].

Core Insights - Alibaba Cloud is entering a significant milestone in its international business as it approaches its ten-year anniversary in global operations, emphasizing a strategic commitment to global expansion [3][4][10] - The company has established a robust presence with 89 availability zones across 29 regions, serving approximately 5 million customers globally, and has seen over 20-fold growth in its overseas market in the past five years [4][10] - The focus on AI integration with cloud services is expected to drive future growth, with a prediction of a new wave of rapid development in the cloud and AI sectors over the next 3-5 years [18][24] Group 1: International Expansion - Alibaba Cloud has made significant investments in new data centers in Mexico, Thailand, South Korea, and Malaysia, enhancing its global cloud network [10][11] - The company aims to build a comprehensive cloud computing network covering China, Japan, South Korea, Southeast Asia, the Middle East, Europe, and the Americas [10][11] - The international business strategy is characterized by a long-term commitment to local market engagement and infrastructure development [4][24] Group 2: Client Engagement and Trust Building - The company has successfully partnered with high-profile clients such as the International Olympic Committee, BMW, SAP, and LVMH, demonstrating its capability to meet stringent requirements from top-tier companies [13][15] - Trust is built through a gradual process of collaboration, often taking 2-3 years for large enterprises to establish confidence in Alibaba Cloud's services [13][15] - The focus on long-term relationships is likened to maintaining a marriage, emphasizing the importance of sustained engagement and service quality [14] Group 3: AI Integration and Future Outlook - Alibaba Cloud's strategy includes a strong emphasis on integrating AI with cloud services, with 78% of global enterprises expected to adopt AI technologies [18][24] - The company has launched an open-source strategy for its AI models, with over 200 models available and more than 14,000 derivative models, positioning itself as a leader in the open-source AI space [19][20] - Future investments will focus on enhancing AI capabilities, expanding local service systems, and ensuring compliance with over 150 certifications already achieved [25][26]