4QFY3/24 preview
We expect overall revenue to grow by 5% y-o-y to Rmb219bn in 4QFY3/24, in line with market expectations.
For Taobao and Tmall Group, we expect CMR to increase by c.3% y-o-y in 4QFY3/24, higher than market expectations of flattish growth, thanks to double-digit percentage GMV growths in January and February. However, we expect direct sales to drop by a low-single-digit percentage y-o-y due to strategic adjustment of its Tmall Supermarket and Taobao Maicai platform.
We expect the international commerce segment to sustain strong y-o-y growth of c.40% in 4QFY3/24, mainly supported by increasing penetration in AliExpress’s Choice. We believe this segment’s robust growth will sustain over the next few quarters.
We also expect Alibaba’s cloud intelligence business to grow by c.3% y-o-y in 4QFY3/24, with stable demand for its core public cloud products. We expect adjusted segment EBITA margin to remain steady at 5% going forward, as the ongoing reduction of low margin CDN projects should offset the impact from recent price cuts.
We expect overall adjusted EBITA to drop by a mid-single-digit percentage y-o-y in 4QFY3/24, versus previous market expectations of c.8% growth, mainly due to a one-off staff retention bonus on Cainiao’s IPO withdrawal and increased investments in its international businesses.
Earnings revision and recommendation
We revised down our FY3/24-3/26F adjusted earnings by 1%/8%/11%, respectively, mainly to reflect increasing investments in its international businesses and Cainiao. We now forecast adjusted earnings of Rmb165bn/Rmb164bn/Rmb175bn for FY3/24F/25F/26F, representing +11%/-1%/+7% y-o-y growth, respectively.
We derived our new TPs of HK$96/US$97 (previously: HK$133/US$134) based on SOTP methodology: (1) core commerce: 10x P/E on FY3/25F core commerce earnings (HK$86); (2) cloud: 1x P/S on FY3/25F (HK$5); (3) local services: 1x P/S on FY3/25F (HK$4); and (4) digital media and entertainment: 1x P/S (HK$2). Note that we removed Cainiao from our valuation (HK$3 previously) given its IPO withdrawal. In addition, we rolled over the valuation base to FY3/25 and lowered the target multiples of core commerce, cloud, and local services from previous 12x P/E, 3x P/S, and 3x P/S, respectively, due to overall weaker sector sentiment.
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