Daiwa: Expects BABA-W (09988) second fiscal quarter cloud revenue to grow over 50% year-on-year, reiterates "Buy" rating

Daiwa released a research report stating that it has increased confidence in the profitability outlook for BABA-W's (09988) cloud business, and currently forecasts cloud revenue for the second fiscal quarter ending at the end of September this year to grow by more than 50% year-on-year; the bank has raised Alibaba's earnings per share forecasts for fiscal years 2027 to 2029 by 2% to 3% to reflect the improved profitability outlook for the cloud business, reiterates a "Buy" rating, and maintains a target price of HK$180. The bank expects that at the EBITA level, cloud business profit could basically offset AI lab losses as early as the third fiscal quarter, becoming an important milestone for the group's AI investment and coming faster than previously expected. The bank maintains its forecast of a 12% cloud EBITA margin for the second fiscal quarter, but raises its third fiscal quarter forecast from 12.4% to about 15%, believing that the relatively high proportion of AI revenue, especially MaaS and IaaS, together with stronger pricing power and economies of scale, should drive margin expansion more quickly. Recent management expectations for capital expenditure are about RMB 200 billion to RMB 300 billion per year, with about 2 to 3 gigawatts of new capacity added annually, half self-built and half through leased and partner-operated facilities, which is expected to help reduce balance sheet pressure. Daiwa expects Alibaba's e-commerce business profitability to be resilient, with instant retail losses narrowing. Although the domestic consumer market remains weak, it believes platform profitability is stable, and that higher average order value and stronger non-food penetration can drive unit economics improvement and support a further narrowing of instant retail losses.