Daiwa has released a research report expressing increased confidence in the profitability outlook of Alibaba-W (09988)'s cloud business, now forecasting that cloud revenue for the second fiscal quarter ending September this year will grow by more than 50% year-on-year.
The firm has raised its earnings per share forecasts for Alibaba-W across fiscal years 2027 to 2029 by 2% to 3% to reflect the improved profitability prospects of the cloud business, while reiterating its "Buy" rating and maintaining a target price of HK$180.
Daiwa expects that at the EBITA level, cloud business profits could essentially offset AI laboratory losses as early as the third fiscal quarter, marking an important milestone for the group's AI investments and coming sooner than previously anticipated.
The firm maintains its forecast of a 12% cloud EBITA margin for the second fiscal quarter, but has raised its third fiscal quarter forecast from 12.4% to approximately 15%, believing that a higher proportion of AI revenue, particularly from MaaS and IaaS, combined with stronger pricing power and economies of scale, should drive margin expansion more rapidly.
Recent management guidance on capital expenditure is approximately RMB 200 billion to RMB 300 billion per year, with annual new capacity of about 2 to 3 gigawatts, half self-built and half through leased and partner-operated facilities, which is expected to help reduce balance sheet pressure.
Daiwa expects that Alibaba-W's e-commerce business profitability will remain resilient, with losses in instant retail narrowing. Although the domestic consumer market remains weak, the firm believes platform profitability will remain stable, and together with higher average order values and strengthened non-food penetration, this should drive unit economics improvement and support further narrowing of instant retail losses.
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