As Alibaba & Hang Seng Technology broke previous highs, here are some insights from Dolphin Research.

During the Spring Festival of the Year of the Snake, while everyone is celebrating the New Year, the Chinese stock market, especially the Hong Kong stock market, and overseas markets, is quite vibrant. Taking the Hang Seng Technology Index as an example, from the low point on January 13 to today, it has accumulated a rise of over 25% in just one month, outperforming global capital markets and far better than the generally fluctuating U.S. stock indices during the same period, reminiscent of the significant surge around October last year.

In this wave of surge, Alibaba is undoubtedly one of the leading stocks. From January 13 to today, it has accumulated a rise of about 50%. As a trillion-dollar giant, a half-fold increase in just one month is astonishing and has brought substantial returns to investors.

Today, both Alibaba and the Hang Seng Technology Index briefly broke through last October's highs (though they have retreated somewhat since), and Dolphin Research would like to share some of our insights:

1) Firstly, the catalyst and main theme of this round of increase are different from last October. The previous surge was due to a policy shift leading to a comprehensive reassessment of Chinese assets. This time can be summarized as follows: DeepSeek has replicated the "singularity moment" of ChatGPT in the U.S. stock market, which has initiated a continuous AI wave. Therefore, the leading stocks in this round are mainly related to AI, including upstream semiconductor chips, cloud computing power providers, and software or hardware applicable to AI (such as smartphones, AR glasses, autonomous driving, etc.).

2) Since the main theme is closely related to AI, borrowing from the experience of the U.S. stock market, the earliest and most benefited from AI investments are the upstream chip hardware (NVIDIA corresponds to China's SMIC). Following closely are cloud computing providers represented by Microsoft (from the low point at the end of 2022 to the mid-2024 high point, trillion-dollar supergiants have seen their stock prices double). With the "replay" of the AI investment theme in China, the demand for cloud computing services from upstream is relatively certain, benefiting from the substantial usage requirements brought by downstream enterprises for both training and inference. Especially after DeepSeek has demonstrated the possibility of low-cost & high-performance AI large models, it suggests that the costs for cloud providers to offer AI services may be lower than previously expected, and downstream demand may be higher than anticipated. This means higher profits + higher revenue potential, which can be said to enhance the market's long-term outlook for cloud providers in the AI era.

Under this logic, domestic cloud computing or AI model providers like Alibaba and Baidu are the most direct beneficiaries. The news that Apple will collaborate with Alibaba to provide AI services for domestic iPhone users (which has been confirmed by Joseph Tsai today) has further highlighted Alibaba. Although the details of the collaboration are currently unknown and it is difficult to quantify the benefits, emotionally, the previously somewhat obscure Alibaba large model has been brought to the center of market attention under Apple's endorsement, amidst "has-been internet celebrities" like Wenxin Yiyan, Kimi, and Doubao. In short, the market's reassessment of Alibaba Cloud should be the main contributor to Alibaba's significant surge this time.

3) Additionally, Alibaba's valuation is still largely dependent on its Taobao and Tmall businesses, and the core e-commerce business must not become a drag on valuation. According to the company's guidance for 3QF25, the Taobao and Tmall Group expects CMR to grow by 5% year-on-year, while adjusted EBITA is expected to decline by about 3% year-on-year. Compared to the less than 3% year-on-year growth in CMR and over 5% year-on-year decline in profits in 2QF25, there has been a quarter-on-quarter improvement. Measures like full-site push seem to be starting to show effects in enhancing Taobao and Tmall's TR. Although we currently maintain a cautious outlook on the mid-term trends of domestic e-commerce, the improving state of the core e-commerce business at least won't worry investors about being undermined by a weak-performing e-commerce business while betting on AI and Alibaba Cloud, which is also the foundation for Alibaba's noticeable rise this time.

4) After a rise of about 50%, how do we view Alibaba's current price? Firstly, we want to point out that the aforementioned visions around AI and the reassessment of Alibaba Cloud's performance & valuation are still in the logical and emotional phase, and the actual impact on performance will take time to materialize. In other words, the recent surge is partly driven by valuation expansion, especially the valuation of Alibaba Cloud.

We consider two scenarios. Firstly, in a neutral optimistic scenario, we generally keep the valuation of the core Taobao and Tmall business unchanged (corresponding to the unclear prospects of domestic e-commerce), still applying a 10x PE to the adjusted earnings for 2025, corresponding to a valuation of about 1.5+ trillion. For Alibaba Cloud's valuation, we refer to the current implied expectations, applying a 5x P/S for 2025 revenue (slightly lower than the average of about 7x P/S for U.S. SaaS), corresponding to about 570 billion. The total valuation is about 2.1 trillion, roughly corresponding to the current market value.

In an extremely optimistic scenario, if we restore the valuation of the core Taobao and Tmall business to 12x PE, Alibaba Cloud's valuation would be raised to above the average of U.S. SaaS at 10x P/S. Then, just the Alibaba Cloud business would correspond to about 1.15 trillion in market value, with the group totaling nearly 3 trillion in market value. It should be noted that this is a simple extrapolation of the valuation range under pure valuation expansion. As seen in the U.S. stock market, after the first wave of emotional surges, it is still necessary to observe the actual performance delivery of each quarter. If the narrative can be transformed into tangible incremental performance, then after raising performance expectations, the final valuation may exceed our above optimistic estimates. If it is just storytelling without performance delivery, then naturally it will "come from nowhere, go back to nowhere."

Of course, Dolphin Research holds an optimistic view on the overall prospects of AI.

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