SWS Research has reiterated its "Buy" rating on Alibaba-W (09988), maintaining its profit forecasts. The report projects Alibaba Group's total revenue for FY2026-FY2028 at RMB1,038.6 billion, RMB1,143.4 billion, and RMB1,250.6 billion, respectively, with adjusted net profits attributable to shareholders of RMB101.9 billion, RMB145.5 billion, and RMB183.6 billion.

Under the SOTP valuation method, the group's target valuation stands at RMB3,412.4 billion, equivalent to $203 per ADS (34% upside potential) and HK$197 per share (34% upside potential). Key insights from SWS Research include:

1. **Continued Growth in AI Cloud**: Following global trends, capital expenditure (Capex) increases and accelerating cloud revenue growth are expected to persist in China. Domestic AI cloud growth drivers include partial relief in upstream chip supply constraints and rising AI adoption rates. Alibaba is uniquely positioned with its full-stack in-house R&D capabilities spanning "chips-servers-cloud OS-large models." While its revenue scale, growth rate, and margins rank among China's top-tier cloud providers, its profitability still lags behind global peers like Google Cloud. However, proprietary chips and economies of scale in its ecosystem could drive long-term margin improvements.

2. **Competition from ByteDance’s Volcano Engine**: While Volcano Engine focuses on MaaS (Model-as-a-Service) with low-cost offerings, Alibaba Cloud’s advantages in full-stack solutions and ecosystem integration remain difficult to replicate. The current MaaS market is relatively small, and Alibaba Cloud’s leadership in broader AI IaaS and the overall cloud market remains solid. Its growth strategy centers on supporting enterprises’ holistic digital transformation rather than merely providing standalone model services.

3. **AI Growth Catalyst 1: Domestic AI Chips**: Alibaba’s chip unit, T-Head, has begun external sales, with performance comparable to international standards. It has secured contracts for large-scale AI computing centers, reinforcing Alibaba Cloud’s differentiated computing services and margin expansion. The rise of domestic chip listings could further highlight the value of self-developed chips by internet cloud providers.

4. **AI Growth Catalyst 2: Capturing Consumer AI Entry Points**: Unlike OpenAI’s monetization via subscriptions and APIs, Alibaba is leveraging its expertise in traffic operations to dominate the shift from graphical (GUI) to natural language interfaces (LUI). Upgrades like the "Qianwen" super assistant—integrating Taobao, Amap, and Alipay—and the launch of the "Quark AI Glasses" aim to make "conversation" the gateway to all services. Success in building an ecosystem linking consumer AI, developers, and users could translate Alibaba’s e-commerce and local services strengths into AI-era user retention and data assets.

**Risks**: Macroeconomic impacts on cloud demand, slower-than-expected AI industry progress in China, and intensifying competition among domestic cloud providers.