Daiwa: The dilution effect of BABA-W (09988) in its equity financing is limited, and the valuation remains attractive.

Daiwa released a research report stating that BABA-W (09988) announced plans to place 710 million new shares, raising HK$80 billion, with a placement price of HK$112.7 per share, equivalent to US$115 per ADR. This represents discounts of 8.4% and 3.6% compared to the latest closing prices of HK$123 for H shares and US$119.34 for ADRs, respectively. The net proceeds will be used entirely to develop full-stack AI capabilities and expand AI infrastructure. The bank indicated that the funds raised would amount to approximately RMB 73 billion, accounting for about 19% of the group's three-year budget of RMB 380 billion for AI infrastructure, as well as around 38% of the remaining commitment of RMB 190 billion. This also represents less than 38% of the bank's capital expenditure budget of RMB 194 billion for the fiscal year 2027. It is believed that the share placement will significantly alleviate funding pressure, and equity financing will avoid increasing debt and interest expenses, preserving balance sheet flexibility. Previously, Daiwa forecasted the group's free cash flow for the fiscal year 2027 to be negative RMB 17 billion. This marks Alibaba's first significant placement action since its listing in Hong Kong in 2019. Daiwa estimates that, based on approximately 19.2 billion existing ordinary shares, the placement will increase the number of shares by about 3.7%, meaning that the effects of earnings per share and ownership dilution will be similar. The 3.6% discount on ADRs may cause the short-term stock price to stabilize near the placement price, creating temporary technical pressure, although the current discount is relatively moderate. Based on Alibaba's current price and an estimated price-to-earnings ratio of about 17 times for the core forecast in the fiscal year 2027, considering the group's full-stack AI capabilities, Daiwa believes its valuation remains attractive.