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JD.com
- Sector: Media and TelecommunicationsTechnology
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 05 Jun 2023We maintain our Market perform recommendation on JD. JD’s 1Q23 revenues were up 1.4% YoY and beat expectations thanks to continued strength of its net services revenues. JD’s EBITDA margins also improved but it incurred a net operating cash outflow in 1Q23 due to higher working capital investments.
We expect JD’s topline growth to gradually recover and achieve mid-to-high single digit growth for FY23. We expect JD’s EBITDA margin to edge lower in FY23 compared to FY22 due to the subsidy program and upcoming large promotional events in 2Q23 (6.18), offset in part by its continued improvement in fulfillment efficiency and economies of scale. We expect JD to continue to generate strong operating cash flow in FY23, and marginally reduce its total debt and Total debt/EBITDA.
Business Description
AS OF 06 Jun 2023- JD is one of China's leading e-commerce and retail infrastructure service providers.
- JD has a large fulfillment infrastructure which includes over 1,500 warehouses with an aggregate gross floor area of approximately over 31 mn square meters, as of 31 March 2023.
- JD has 4 operating segments, namely JD Retail, JD Logistics, Dada and New businesses. Dada began reporting as a standalone segment with effect from 28 February 2022.
- New businesses mainly include JD Property, Jingxi business group, CNLP, overseas businesses and technology initiatives
- JD had a market capitalization of RMB 396.5 bn as of 5 June 2023.
Risk & Catalysts
AS OF 05 Jun 2023Chinese tech companies have been facing increasing scrutiny by the Chinese government. Any regulatory clampdowns may adversely affect the business of JD (e.g. antitrust rules, data security & personal data protection laws).
A prolonged economic slowdown in China would weigh on consumption and JD’s business outlook.
There are regulatory risks involving the use of variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs). Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.
JD may be subject to lawsuits for items listed on its marketplaces, which may be pirated, counterfeit or illegal. JD cooperates with 3rd party logistics cos to help deliver products to buyers. Failure to provide reliable delivery services or unexpected logistics bottleneck may materially affect the business.
Key Metrics
AS OF 05 Jun 2023| RMB mn | FY19 | FY20 | FY21 | FY22 | LTM 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 15.7% | 12.5% | 12.2% | 19.2% | 19.4% |
| Debt/Total Equity | 18.7% | 14.2% | 13.8% | 23.7% | 24.1% |
| Debt/Total Assets | 7.2% | 7.5% | 6.9% | 10.9% | 12.0% |
| Gross Leverage | 1.6x | 1.7x | 3.3x | 2.4x | 2.2x |
| Interest Coverage | 16.2x | 16.4x | 8.5x | 12.8x | 12.5x |
| EBITDA Margin | 2.0% | 2.5% | 1.1% | 2.6% | 2.8% |
CreditSights View
AS OF 12 May 2023We maintain our Market perform recommendation on JD. Within A-rated China tech, we continue to prefer Alibaba and Tencent for similar/higher yields despite being rated 2-3 notches higher. For total return investors, we continue to like JD Apr-26, which yields higher than JD Jan-30 due to the inverted US Treasury curve. We expect JD’s revenue growth to improve to 15% YoY for FY23 (FY22: 10% YoY). We expect revenue growth of JD Logistics, Dada Nexus and new business lines to decelerate from the high bases in FY22 but remain strong. We expect JD’s EBITDA margin to decline marginally to 3.7% from 3.9% in FY22 as the company engages in more promotional activities. We expect JD’s cash flow generation to improve and the company to maintain a net cash position in FY23.
Recommendation Reviewed: May 12, 2023
Recommendation Changed: November 21, 2022
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Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Search topics about wealth insights and investments.Tencent
- Sector: Technology Media and Telecommunications
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 30 May 2023We affirm our Outperform recommendation on Tencent. We like Tencent’s 24,25 for total return investors given its relatively flat yield curve, and the belly part of its curve (29,30,31) for spread investors.
Tencent’s revenue growth in 1Q23 was ahead of our/market expectations thanks to a solid and broad-based recovery across its business segments, including domestic gaming, payment transactions, and online advertising. EBITDA margin was 5 ppt ahead of our expectation thanks to the recovering topline growth of its higher-margin businesses and continued cost optimization. We expect Tencent’s credit profile to improve in FY23 with continued recovery in advertising and gaming revenues, effective cost control measures, which result in improving EBITDA and free operating cash flow.
Business Description
AS OF 30 May 2023- Founded in November 1998, Tencent is a leading provider of Internet value added services in China. Since its establishment, Tencent has ventured into instant messaging, social networking, online payments, digital entertainment, and PC and smartphone gaming. Most recently, it has also forayed into high-tech areas such as artificial intelligence, and cloud computing.
- Tencent's leading Internet platforms in China include Weixin/WeChat (online messaging), QQ Instant Messenger (online messaging), Tencent Games (gaming), Tencent Video/Weixin Video Accounts (video platforms), WeChat Pay (payments), and Tencent Cloud. The combined monthly average users (MAU) of Weixin and Wechat reached 1.3 bn as of 31 March 2023.
- In 1Q23, 53% of revenues came from Value Added Services (which consist of Domestic Games, International Games, and Social Networks), 32% came from FinTech and Business Services (e.g. commercial payments and cloud), 14% from Online Advertising and 1% from Others.
- Tencent is currently primarily listed on the Hong Kong Stock Exchange, with a market capitalization of HKD 3.0 tn as of 30 May 2023.
Risk & Catalysts
AS OF 30 May 2023Any regulatory clampdowns abroad and domestically (e.g. antitrust rules, data security, personal information protection laws) may affect Tencent’s business. Tencent’s gaming, music streaming, and online payment units are among those that have come under regulatory scrutiny in the past. In addition, Tencent uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers, which poses regulatory risks. Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.
Tencent operates in a competitive market alongside other Chinese tech giants. Failure to continually innovate may result in loss of market share and profitability. Monetization of its social-network base may take time and heavy investment in payments, cloud, AI and retail businesses may weigh on margins.
The potential restructuring and spin-off of Tencent’s finance-related business into a financial holding company as ordered by the Chinese government could be a credit negative event depending on the final structural reorganization.
Key Metrics
AS OF 30 May 2023| RMB bn | FY19 | FY20 | FY21 | FY22 | LTM 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 32.2% | 25.2% | 27.0% | 31.4% | 30.1% |
| Net Debt to Book Cap | 7.3% | 4.0% | 6.0% | 8.5% | 4.8% |
| Debt/Total Equity | 47.6% | 33.7% | 36.9% | 45.9% | 43.0% |
| Debt/Total Assets | 24.4% | 19.7% | 20.1% | 22.8% | 23.9% |
| Gross Leverage | 1.7x | 1.5x | 1.9x | 2.2x | 2.0x |
| Net Leverage | 0.4x | 0.2x | 0.4x | 0.6x | 0.3x |
| Interest Coverage | 17.9x | 22.9x | 21.9x | 16.4x | 16.7x |
| EBITDA Margin | 36.4% | 35.4% | 30.9% | 29.6% | 31.4% |
CreditSights View
AS OF 18 May 2023We affirm our Outperform recommendation on Tencent. We expect Tencent ‘s credit profile to improve in FY23 with continued recovery in advertising and gaming revenues, effective cost control measures, which result in improving EBITDA and free operating cash flow. Tencent’s revenue growth in 1Q23 was ahead of our/market expectations thanks to a solid and broad-based recovery across its business segments, including domestic gaming, payment transactions, and online advertising. EBITDA margin was 5 ppt ahead of our expectation thanks to the recovering topline growth of its higher-margin businesses and continued cost optimization. We like the short-end (24,25) of Tencent’s curve, given its relatively flat yield curve. For spread investors, we like the belly part of its curve (29,30,31).
Recommendation Reviewed: May 18, 2023
Recommendation Changed: August 18, 2022
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Search topics about wealth insights and investments.Baidu
- Sector: Media and TelecommunicationsTechnology
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 30 May 2023We maintain our Market perform recommendation on Baidu following its strong 1Q23 results. Baidu posted a solid beat in revenues and EBITDA, and maintained its healthy leverage metrics. Baidu maintained its good cost controls, which led to a better EBITDA margin and improved FOCF in 1Q23. We expect Baidu to maintain healthy debt metrics in FY23, and believe the company is well positioned to benefit from China’s macro recovery. Management sees continued recovery of online advertising in 2Q23 and opportunities in generative AI.
However, we think Baidu’s $ bonds are expensive compared to Alibaba and Tencent. For those seeking exposure to Baidu, we prefer Baidu short-end (24, 25s, 26) on a total return basis, as its yield curve is relatively, and we prefer Baidu 26 and 30s for spread investors.
Business Description
AS OF 30 May 2023- Founded in 2000, Baidu started out as an internet search provider and has since added another two segments, transaction services and iQIYI. Transaction services include Baidu Nuomi, Baidu Deliveries, Baidu Mobile Game, Baidu Wallet, and Baidu Maps. iQIYI is an online video platform with a content library that includes licensed movies, television series, cartoons, and other programs.
- "Baidu Core" (primarily marketing services triggered by internet search queries) made up around 75% of 1Q23 revenues, but generated the majority of Baidu's operating profit. Baidu's other key segment, iQIYI, turned profitable only from 1Q22.
- Baidu has also been pouring investment into artificial intelligence (AI), self-driving vehicles, and smart bikes. According to the company, Baidu has been deploying AI since 2010 - 2011 and launched Apollo, its autonomous driving platform, in 2017. Baidu also launched ERNIE bot in Mar-23, a generative AI chatbot based on a large language model
- Baidu has a market capitalization of RMB 312.6 bn as of 30 May 2023.
Risk & Catalysts
AS OF 30 May 2023Any regulatory clampdowns abroad and domestically (e.g. potential US investment ban, antitrust rules, data security and personal information protection laws) may adversely affect the business of Baidu. The interpretation of Chinese laws and regulations involves some degree of uncertainty.
There are regulatory risks given the corporate structure which uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs).
Baidu has made significant investments into long-term AI-related projects, which may take time to turn profitable. A potential escalation of the US chip restriction could have a material negative impact its AI related business (ie. cloud, ernie bot, autonomous driving).
Key Metrics
AS OF 30 May 2023| RMB bn | FY19 | FY20 | FY21 | FY22 | LTM 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 30.0% | 30.4% | 29.7% | 28.5% | 28.3% |
| Net Debt to Book Cap | n/m | n/m | n/m | n/m | n/m |
| Debt/Total Equity | 42.8% | 43.8% | 42.2% | 39.8% | 39.5% |
| Debt/Total Assets | 24.4% | 24.8% | 24.1% | 23.4% | 23.5% |
| Gross Leverage | 3.5x | 2.7x | 3.3x | 2.8x | 2.6x |
| Net Leverage | n/m | n/m | n/m | n/m | n/m |
| Interest Coverage | 7.2x | 9.8x | 8.2x | 11.4x | 11.9x |
| EBITDA Margin | 19.7% | 28.5% | 22.6% | 26.8% | 28.3% |
CreditSights View
AS OF 17 May 2023We maintain our Market perform recommendation on Baidu following its strong 1Q23 results. Baidu posted a solid beat in revenues and EBITDA, and maintained its healthy leverage metrics. Baidu maintained its good cost controls, which led to a better EBITDA margin and improved FOCF in 1Q23. We expect Baidu to maintain healthy debt metrics in FY23, and believe the company is well positioned to benefit from China’s macro recovery. Management sees continued recovery of online advertising in 2Q23 and opportunities in generative AI. However, we think Baidu’s $ bonds are expensive compared to Alibaba and Tencent. For those seeking exposure to Baidu, we prefer Baidu short-end (24, 25s, 26) on a total return basis, as its yield curve is relatively, and we prefer Baidu 26 and 30s for spread investors.
Recommendation Reviewed: May 17, 2023
Recommendation Changed: August 31, 2022
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Search topics about wealth insights and investments.Bank of China
- Sector: Financial Services
- Sub Sector: Banks
- Country: China
- Region: China
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): M/P
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Fundamental View
AS OF 18 May 2023The Bank of China (BCHINA; ratings: A1/A/A) is one of the Big 4 banks in China. Its subsidiary, BOC Hong Kong, is one of the major banks in Hong Kong.
BCHINA’s systemic importance is enhanced by the leading role it plays in China’s international trade and investment and strong government links.
BCHINA’s financial metrics are a little weaker than ICBCAS and CCB due to its larger overseas exposure, but the Big 4 banks have generally been managed more prudently compared to the smaller and more aggressive joint stock banks.
Business Description
AS OF 18 May 2023- While its origins date back to China's last imperial dynasty, BCHINA was formally established in 1912 and has played the role of China's international bank for more than a century. Its operations outside mainland China include its 66%-owned subsidiary Bank of China (HK) Ltd.
- After 1949, BCHINA became a state entity but was focused on FX and financing of foreign trade. It was set on a path of commercialisation in 1994 but only became a corporate entity in 2003 prior to its listings in HK and Shanghai in 2006. BCHINA is controlled by the government via a 64% stake held by Central Huijin.
- BCHINA was effectively insolvent in the late 1990s and the removal of NPLs to an AMC in 1999 did not fully deal with its legacy bad loans. In 2003, the bank received another $22.5 bn capital injection, paving the way for BOC's HK listing in 2006.
- BCHINA is a G-SIB with a capital surcharge of 1.5%. BOCHK is a D-SIB in HK and is the holding company for all of BCHINA's Southeast Asian operations excluding Singapore.
Risk & Catalysts
AS OF 18 May 2023China’s sovereign ratings (A1/A+/A+) are a key factor behind BCHINA’s credit standing.
BCHINA is managed on commercial terms, but fulfilling the government’s socioeconomic objectives may at times override profitability considerations and require the bank to perform “national service”. We would not regard such actions as credit-negative as they reflect close government links that also underpin the bank’s credit standing.
BCHINA’s overseas footprint has to some extent offset the onshore NIM pressure and led to a stabler NIM compared to peers in FY22. However, as overseas funding costs go up, its NIM will also be under pressure in FY23.
Key Metrics
AS OF 18 May 2023| RMB bn | FY19 | FY20 | FY21 | FY22 | 1Q23 |
|---|---|---|---|---|---|
| PPP ROA | 1.60% | 1.55% | 1.48% | 1.40% | 1.52% |
| Credit Costs | 0.82% | 0.87% | 0.70% | 0.63% | 0.73% |
| Reported ROA | 0.92% | 0.87% | 0.89% | 0.85% | 0.83% |
| Reported ROE | 11.5% | 10.6% | 11.3% | 10.8% | 11.1% |
| Total Equity/Total Assets | 8.1% | 8.4% | 8.3% | 8.4% | 8.2% |
| CET1 Ratio | 11.3% | 11.3% | 11.3% | 11.8% | 11.6% |
| NPL Ratio | 1.36% | 1.46% | 1.33% | 1.32% | 1.18% |
| Loan-Deposit Ratio | 83% | 84% | 87% | 87% | 85% |
CreditSights View
AS OF 15 Jun 2023BCHINA is one of the Big 4 banks (the 4th-largest by assets) with a reasonable capital stack and sufficient liquidity. Its majority government ownership and systemic importance also assures it of strong state support. Its NIM and profitability has trailed its more domestically-focused peers due to higher cost-income ratios of its overseas operations, but its credit costs are also the lowest among the Big 5 banks. Its overseas footprint has to some extent offset the onshore NIM pressure and led to a stabler NIM compared to peers in FY22. However, as overseas funding costs go up, its NIM will also be under pressure in FY23.
Recommendation Reviewed: June 15, 2023
Recommendation Changed: July 16, 2021
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Search topics about wealth insights and investments.Agricultural Bank of China
- Sector: Financial Services
- Sub Sector: Banks
- Country: China
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): M/P
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Fundamental View
AS OF 18 May 2023Our credit view on AGRBK (credit ratings: A1/A/A) is based on the strong likelihood of state support, given its large size, systemic importance and majority state ownership. This is enhanced by AGRBK’s extensive presence in rural areas.
AGRBK’s financial metrics are a tad weaker than those of peer-group leaders ICBCAS and CCB and in line with BCHINA; however they have been on an improving trend. The Big 4 have been managed more prudently in recent years than the smaller and more aggressive joint stock banks.
We view it as a strong credit taking into account its structural profitability, robust balance sheet metrics, large size, and systemic importance that assure it of state support if needed.
Business Description
AS OF 18 May 2023- AGRBK is the third-largest bank in China and is classified as a G-SIB with a capital surcharge of 1.0%.
- It was founded in 1951 as the Agricultural Cooperative Bank, merged with the central bank and spun out as AGRBK in 1979, charged with financing the rural and agricultural sectors. It was recapitalised in 1999 and again in 2007 by special MOF bonds. It also received $19 bn in equity capital from Huijin, funded by China's FX reserves.
- Due to its poorer asset quality and weaker profitability, AGRBK was the last of the Big 4 banks to be listed in 2010.
- The Chinese government is a majority shareholder of AGRBK via Central Huijin (40%), MOF (35%) and the Social Security Fund (7%).
- AGRBK has the second largest branch network in China after Postal Bank, with a particularly good presence in rural areas.
Risk & Catalysts
AS OF 18 May 2023China’s sovereign ratings (A1/A+/A+) are a key factor behind AGRBK’s credit standing.
AGRBK’s loan growth has been the strongest among the Big 5 banks since FY22, but the impact on net interest income growth was largely offset by a significant contraction in NIM. Rapid loan growth has led to a widened capital ratio differential between AGRBK and other Big 4 banks.
AGRBK is managed on commercial terms but the government may call on it to perform “national service” that overrides profitability considerations. However, we do not see it as a clear credit negative as these actions reflect close state links that underpin ABC’s credit standing.
Key Metrics
AS OF 18 May 2023| RMB bn | FY19 | FY20 | FY21 | FY22 | 1Q23 |
|---|---|---|---|---|---|
| PPP ROA | 1.71% | 1.65% | 1.64% | 1.43% | 1.58% |
| Reported ROA | 0.90% | 0.83% | 0.86% | 0.82% | 0.82% |
| Reported ROE | 12.4% | 11.4% | 11.6% | 11.3% | 12.6% |
| Total Equity/Total Assets | 7.8% | 8.1% | 8.3% | 7.9% | 7.4% |
| CET1 Ratio | 11.2% | 11.0% | 11.4% | 11.2% | 10.7% |
| NPL Ratio | 1.40% | 1.56% | 1.43% | 1.37% | 1.37% |
| Credit Costs | 1.10% | 1.16% | 1.03% | 0.79% | 1.11% |
| Loan-Deposit Ratio | 71% | 74% | 78% | 79% | 76% |
CreditSights View
AS OF 24 May 2023AGRBK is the 3rd-largest of the Chinese state-owned commercial banks and has a strong deposit franchise, especially in rural areas, which gives it access to a large pool of low-cost deposits. We view it as a strong credit taking into account its structural profitability, robust balance sheet metrics, large size and systemic importance that assure it of state support if needed. Its loan growth has been the strongest among the Big 5 banks since FY22, but the impact on net interest income growth was largely offset by a significant contraction in NIM. Rapid loan growth has led to a widened capital ratio differential between AGRBK and other Big 4 banks. Reserve cover is a strength and is well above its peers.
Recommendation Reviewed: May 24, 2023
Recommendation Changed: July 16, 2021
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Fundamental View
AS OF 11 May 2023CDB’s credit standing is based on its role as a quasi-sovereign policy bank that provides financial support for implementation of the government’s socio-economic policy priorities both domestically and externally.
It is the largest issuer in the Chinese domestic bond market (accounting for near one-tenth of the whole China bond market) after the government itself.
CDB is wholly owned by the Chinese government and can lean on the central bank for liquidity and capital needs. In 2015, the government injected $32 bn in FX reserves into the bank to facilitate financing for Belt and Road Initiative (BRI) projects.
Business Description
AS OF 11 May 2023- CDB was established in 1994 to alleviate the problem of insufficient funds for China's economic growth and to take over the long-term financial agency function and policy loan function of CCB.
- From 1998-2013, under the leadership of Chen Yuan, CDB started its commercialization journey with its management attempting to demonstrate that a policy bank can be run along relatively commercial lines. But the commercialization raised the issue of higher bond financing costs for CDB. Unlike commercial banks, bond financing is the major source of funding for CDB. Since 2013, after a new CEO took over, CDB gradually returned to its original position of a policy bank.
- CDB is owned by the Chinese government via the MOF (37%), Huijin (35%), Buttonwood (27%) - an investment company held by SAFE - and the National Council for Social Security Funds (2%). CDB's main subsidiaries are CDB Capital Co (private equity), CDB Securities Co (underwriting & brokerage) and CDB Leasing, which is listed in Hong Kong.
Risk & Catalysts
AS OF 11 May 2023As its credit standing is strongly linked to the government, CDB is rated in line with the China sovereign (A1/A+/A+). Any downgrade of China’s sovereign rating would affect its own ratings.
Any reduction in the government’s willingness to support CDB would weaken its credit standing. Some uncertainty did arise as the bank moved towards commercialisation pre-2013, but CDB’s policy bank status has since been reaffirmed.
CDB’s policy role may involve it taking on exposure that lead to financial losses, in which case we would expect proactive state support to ensure that the bank remains financially sound.
Key Metrics
AS OF 11 May 2023| Key Metrics | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Operating Income/Average Assets | 1.53% | 1.33% | 0.98% | 1.09% | 1.31% |
| Pre-Impairment Operating Profit / Average Assets | 1.43% | 1.22% | 0.88% | 0.99% | 1.22% |
| ROA | 0.7% | 0.7% | 0.7% | 0.5% | 0.5% |
| ROE | 8.7% | 8.7% | 8.2% | 5.2% | 5.3% |
| CET1 Ratio | 9.7% | 9.9% | 9.9% | 9.9% | 9.3% |
| Credit Costs | 0.86% | 0.45% | 0.05% | 0.59% | 0.85% |
| NPL Ratio | 0.92% | 0.95% | 0.79% | 0.84% | 0.78% |
| Total Equity/Total Assets | 7.90% | 8.30% | 8.51% | 8.82% | 8.66% |
CreditSights View
AS OF 09 Feb 2022CDB is China’s largest policy bank. It is owned by the government and plays a key role in implementing the Chinese government’s economic plans both inside China and overseas. It is a quasi-sovereign entity that is rated in line with China’s sovereign rating. We therefore view its debt as attractive for additional spread pick-up over the $-denominated sovereign curve given that its ultimate risk is that of the Chinese government. We also take the view that CDB will support its subsidiaries, including CDB Leasing which is strategically important.
Recommendation Reviewed: February 09, 2022
Recommendation Changed: July 16, 2021
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Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Search topics about wealth insights and investments.Alibaba
- Sector: Technology Media and Telecommunications
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 21 Apr 2023We affirm our Outperform recommendation on Alibaba. Its F3Q23 revenues, EBITDA and EBITDA margins were ahead of our expectations. Debt metrics also improved in F3Q22 and its net cash position expanded.
We expect China commerce, offline retail, direct sales, international commerce and cloud businesses to gain more momentum starting from F1Q24. We expect Alibaba’s EBITDA margin to marginally improve from FY22. We also expect Alibaba’s cash flow generation capacity to improve and the company to maintain a net cash position in FY24.
We view its $-bond as attractive compared to its A rated Asia Corporate peers, and its tech peers, Baidu and JD. We see an additional ~20-30 bp spread tightening when Alibaba deliver earning recovery over the next few quarters. We prefer its 2024 and 2027.
Business Description
AS OF 21 Apr 2023- Founded in 1999, Alibaba is now the largest retail commerce company in the world based on gross merchandise volume (GMV). GMV transacted on Alibaba's China retail marketplaces was RMB 8.3 tn for the year ended 31 March 2022.
- The company's business segments comprise China Commerce (69% of F2Q23 revenue), International Commerce (8%), Cloud Computing (8%), Digital Media and Entertainment (3%, which includes Youku and UC Browser), Cainiao (7%), Local Consumer Services (5%), and Innovation Initiatives/Others (0.3%, which includes Amap, DingTalk and Tmall Genie).
- Alibaba's core online market places include Taobao and Tmall. The "New Retail" business fuses online and offline shopping through physical stores such as Sun Art and Hema supermarkets. Alibaba also operates outside China through Lazada and AliExpress. As of 31 March 2022, annual active consumers on Alibaba's China retail marketplaces reached 903 mn.
- Alibaba had a market capitalization of RMB 1.62 tn as of 21 April 2023.
Risk & Catalysts
AS OF 21 Apr 2023Resurgence in COVID-19 cases may cause supply chain disruptions if production suspensions are implemented.
Regulatory clampdown (e.g. anti-monopoly guidelines, data security laws, personal information protection laws) may adversely affect Alibaba. There are regulatory risks given the corporate structure which uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs).
Alibaba does not control Alipay but relies on Alipay to conduct substantially all the payment processing and escrow services on its marketplaces.
Alibaba may be subject to lawsuits for items listed on its marketplaces, which may be pirated, counterfeit, or illegal.
Key Metrics
AS OF 21 Apr 2023| CNY BN | LTM F3Q22 | FY22 | FY21 | FY20 | FY19 |
|---|---|---|---|---|---|
| Debt to Book Cap | 12.6% | 11.6% | 12.1% | 12.5% | 17.9% |
| Net Debt to Book Cap | n/m | n/m | n/m | n/m | (7.9%) |
| Debt/Total Equity | 14.4% | 13.1% | 13.8% | 14.3% | 21.8% |
| Debt/Total Assets | 9.0% | 8.3% | 8.8% | 9.6% | 13.9% |
| Gross Leverage | 1.1x | 1.1x | 1.2x | 1.0x | 1.6x |
| Net Leverage | n/m | n/m | n/m | n/m | n/m |
| Interest Coverage | 27.4x | 27.3x | 28.7x | 24.3x | 15.9x |
| EBITDA Margin | 17.0% | 15.7% | 17.9% | 24.7% | 22.0% |
CreditSights View
AS OF 19 May 2023We maintain our Outperform recommendation on Alibaba post its F4Q23 results. We expect Alibaba’s leverage metrics to remain healthy, and to maintain its net cash position in FY24. In F4Q23. Alibaba’s revenue grew 2% YoY but missed expectations due the slower-than-expected recovery of domestic online retail spending and cloud business. Alibaba’s margins improved thanks to narrowing losses of Taobao Deals and Taocaicai, its leverage metrics remained healthy, and FOCF improved. For investors looking for duration in Asian $ bonds, the very long-dated Alibaba (41,47,57) spreads are wider than lower-rated JD and same-rated Tencent and are trading at close to ~6% yields. For those prefer short-dated carry, we like Alibaba 27 for spread investors and Alibaba 24 for total return investo
Recommendation Reviewed: May 19, 2023
Recommendation Changed: August 05, 2022
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India