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Sector: Technology Media and Telecommunications
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.Globe Telecom
- Sector: TechnologyTechnology Media and Telecommunications
- Sub Sector: Telecommunications
- Country: Philippines
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Fundamental View
AS OF 09 May 2023Globe’s 1Q23 revenues and EBITDA grew modestly YoY as strong mobile and enterprise data revenues outweighed poorer broadband revenues. Credit metrics worsened slightly to 4.0x/3.8x.
We see a challenging FY23 for Globe in view of high domestic inflation and strong competition, mitigated by Globe’s leading mobile market position and new entrant DITO’s tight liquidity. We expect low-to-mid single digit % YoY revenue growth in FY23.
We anticipate a mild improvement in Globe’s FY23 credit metrics in view of: 1) Residual PHP 52 bn of tower sales that should conclude by end-FY23 and enlarge Globe’s capex funding and deleveraging buffer; 2) Reduced FY23E capex that is ~22% YoY lower than FY22 actual capex spending.
Business Description
AS OF 09 May 2023- Globe is a leading telecom operator in the Philippines, competing alongside its main rival PLDT in a duopoly setting.
- Globe provides 2G/3G/4G mobile, fixed-line, broadband, enterprise data, and other digital services to retail and corporate customers.
- Globe operates through 2 main business segments – “Mobile Services” and “Fixed Line and Home Broadband Services”.
- Its “Mobile Services” segment offers mobile voice, mobile SMS and mobile data services to retail customers in the Philippines. These services are marketed under the “Globe Postpaid”, “Globe Prepaid” and “TM” brands.
- Its “Fixed Line and Home Broadband Services” segment provides fixed line voice, corporate data and home broadband services to retail and corporate customers in the Philippines.
- Globe commercially launched 5G services on a small-scale basis in Jun-2019. It currently maintains 5G coverage of 96% of the National Capital Region, with over 2,000 5G sites nationwide.
- Globe maintains dominant market shares in the mobile data, voice and SMS space (FY21 revenue market share [RMS] of 52% vs PLDT 47%) and home broadband space (FY21 RMS of 31% vs PLDT 45%). It loses out heavily to PLDT in the fixed line voice space (FY21 RMS of 10% vs PLDT 90%).
- Globe is largely owned by two established corporate groups – Ayala Corporation (~47 stake) and Singtel (~43% stake).
Risk & Catalysts
AS OF 09 May 2023We see a challenging FY23 for Globe in view of high domestic inflation and strong competition, mitigated by Globe’s leading mobile market position and new entrant DITO’s tight liquidity. We expect low-to-mid single digit % YoY revenue growth in FY23.
Aggressive expansion by new entrant DITO over the next 2-4 years could chew away at Globe’s market share and restrain recoveries in average revenues per user (ARPU).
Globe incurs significant capex that has pressurized its leverage metrics and free cash flows. That said, management believes capex has peaked and guided towards lower FY23E capex (~22% YoY lower than FY22 actual capex spending).
Consistent dividend payouts could worsen Globe’s already negative free cash flows.
Key Metrics
AS OF 09 May 2023| PHP bn | FY20 | FY21 | FY22 | 1Q22 | 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 67.2% | 69.4% | 67.5% | 68.5% | 67.6% |
| Net Debt to Book Cap | 59.4% | 63.0% | 63.7% | 64.8% | 64.3% |
| Debt/Total Equity | 204.5% | 227.2% | 208.1% | 217.7% | 208.9% |
| Debt/Total Assets | 49.8% | 56.7% | 57.1% | 56.2% | 56.3% |
| Gross Leverage | 2.2x | 3.3x | 3.9x | 3.4x | 4.0x |
| Net Leverage | 1.9x | 3.0x | 3.7x | 3.2x | 3.8x |
| Interest Coverage | 9.3x | 7.6x | 5.9x | 7.2x | 5.5x |
| EBITDA Margin | 48.7% | 46.7% | 46.7% | 47.5% | 48.2% |
CreditSights View
AS OF 09 May 2023We have a Market perform recommendation on Globe Telecom. Globe’s Jul-2030 bond trades 49 bp tighter than PLDT’s Jan-2031 bond. We think Globe should trade 25-30 bp wider as its unrated credit status and poorer net leverage outweigh its lower FY23E capex and lower corporate governance uncertainties. While we acknowledge the risks of rising inflation and mounting competitive pressures from new entrant DITO, we think this is mitigated by Globe’s leading mobile market position and DITO’s debt woes that could impede its rapid expansion. Further ~PHP 56 bn of tower sales closures and lower capex could support Globe’s credit profile. We anticipate Globe’s credit metrics to improve mildly in the next 3 quarters.
Recommendation Reviewed: May 09, 2023
Recommendation Changed: December 19, 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.PLDT
- Sector: Media and TelecommunicationsTechnologyTechnology Media and Telecommunications
- Sub Sector: Telecommunications
- Country: Philippines
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Fundamental View
AS OF 09 May 2023PLDT’s 1Q23 results were solid. Earnings growth was buoyed by sustained broadband and enterprise data demand that outweighed strong mobile competition and higher fuel/typhoon-related expenses. Credit metrics improved slightly to 2.8x/2.5x.
We anticipate its FY23 earnings to grow modestly YoY as strong broadband and enterprise data revenue growth outweigh strong mobile competition and hot domestic inflation. We take comfort in PLDT’s leading market position in the higher-margin broadband space.
While its capex overrun should keep FY23 capex elevated, we draw mild comfort that it was likely not due to fraud but rather a management misstep. The impact is also mitigated by PLDT’s robust operating cash flows and a further PHP 33 bn of tower sales closures by end-2023.
Business Description
AS OF 09 May 2023- PLDT is a leading telecom operator in the Philippines, competing alongside its main rival Globe Telecom in a predominant duopoly.
- PLDT provides 2G/3G/4G mobile, fixed-line, broadband, enterprise data, and other digital services to retail and corporate customers.
- PLDT operates through 2 main business segments – “Wireless Services” and “Fixed Line Services”.
- Its “Wireless” segment offers mobile voice, mobile SMS, mobile data and mobile broadband services to retail customers in the Philippines. These services are marketed under the “Smart Postpaid”, “Smart Prepaid”, "Sun Postpaid" and “TNT Prepaid” brands.
- Its “Fixed Line Services” segment provides fixed line voice, corporate data and home broadband services to retail and corporate customers in the Philippines.
- PLDT commercially launched 5G services on a small-scale basis in Jul-2020. It currently has over 3,000 5G sites nationwide.
- PLDT maintains dominant market shares in the mobile data, voice and SMS space (FY21 revenue market share [RMS] of 47% vs Globe 52%), the fixed line voice space (FY21 RMS of 90% vs Globe 10%), and the home broadband space (FY21 RMS of 45% vs Globe 31%).
- PLDT is backed by three established corporate groups, namely First Pacific (~15% stake), NTT Corporation (~12% stake) and JG Summit Holdings (~7% stake).
Risk & Catalysts
AS OF 09 May 2023Aggressive expansion by new entrant DITO over the next 2-4 years could chew away at PLDT’s market share and restrain recoveries in average revenues per user (ARPU).
PLDT incurs significant capex that has restrained improvements in its leverage metrics and free cash flows. This is worsened by a recent capex overrun that has induced mild corporate governance uncertainties. Such uncertainties have eased since.
Consistently high dividend payouts could worsen PLDT’s already negative free cash flows.
PLDT is exposed to $/PHP depreciation risks ($300 mn 2050 bond is fully unhedged).
Key Metrics
AS OF 09 May 2023| PHP bn | FY20 | FY21 | FY22 | 1Q22 | 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 67.0% | 68.3% | 71.9% | 68.6% | 72.2% |
| Net Debt to Book Cap | 55.9% | 62.3% | 65.7% | 62.2% | 65.7% |
| Debt/Total Equity | 202.9% | 215.2% | 256.2% | 218.7% | 260.3% |
| Debt/Total Assets | 42.2% | 43.8% | 46.8% | 43.9% | 46.4% |
| Gross Leverage | 2.7x | 2.8x | 2.9x | 2.9x | 2.8x |
| Net Leverage | 2.2x | 2.6x | 2.7x | 2.6x | 2.5x |
| Interest Coverage | 7.8x | 8.2x | 7.3x | 7.8x | 7.4x |
| EBITDA Margin | 50.4% | 50.7% | 48.4% | 43.7% | 48.6% |
CreditSights View
AS OF 09 May 2023We have a Market perform recommendation on PLDT. PLDT’s Jan-2031 bond trades 38 bp tighter than Globe’s Jul-2030 bond. We think PLDT should trade 25-30 bp tighter than Globe as PLDT’s IG rated status and stronger net leverage could outweigh its mild corporate governance flaws and higher capex. The concluded capex overrun audit helps to ease corporate governance fears and aid free cash flow recovery. Further clarity on US SCA lawsuits and management replacements are welcome too. Residual PHP 33 bn of tower sales would provide greater financial flexibility for capex funding and some mild deleveraging. While we acknowledge the risks of hot domestic inflation and strong competition, we think the impact is negated by its leading broadband market position and DITO’s debt woes.Â
Recommendation Reviewed: May 09, 2023
Recommendation Changed: May 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.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
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Search topics about wealth insights and investments.Meta Platforms
- Sector: TechnologyTechnology Media and Telecommunications
- Sub Sector: Technology
- Country: US
- Bond: META 4.95 33
- Indicative Yield-to-Maturity (YTM): 4.95%
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): ( A1 / AA- / - )
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Fundamental View
AS OF 16 Mar 2023- Meta’s further reduction in total expenses for 2023 is a favorable development for creditors, and we expect operating leverage to drive meaningful EBITDA growth in 2024. Gross leverage is just 0.2x and the company has $31 bn net cash, although we do expect a significant decline in net cash as shareholder returns exceed FCF through year-end 2023.
- Meta previously boosted its share buyback authorization by $40 bn which indicates that the company will remain aggressive with repurchases and increases the odds it will come to market this year. The strong balance sheet and durability of its highly cash generative Family of Apps business are supportive in the medium-term although competition and regulation remain long-term concerns.
Business Description
AS OF 16 Mar 2023- Meta Platforms is the largest social networking company in the world. Meta generates substantially all of its revenue from advertising on Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications.
- In 4Q22, Family of Apps was 98% of revenue (97.2% from advertising and 0.6% from other) and Reality Labs was 2% of revenue. Reality Labs generated $13.7 bn in operating losses during LTM 4Q22 as the company is investing heavily in the metaverse.
- Total MAUs and DAUs are 2,963 mn and 2,000 mn respectively at 4Q22. While US & Canada have the lowest number of users, they generate higher revenue than other regions given significantly higher ARPU. Revenue is 49% from US & Canada, 22% from Europe, 19% from Asia Pacific, and 11% from Rest of World.
- Meta is headquartered in Menlo Park, California. Employee headcount was 86.5k at 4Q22.
Risk & Catalysts
AS OF 16 Mar 2023- In December 2020, the FTC filed a lawsuit against Meta targeting its acquisitions of Instagram and Whatsapp. If Meta is forced to unwind prior acquisitions, this would be a credit negative given reduced scale and diversification.
- Meta’s Facebook and Instagram are uniquely exposed to rising competition from TikTok and other social media platforms. Meta is seeking to emulate TikTok’s success with its own short-from video product Reels. The US has again threatened to ban TikTok unless its Chinese owners divest its stake.
- Meta’s business model relies almost entirely on user-generated content. As such, there are risks related to customer privacy (e.g., Cambridge Analytica data scandal in 2018) and regulatory scrutiny.
- In October 2022, activist Altimeter Capital wrote a letter to Zuck and Board although we think it was on the friendly-side of activism and some suggestions have already been implemented.
Key Metrics
AS OF 16 Mar 2023| $ mn | 2018 | 2019 | 2020 | 2021 | LTM 4Q22 |
|---|---|---|---|---|---|
| Revenue YoY % | 37.4% | 26.6% | 21.6% | 37.2% | (1.1%) |
| EBITDA | 33,380 | 34,562 | 46,069 | 63,882 | 49,622 |
| EBITDA Margin | 59.8% | 48.9% | 53.6% | 54.2% | 42.6% |
| CapEx % of Sales | 25.0% | 22.1% | 18.3% | 16.3% | 27.5% |
| Sh. Ret. % of CFO-CapEx | 84% | 20% | 27% | 116% | 152% |
| Net Debt | (41,114) | (54,855) | (61,954) | (47,998) | (30,815) |
| Gross Leverage | 0.0x | 0.0x | 0.0x | 0.0x | 0.2x |
| EV / EBITDA | 10.1x | 15.5x | 15.8x | 14.0x | 5.8x |
CreditSights View
AS OF 22 May 2023We came away from Meta’s 1Q23 results with increased confidence since advertising revenue is seeing a much sharper acceleration in growth than expected. We expect meaningful EBITDA growth in 2024 given improving revenue, tightly managed expenses given the layoffs and facilities consolidation, and lapping of $3-5 bn restructuring costs. Meta has $28 bn net cash at 1Q23, although we expect a significant decline in net cash as shareholder returns exceed FCF through year-end 2023. We estimate gross leverage of 0.4x pro forma for the recent $8.5 bn bond deal. Meta previously commented it will periodically access the debt markets although maintain positive or neutral net cash over time.
Recommendation Reviewed: May 22, 2023
Recommendation Changed: August 04, 2022
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India