Sector: Technology
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Fundamental View
AS OF 16 Apr 2024- We maintain our M/P recommendation on Baidu (A3/NR/A) post its largely in-line but uninspiring 4Q23 results. Revenues were up 5.7% YoY and EBITDA margin expanded. CFO also increased YoY which was used in AI related capex and investments, debt reduction and share buybacks; debt metrics largely improved in 4Q23. Baidu trades ~5-6 bp wider than Alibaba and Tencent despite being rated 1-2 notches lower (average of A1 & A3 China corp: 20 bp). With spreads trading at historical lows, we see limited catalyst for Baidu to significantly further tighten given our marginally weaker credit outlook on the company: we expect its topline growth to decelerate and EBITDA margin to decline; we also do not expect its AI initiatives to boost its financials over the near-term. We prefer Baidu’s 2030s.
Business Description
AS OF 16 Apr 2024- Founded in 2000, Baidu started out as a search engine business and began its development into artificial intelligent (AI) since 2010.
- Baidu Core is the main revenue driver of the company (79% of 4Q23 revenues) which provides search-based, feed-based and other online marketing services (total: 55% of 4Q23 revenues), as well as products and services from new AI initiatives (24% of 4Q23 revenues); Baidu's AI initiatives include AI cloud (enterprise & public sector cloud, and personal cloud), Intelligent Group Driving (Apollo Go, Apollo auto solutions, and intelligent EVs under Jidu Auto), Mobile Ecosystem (Baidu App, ERNIE Bot, Haokan and Baidu Post), and other growth initiatives (ie. Xiaodu smart devices powered by DuerOS smart assistant and AI chips).
- iQiyi accounts for the remaining revenues of Baidu; iQIYI is an online video platform with a content library that includes licensed movies, television series, cartoons, and other programs.
- Baidu launched ERNIE bot in Mar-23, a generative AI chatbot powered by ERNIE, Baidu's in-house foundation model.
- Baidu has a market capitalization of RMB 244.2 bn as of 16 April 2024.
Risk & Catalysts
AS OF 16 Apr 2024- Any 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 16 Apr 2024RMB bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Debt to Book Cap | 30.0% | 30.4% | 29.7% | 28.5% | 25.0% |
Debt/Total Equity | 42.8% | 43.8% | 42.2% | 39.8% | 33.4% |
Debt/Total Assets | 24.4% | 24.8% | 24.1% | 23.4% | 20.8% |
Gross Leverage | 3.5x | 2.7x | 3.3x | 2.8x | 2.0x |
Interest Coverage | 7.2x | 9.8x | 8.2x | 11.4x | 13.0x |
EBITDA Margin | 19.7% | 28.5% | 22.6% | 26.8% | 31.4% |
CreditSights View
AS OF 29 Feb 2024We maintain our M/P recommendation on Baidu (A3/NR/A) post its largely in-line but uninspiring 4Q23 results. Revenues were up 5.7% YoY and EBITDA margin expanded. CFO also increased YoY which was used in AI related capex and investments, debt reduction and share buybacks; debt metrics largely improved in 4Q23. Baidu trades ~9 bp wider than Alibaba and Tencent despite being rated 1-2 notches lower (average of A1 & A3 China corp: 25 bp). With spreads trading at historical lows, we see limited catalyst for Baidu to significantly further tighten given our marginally weaker credit outlook on the company: we expect its topline growth to decelerate and EBITDA margin to decline; we also do not expect its AI initiatives to boost its financials over the near-term. We prefer Baidu’s 2030s.
Recommendation Reviewed: February 29, 2024
Recommendation Changed: August 31, 2022
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Fundamental View
AS OF 01 Apr 2024PLDT’s FY23 results were stable as expected, buoyed by sustained broadband and enterprise data demand; Credit metrics were stable at 2.9x/2.8x. We expect PLDT’s FY24 credit metrics to improve slightly.
Residual tower sales closures of ~PHP 15.3 bn through FY24 could aid liquidity.
While the spillover of a PHP 33 bn capex overrun to FY23-FY25 could weigh on free cash flows, we draw mild comfort that it was likely not due to fraud but rather a management misstep.
Business Description
AS OF 01 Apr 2024- 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 01 Apr 2024Aggressive 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 (though these have eased in recent months).
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 01 Apr 2024PHP bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Debt to Book Cap | 64.2% | 67.0% | 68.3% | 71.9% | 73.3% |
Net Debt to Book Cap | 56.7% | 55.9% | 62.3% | 65.7% | 69.3% |
Debt/Total Equity | 179.6% | 202.9% | 215.2% | 256.2% | 273.9% |
Debt/Total Assets | 39.8% | 42.2% | 43.8% | 46.8% | 49.6% |
Gross Leverage | 2.5x | 2.7x | 2.8x | 2.9x | 2.9x |
Net Leverage | 2.2x | 2.2x | 2.6x | 2.7x | 2.8x |
Interest Coverage | 8.4x | 7.8x | 8.1x | 7.3x | 6.5x |
EBITDA Margin | 49.6% | 50.4% | 50.7% | 48.6% | 49.1% |
CreditSights View
AS OF 01 Apr 2024We have a Market perform recommendation on PLDT. PLDT’s Jan-2031 bond trades 19 bp tighter than Globe’s Jul-2030 bond. We think PLDT should trade 45-50 bp tighter than Globe as PLDT’s IG rated status, stronger net leverage, and stronger free cash flows could outweigh its arguably weaker shareholder backing. We remain comfortable with PLDT’s sturdy credit profile aided by a resilient broadband business and PHP 98.3 bn of tower sales (PHP 15.3 bn to close in FY24). The concluded capex overrun audit and swift management replacements also help to meaningfully ease corporate governance fears. 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.
Recommendation Reviewed: April 01, 2024
Recommendation Changed: May 31, 2022
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Fundamental View
AS OF 04 Mar 2024Globe’s FY23 earnings grew modestly but leverage metrics worsened amid delays in tower sales closures, a weak broadband business, sticky dividends, and still-historically high capex (even if lower YoY).
We believe credit metrics may improve only slightly in FY24 as modest EBITDA growth, lower YoY capex, and PHP 40 bn of residual tower sales closures through 1H24 are negated by potentially higher dividend payouts. FCFs are likely to remain negative in FY24.
While we acknowledge the competitive pressures by new entrant DITO, we think the impact is mitigated by Globe’s still-dominant mobile market position and DITO’s slowing expansion (given its weak financials and the costly capex involved).
Business Description
AS OF 04 Mar 2024- 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 (FY22 revenue market share [RMS] of 52% vs PLDT 40%), but loses out to PLDT in the home broadband space (FY22 RMS of 28%-30% vs PLDT 48%-50%).
- Globe is largely owned by two established corporate groups – Ayala Corporation (~47 stake) and Singtel (~43% stake).
Risk & Catalysts
AS OF 04 Mar 2024Globe faces mounting competitive pressures from new mobile entrant DITO and incumbent broadband competitor PLDT.
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; Globe recently raised the upper end of its dividend policy from 75% to 90% of net income, suggesting an increased skew to shareholder-friendly actions.
Key Metrics
AS OF 04 Mar 2024PHP bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Debt to Book Cap | 63.2% | 67.2% | 69.4% | 67.5% | 69.7% |
Net Debt to Book Cap | 59.4% | 59.4% | 63.0% | 63.7% | 66.6% |
Debt/Total Equity | 171.7% | 204.5% | 227.2% | 208.1% | 230.5% |
Debt/Total Assets | 45.9% | 49.8% | 56.7% | 57.1% | 60.3% |
Gross Leverage | 1.8x | 2.2x | 3.3x | 3.9x | 4.3x |
Net Leverage | 1.6x | 1.9x | 3.0x | 3.7x | 4.1x |
Interest Coverage | 9.9x | 9.3x | 7.6x | 5.9x | 4.6x |
EBITDA Margin | 47.8% | 48.7% | 46.7% | 46.7% | 47.7% |
CreditSights View
AS OF 04 Mar 2024We downgrade Globe Telecom to U/P from M/P. Globe’s benchmark Jul-2030 trades only 14 bp wider than PLDT’s Jan-2031; we see fair value at ~45-50 bp wider given Globe’s poorer net leverage (4.1x vs. PLDT’s 2.8x), unrated status, and poorer free cash flows that outweigh its arguably stronger shareholder backing from Singtel and Ayala Corporation. We also note Globe is trading near its historical tights. We expect Globe to improve its net leverage by only slightly in FY24 (~0.2x-0.3x), as lower capex and residual ~PHP 39 bn of tower sales closures are offset by a continued weak broadband business and sticky dividends. Globe also recently revised its dividend policy to 60%-90% of net income from 60%-75% previously, suggesting an increased skew towards shareholder-friendly actions.
Recommendation Reviewed: March 04, 2024
Recommendation Changed: March 01, 2024
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Fundamental View
AS OF 07 Feb 2024We continue to be encouraged by the underlying momentum in the Family of Apps business, particularly the strong revenue guidance for 1Q24 which implies an acceleration to 29% YoY growth in constant currency at the high-end. Credit metrics are rock solid with 0.3x gross leverage and $47 bn net cash.
We continue to expect Meta to be a regular/annual issuer to fund its shareholder returns and big investments in AI and metaverse, although our best guess is this will be in 2H24 given its increased cash balance and improved FCF generation. Longer term, we expect Meta to adhere to its previously communicated financial policy of maintaining a positive or neutral cash balance.
Business Description
AS OF 07 Feb 2024- Meta Platforms is the largest social networking company in the world. Meta generates substantially all of its revenue from advertising which includes Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications.
- In 4Q23, Family of Apps was 97% of revenue (96.5% from advertising and 0.8% from other) and Reality Labs was 3% of revenue. Reality Labs generated $16.1 bn in operating losses during LTM 4Q23 as the company is investing heavily in the metaverse.
- Total MAUs and DAUs are 3,065 mn and 2,110 mn respectively at 4Q23. While US & Canada have the lowest number of users, they generate higher revenue than other regions given significantly higher ARPU. Revenue is 46% from US & Canada, 24% from Europe, 19% from Asia Pacific, and 11% from Rest of World.
- Meta is headquartered in Menlo Park, California. Employee headcount was 67.3k at 4Q23.
Risk & Catalysts
AS OF 07 Feb 2024In December 2020, the FTC filed a lawsuit against Meta targeting its acquisitions of Instagram and Whatsapp. If Meta is forced to unwind prior acquisitions, this would be a credit negative given reduced scale and diversification.
Meta’s Facebook and Instagram are exposed to rising competition from TikTok and other social media platforms. Meta has cloned TikTok’s short-from video with Reels. The US has threatened to ban TikTok unless its Chinese owners divest its stake.
Meta’s business model relies almost entirely on user-generated content. As such, there are risks related to customer privacy (e.g., Cambridge Analytica data scandal in 2018) and regulatory changes (e.g., Section 230 protections).
In October 2022, activist Altimeter Capital wrote a letter to Zuck and Board although it was on the friendly-side of activism and some suggestions have already been implemented.
Key Metrics
AS OF 07 Feb 2024$ mn | 2019 | 2020 | 2021 | 2022 | LTM 4Q23 |
---|---|---|---|---|---|
Revenue YoY % | 26.6% | 21.6% | 37.2% | (1.1%) | 15.7% |
EBITDA | 34,562 | 46,069 | 63,882 | 49,622 | 71,955 |
EBITDA Margin | 48.9% | 53.6% | 54.2% | 42.6% | 53.3% |
CapEx % of Sales | 22.1% | 18.3% | 16.3% | 27.5% | 20.8% |
Sh. Ret. % of CFO-CapEx | 20% | 27% | 116% | 152% | 46% |
Net Debt | (54,855) | (61,954) | (47,998) | (30,815) | (47,018) |
Gross Leverage | 0.0x | 0.0x | 0.0x | 0.2x | 0.3x |
EV / EBITDA | 15.5x | 15.8x | 14.0x | 5.8x | 12.3x |
CreditSights View
AS OF 18 Apr 2024Meta has Aa3/AA-/NR ratings (following the Moody’s upgrade) which reflects extremely strong credit metrics of 0.3x gross leverage and $47 bn net cash. We are encouraged by the underlying momentum in the business, particularly the strong revenue guidance for 1Q24 which implies a 7 pt acceleration to 29% YoY growth in cc at the high-end. We expect Meta to be a regular/annual issuer although our best guess is this will be in 2H24 given its increased cash balance and improved FCF generation. Longer term, we expect Meta to adhere to its previously communicated financial policy of maintaining a positive or neutral cash balance. Meta does have legal and regulatory risks notably an FTC suit that seeks to unwind its prior acquisitions of Instagram and WhatsApp.
Recommendation Reviewed: April 18, 2024
Recommendation Changed: April 18, 2024
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Fundamental View
AS OF 15 Dec 2023We maintain our Market perform recommendation on JD (Baa1/A-/NR) post its 3Q23 results; revenues were slightly ahead of consensus; margins were flat YoY; but debt metrics and cash flow improved. Management remains optimistic on JD’s outlook in FY24 on continued consumption recovery and market share expansion.
Within the A-rated China tech sector, we continue to prefer Alibaba (O/P) and Tencent (O/P) over JD. JD trades only ~9-11 bp wider than the comparable bonds of Tencent and Alibaba, despite being rated 2-3 notches lower. JD also provides a spread pick up of 63 bp against US A-rated tech.
Business Description
AS OF 15 Dec 2023- JD is one of China's leading e-commerce and retail infrastructure service providers.
- JD has a large fulfillment infrastructure which includes over 1,600 warehouses with an aggregate gross floor area of approximately over 32 mn square meters, as of 30 September 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 283.6 bn as of 14 December 2023.
Risk & Catalysts
AS OF 15 Dec 2023While Chinese regulators have adopted a friendlier stance towards tech companies, any regulatory clampdowns may still adversely affect the business of JD (e.g. antitrust rules, data security & personal data protection laws).
Intensifying competition amongst Chinese eCommerce platforms with the entrance of new live-streaming/short-form video platforms and group buying discount platforms may result in slower topline growth and weaker EBITDA margins for JD as its increase its user/merchant incentives and promotional activities to defend its market share.
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 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 15 Dec 2023RMB mn | FY19 | FY20 | FY21 | FY22 | LTM 3Q23 |
---|---|---|---|---|---|
Debt to Book Cap | 15.7% | 12.5% | 12.2% | 19.2% | 19.1% |
Debt/Total Equity | 18.7% | 14.2% | 13.8% | 23.7% | 23.6% |
Debt/Total Assets | 7.2% | 7.5% | 6.9% | 10.9% | 11.3% |
Gross Leverage | 1.2x | 1.4x | 1.8x | 1.9x | 1.7x |
Interest Coverage | 21.3x | 20.1x | 16.1x | 16.3x | 15.6x |
EBITDA Margin | 2.7% | 3.0% | 2.0% | 3.3% | 3.9% |
CreditSights View
AS OF 07 Mar 2024We maintain our Market perform recommendation on JD (Baa1/A-/NR) post its 4Q23 results; topline growth and EBITDA margin was better than expected, and cash flow generation improved; however the company’s net cash position shrank due to higher investments in wealth management products; we see continued pressure on growth and margin in FY24 and FY25 due to intensifying e-Commerce competition; but we expect JD to maintain stable cash flow, total leverage metrics and a net cash position. Among A-rated China tech companies, we continue to prefer Alibaba (A1/A+/A+; Outperform) and Tencent (A1/A+/A+; Outperform) over JD, as we think JD trades tight. We see limited further positive for JD to tighten spreads from the current historic low levels. We prefer JD 2030.
Recommendation Reviewed: March 07, 2024
Recommendation Changed: November 21, 2022