Sector: Technology
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Fundamental View
AS OF 28 May 2024We maintain our Market perform recommendation on JD (Baa1/A-/NR) post its largely in-line 1Q24 revenue. Growth accelerated on a pick up of general merchandise sales, marketing and logistic service revenues. Gross/EBITDA margin improved and FOCF narrowed on lower capex. Net cash position shrank as the company used internal cash to fund share buybacks. We expect the intense competition among Chinese eCommerce platforms to cap revenue upside and pressure EBITDA margin in FY24; we expect continued strong positive FOCF, but the bulk would be used for shareholder rewards, resulting in flat Total debt/EBITDA and net cash position. We continue to prefer Alibaba and Tencent (especially the 10-20Y part) among A-rated China tech. We think JD’s 2050 is relatively more attractive.
Business Description
AS OF 28 May 2024- 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 operated by the company, and and 2,000 cloud warehouses operated by third-party warehouse owner-operators under JD Logistics Open Warehouse Platform. Its warehouse network had an aggregate gross floor area of approximately over 32 mn square meters, as of 31 December 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 335.6 bn as of 28 May 2024.
Risk & Catalysts
AS OF 28 May 2024While 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 28 May 2024RMB mn | FY20 | FY21 | FY22 | FY23 | LTM 1Q24 |
---|---|---|---|---|---|
Debt to Book Cap | 12.5% | 12.2% | 19.2% | 18.8% | 19.6% |
Debt/Total Equity | 14.2% | 13.8% | 23.7% | 23.1% | 24.3% |
Debt/Total Assets | 7.5% | 6.9% | 10.9% | 10.9% | 11.6% |
Gross Leverage | 1.4x | 1.8x | 1.9x | 1.5x | 1.5x |
Interest Coverage | 20.1x | 16.1x | 16.3x | 15.5x | 16.3x |
EBITDA Margin | 3.0% | 2.0% | 3.3% | 4.1% | 4.3% |
CreditSights View
AS OF 17 May 2024We maintain our Market perform recommendation on JD (Baa1/A-/NR) post its largely in-line 1Q24 revenue. Growth accelerated on a pick up of general merchandise sales, marketing and logistic service revenues. Gross/EBITDA margin improved and FOCF narrowed on lower capex. Net cash position shrank as the company used internal cash to fund share buybacks. We expect the intense competition among Chinese eCommerce platforms to cap revenue upside and pressure EBITDA margin in FY24; we expect continued strong positive FOCF, but the bulk would be used for shareholder rewards, resulting in flat Total debt/EBITDA and net cash position. We continue to prefer Alibaba and Tencent (especially the 10-20Y part) among A-rated China tech. We think JD’s 2050 is relatively more attractive.
Recommendation Reviewed: May 17, 2024
Recommendation Changed: November 21, 2022
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Fundamental View
AS OF 28 May 2024We maintain our Market perform recommendation on Baidu (A3/NR/A) post its uninspiring 1Q24 results. 1Q24 topline growth decelerated to 1.2% YoY as the core advertising slowed and revenues from iQiyi contracted YoY on a falling number of subscribers. 1Q24 EBITDA margin was stable 28.9%. Baidu’s Total debt/EBITDA weakened, FOCF dropped YoY due to higher capex, and net cash position narrowed from YE23. We see limited earnings upside due to the intense competition of the domestic ads market and largely homogeneous competition; we do not expect its AI-related initiatives to translate to better topline and Margin in FY24.
We continue preferring Tencent and Alibaba among A-rated China tech. We prefer Baidu 2030s.
Business Description
AS OF 28 May 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 (75% of 1Q24 revenues) which provides search-based, feed-based and other online marketing services (total: 54% of 1Q24 revenues), as well as products and services from new AI initiatives (22% of 1Q24 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 254.7 bn as of 28 May 2024.
Risk & Catalysts
AS OF 28 May 2024Any 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 28 May 2024RMB bn | FY20 | FY21 | FY22 | FY23 | LTM 1Q24 |
---|---|---|---|---|---|
Debt to Book Cap | 30.4% | 29.7% | 28.5% | 25.0% | 25.7% |
Debt/Total Equity | 43.8% | 42.2% | 39.8% | 33.4% | 34.7% |
Debt/Total Assets | 24.8% | 24.1% | 23.4% | 20.8% | 21.6% |
Gross Leverage | 2.7x | 3.3x | 2.8x | 2.2x | 2.3x |
Interest Coverage | 9.8x | 8.2x | 11.4x | 12.1x | 12.3x |
EBITDA Margin | 28.5% | 22.6% | 26.8% | 29.2% | 29.2% |
CreditSights View
AS OF 17 May 2024We maintain our Market perform recommendation on Baidu (A3/NR/A) post its uninspiring 1Q24 results. 1Q24 topline growth decelerated to 1.2% YoY as the core advertising slowed and revenues from iQiyi contracted YoY on a falling number of subscribers. 1Q24 EBITDA margin was stable 28.9%. Baidu’s Total debt/EBITDA weakened, FOCF dropped YoY due to higher capex, and net cash position narrowed from YE23. We see limited earnings upside due to the intense competition of the domestic ads market and largely homogeneous competition; we do not expect its AI-related initiatives to translate to better topline and Margin in FY24; we continue preferring Tencent and Alibaba among A-rated China tech. We prefer Baidu 2030s.
Recommendation Reviewed: May 17, 2024
Recommendation Changed: August 31, 2022
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Fundamental View
AS OF 15 May 2024Globe’s FY23 earnings and 1Q24 earnings grew modestly, but leverage metrics have not yet improved due to 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 29 bn of residual tower sales closures through 2Q24 are negated by potentially higher dividend payouts.
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).
Weakness in the broadband business could decelerate and improve from 3Q24 onwards.
Business Description
AS OF 15 May 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 15 May 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, capex should meaningfully decline ahead in line with management guidance (FY24E capex ~22% YoY lower than FY23A capex).
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 15 May 2024PHP bn | FY21 | FY22 | FY23 | 1Q23 | 1Q24 |
---|---|---|---|---|---|
Debt to Book Cap | 69.4% | 67.5% | 69.7% | 67.6% | 69.6% |
Net Debt to Book Cap | 63.0% | 63.7% | 66.6% | 64.3% | 66.4% |
Debt/Total Equity | 227.2% | 208.1% | 230.5% | 208.9% | 229.1% |
Debt/Total Assets | 56.7% | 57.1% | 60.3% | 56.3% | 60.0% |
Gross Leverage | 3.3x | 3.9x | 4.3x | 4.0x | 4.3x |
Net Leverage | 3.0x | 3.7x | 4.1x | 3.8x | 4.1x |
Interest Coverage | 7.6x | 5.9x | 4.6x | 5.5x | 4.4x |
EBITDA Margin | 46.7% | 46.7% | 47.7% | 48.2% | 49.4% |
CreditSights View
AS OF 04 Jul 2024We upgrade Globe to Market perform from Underperform. Globe Jul-2030 trades 33 bp wider than PLDT Jan-2031; we see fair value at 30-35 bp wider given Globe’s poorer net leverage, unrated status, and poorer free cash flows that outweigh its arguably stronger shareholder backing from Singtel and Ayala Corporation. We think Globe’s c.2026 perp trades fairly. We do not prefer its Jul-2035 that trades just 2 bp wider than its Jul-2030. We expect Globe to improve its net leverage by only slightly in FY24 as lower capex and residual ~PHP 29 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 PAT from 60%-75% previously, suggesting an increased skew towards shareholder-friendly actions.
Recommendation Reviewed: July 04, 2024
Recommendation Changed: June 18, 2024
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Fundamental View
AS OF 10 May 2024PLDT’s FY23 and 1Q24 results were stable as expected; we see a modestly improving FY24 credit outlook aided by resilient EBITDA growth and residual PHP 15 bn of tower sales, which could offset persisting high capex and dividends.
A potential stake sale of the data center business could drive further deleveraging.
While the spillover of a PHP 33 bn capex overrun to FY24-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 10 May 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 10 May 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 10 May 2024PHP bn | FY21 | FY22 | FY23 | 1Q23 | 1Q24 |
---|---|---|---|---|---|
Debt to Book Cap | 68.3% | 71.9% | 73.3% | 72.2% | 74.1% |
Net Debt to Book Cap | 62.3% | 65.7% | 69.3% | 65.7% | 70.7% |
Debt/Total Equity | 215.2% | 256.2% | 273.9% | 260.3% | 286.6% |
Debt/Total Assets | 43.8% | 46.8% | 49.6% | 46.4% | 49.0% |
Gross Leverage | 2.8x | 2.9x | 2.9x | 2.8x | 2.9x |
Net Leverage | 2.6x | 2.7x | 2.8x | 2.5x | 2.7x |
Interest Coverage | 8.1x | 7.4x | 6.5x | 7.4x | 6.4x |
EBITDA Margin | 50.7% | 48.7% | 49.1% | 48.6% | 52.0% |
CreditSights View
AS OF 18 Jun 2024We have a Market perform recommendation on PLDT. PLDT’s Jan-2031 trades 33 bp tighter than Globe’s Jul-2030, in line with our fair spread differential of 30-35 bp tighter as PLDT’s IG rated status, stronger net leverage, stronger FCFs, and greater exposure to the stabler broadband sector could offset its weaker shareholder backing. We do not like the Jun-2050 that trades just 9 bp wider than the Jul-2030. We are comfortable with PLDT’s sturdy credit profile aided by a resilient broadband business and tower sales (PHP 15 bn to close in FY24), cushioning high capex and dividends. Corporate governance fears have also eased post its capex overrun in end-2022. We are watchful of strong competition in the mobile space due to DITO’s ramp up.
Recommendation Reviewed: June 18, 2024
Recommendation Changed: May 31, 2022
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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 25 Apr 2024Meta has Aa3/AA-/NR ratings which reflects extremely strong credit metrics of 0.2x gross leverage and $40 bn net cash. We are encouraged by Meta’s strong advertising growth relative to peers. However, Meta is poised to go through a heavy investment cycle for both AI and the metaverse, and also significantly stepped up its shareholder returns in 1Q24. We continue to expect Meta to be a regular/annual issuer to fund its shareholder returns and massive investments in AI and metaverse. 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 25, 2024
Recommendation Changed: April 18, 2024
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