Fundamental ViewAS OF 07 Dec 2022
We have an Outperform on Alibaba, and we remain constructive on its credit outlook.
Alibaba reported a decent set of F2Q23 results, with growth showing signs of emerging recovery and its profitability margins improved. Looking ahead, we expect Alibaba growth to continue to rebound on the back of China’s reopening, and for its profitability to remain stable. We also expect Alibaba to maintain its healthy leverage metrics and net cash position in the next 6-12 months.
We think that Alibaba $-bonds are trading at attractive levels compared to its A-rated US tech and China corporate peers. We have a preference for its $-bonds with maturity <5Y. We expect Alibaba's spreads to tighten against its aforementioned peers as China gradually reopens, alongside a supportive tech regulation environment.
Business DescriptionAS OF 07 Dec 2022
- 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 Core Commerce (73.0% of F2Q23 revenue), Cloud Computing (10.0%), Digital Media and Entertainment (4.1%, which includes Youku and UC Browser), Cainiao (6.5%), Local Consumer Services (6.3%), and Innovation Initiatives/Others (0.2%, 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 1.69 tn as of 7 December 2022.
Risk & CatalystsAS OF 07 Dec 2022
Resurgence in COVID-19 cases may cause supply chain disruptions if production suspensions are implemented.
Regulatory clampdown (e.g. US SEC delisting risk, anti-monopoly guidelines, data security 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 MetricsAS OF 28 Feb 2023
|CNY BN||LTM F1Q22||FY22||FY21||FY20||FY19|
|Debt to Book Cap||12.2%||11.6%||12.1%||12.5%||17.9%|
|Net Debt to Book Cap||n/m||n/m||n/m||n/m||(7.9%)|
CreditSights ViewAS OF 07 Dec 2022
We 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 Single-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.
Recommendation Reviewed: February 27, 2023
Recommendation Changed: August 05, 2022