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Sub-sector: Technology
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
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.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.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
How may we help you?
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