Hong Kong, October 28, 2022 -- Moody's Investors Service has affirmed Alibaba Group Holding Limited's A1 issuer rating and senior unsecured ratings.
The outlook remains stable.
"The rating affirmation reflects the company's established brand name, leading market position in the e-commerce industry, track record of steady cash flow generation and prudent financial policy. These factors provide a strong buffer against intensifying competition and regulatory challenges," says Lina Choi, a Moody's Senior Vice President.
RATINGS RATIONALE
Alibaba's A1 ratings reflect its leading position as an integrated and diversified e-commerce platform, allowing it to grow steadily given its large user base, and creating synergies with new and expanded business initiatives.
The rating also considers Alibaba's track record of monetization through fees from online marketing, services and subscriptions; its steady cash flow; and solid net cash position. These factors will support the company's investment needs and shareholder return requirement, and provide a strong buffer against regulatory challenges and potential contingent liabilities associated with Ant Group, its affiliate company under business reorganization.
Growth rates will slow for Alibaba's core commerce segment, given the ongoing economic headwinds and dampened consumption appetite. The company will continue to expand new business segments such as local consumer services and cloud services, which carry lower profit margins than the core commerce segment. While the new segments will support revenue growth, their low margins will weigh on the company's consolidated profitability.
The ratings also incorporate risks stemming from ongoing regulatory scrutiny. While its exposure to event risk has decreased following its payment of a RMB18.2 billion antitrust penalty and the closure of that investigation in 2021, Moody's expects tightened regulatory monitoring on large platforms including Alibaba to continue. To counter intensifying competition while staying fully compliant with antitrust regulations, Alibaba will likely increase its investments in product development, customer services and other selling and marketing costs, which will continue to weigh on its profit margins.
As such, Moody's expects Alibaba's revenue growth rate to moderate to 6%-8% in the coming 12-18 months, compared with its 31% per annum average revenue growth in the three years ended March 2022. At the same time, the agency expects the company's consolidated EBITDA margins to decline to around 16%-18%, compared with 20% Moody's estimated in the year ended March 2022.
Despite slowing growth and margin erosion, Alibaba's EBITDA will remain at around RMB150 billion-RMB170 billion per annum in the next 1-2 years. Moody's expects the company to stay prudent in its investments and execution of shareholder repurchase programs, and maintain low leverage. Alibaba generated free cash flow over the last five fiscal years, and maintained a retained cash flow coverage of total debt of around 70%. Its strong cash flow has helped limit its total debt to around RMB150 billion-RMB180 billion during the same period.
Moody's expects Alibaba to continue generating free cash flow over the next 1-2 years, and that its retained cash flow coverage of total debt will stay at around 65%-80%. The agency also expects the company's leverage, as measured by adjusted debt/EBITDA, to stay at around 1.0x-1.1x. These credit metrics are appropriate for its A1 ratings.
Alibaba's liquidity is excellent. As of 30 June 2022, it held RMB453 billion in cash and cash-like resources. Together with an estimated annual adjusted EBITDA of RMB150 billion-RMB170 billion, Alibaba's internal cash flow is more than sufficient to cover its reported short-term debt of RMB13.5 billion, capital spending and investment needs.
Alibaba's issuer rating is not affected by subordination to claims at the operating company level, because the holding company benefits from cash flow upstreamed from its operating companies under the VIE structure. In addition, despite Alibaba's status as a holding company, Moody's considers the company's operational diversification across multiple segments in different geographies a meaningful mitigant against structural subordination risks.
ESG considerations have a neutral-to-low impact on Alibaba's ratings. The company's exposure to social risks is moderately negative, reflecting the moderate data privacy and security risks it faces because it generates and processes a large volume of personal, transaction, demographic and behavioral data, which increase its exposure to legal, regulatory and reputational risks. In terms of governance risks, the company's balanced board composition featuring mostly independent directors, its highly diversified shareholder base across the world, consistently prudent financial strategy and solid management track record counterbalance the high concentration of director selection voting power in Alibaba Partnership.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook on Alibaba's issuer and senior unsecured ratings reflects Moody's expectation that Alibaba will maintain its dominant position in China's e-commerce market; continue to generate steady cash flow from its core commerce marketplaces to support its strong balance sheet with a net cash position; and refrain from engaging in larger-than-expected debt-funded acquisitions, such that its financial profile remains appropriate for its A1 ratings in the next 1-2 years.
Upward rating pressure will be limited in the near term because Alibaba's issuer rating is already at the same level as the sovereign rating of China, where the company conducts most of its operations and activities.
Moody's could downgrade the ratings if Alibaba (1) fails to fend off competition and experiences substantial declines in its market shares or substantial disruptions in its integrated ecosystem that hurt its revenue growth and cash flow; (2) deviates from its stated financial policy; and (3) engages in aggressive acquisitions that strain its balance sheet liquidity or increase its overall risk profile.
Financial indicators for a downgrade include adjusted debt/EBITDA trending toward 2.0x or a net debt position, both on a sustained basis. Moody's will also monitor for any sustained deterioration in the company's adjusted retained cash flow/debt, which has remained at around 70%-85% since 2015.
Furthermore, adverse developments in China's regulatory framework that adversely affect Alibaba's operations and cash flow generating capabilities, or result in a significant capital call from Ant Group, would strain the rating.
The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Founded in 1999 by Jack Ma and a group of partners, Alibaba Group Holding Limited (Alibaba) is a global leader in retail commerce, whose platform enables merchants, brands, retailers and other businesses to engage and transact with their users and customers.
Predominantly focused on China, Alibaba operates various retail and wholesale marketplaces within its core commerce segment. The company also engages in cloud computing services, digital media and entertainment and innovation initiatives. Online escrow payment services are provided by Ant Group.
Alibaba owns a 67% stake in Cainiao Network, an operator of a logistics data platform and global fulfilment network that leverages the capacities of local partners.
Alibaba completed its initial public offering on the New York Stock Exchange on 19 September 2014. The company completed its secondary public offering on the Hong Kong Stock Exchange on 26 November 2019.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Lina Choi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
