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Rating Action:

Moody's affirms Alibaba's A1 ratings; outlook stable

 The document has been translated in other languages

30 Aug 2019

Hong Kong, August 30, 2019 -- Moody's Investors Service has affirmed A1 issuer rating and A1 senior unsecured rating of Alibaba Group Holding Limited.

The outlook is maintained at stable.

RATINGS RATIONALE

"The ratings affirmation reflects Alibaba's leading market position in China, and its solid track record of cash flow generation and maintenance of a strong financial profile," says Lina Choi, a Moody's Senior Vice President.

"We expect Alibaba will continue to expand its business scope in a prudent manner, by generating steady operating cash flow and maintaining a financial profile appropriate for its A1 ratings," adds Choi, who is also Moody's Lead Analyst for Alibaba.

Alibaba commands a leading position in China's fast-growing e-commerce industry, underpinned by its established brand name and integrated ecosystem, large revenue scale of RMB411 billion and track record of monetizing its annual active user base of 674 million in the 12 months ended 30 June 2019.

Moody's expects Alibaba's revenue will continue to grow by 30%-35% over the next 12-18 months, mainly driven by solid growth in its core commerce businesses, in particular the new retail businesses. This growth is supported by increasing market penetration in lower-tier cities and towns in China, improving logistics infrastructure, digital commerce and services technologies, and its investments in new business initiatives.

Alibaba's adjusted EBITDA margin declined to 26% in the fiscal year ended 31 March 2019 from 44% in fiscal 2015, mainly due to continued investments in new services and technologies, as well as the increasing weight of lower-margin new retail services. However, Moody's expects the company's solid revenue growth will outpace EBITDA margin dilution, resulting in 15%-20% absolute EBITDA growth to RMB120-125 billion over the next 12-18 months.

Such strong EBITDA growth should in turn allow the company to generate robust operating cash flow of around RMB160-170 billion over the next 12-18 months, compared to RMB151 billion in fiscal 2019. This strong cash-flow generation supports Alibaba's investment needs and limits the need to take on more debt.

Moody's forecasts that the company's adjusted debt/EBITDA will below 2.0x over the next 12-18 months. Coupled with a consistently high retained cash flow (RCF)/debt ratio and a net cash position of around RMB30 billion, the company is well positioned at its A1 rating level.

Alibaba's liquidity is strong. At 30 June 2019, it held RMB212.2 billion in cash and cash-like resources. Together with its estimated annual operating cash flow of RMB150-160 billion, Alibaba's internal cash flow is more than sufficient to cover its reported RMB23 billion in short-term debt, capital spending, investment needs and announced share repurchase plans.

Alibaba is also in the process of acquiring a 33% equity interest in Ant Financial Services Group (AFSG), a private company that provides a wide range of financial services, including online payments, consumer loans and wealth management products. Moody's has considered the potential contingent liabilities and reputational risks associated with AFSG, and believes such risks are partially mitigated by the latter's track record of raising new capital from a diversified shareholders base. Alibaba's strong financial profile provides an additional buffer against these risks.

Alibaba's ratings also considers the following environmental, social and governance (ESG) factors.

The company faces moderate data privacy and security risks, as it generates and processes a large quantity of personal, transaction, demographic and behavioral data, in turn raising legal, regulatory and reputational risks. The company manages such risks, inter alia, by complying with legal and regulatory requirements for the collection, processing, retention and protection of its data. However, it could face operating and financial damage in the event of a cyber breach.

Governance risks that Moody's considered include the concentration of director selection voting power in Alibaba Partnership, which is comprised primarily of the company's directors and executive officers. A voting agreement provides that Softbank, Altaba, Jack Ma and Joe Tsai (which in aggregate hold 43.7% of Alibaba's shares as of 3 June 2019) will vote in favor of the Alibaba Partnership director nominees.

In addition, Alibaba operates under a variable interest entities (VIE) structure, and the main VIEs (onshore operating companies) that generate cash flow are controlled by two limited partnerships comprised of members of Alibaba Partnership or senior management who are PRC citizens.

However, these governance risks are mitigated by the balanced board composition, featuring a majority of independent non-executive directors, and the presence of the strategic shareholders, namely SoftBank Group Corp. (Ba1 stable) and Altaba Inc. In addition, the company's shareholder base is highly diversified and includes more than 200 shareholders across the world.

The stable outlook reflects Moody's expectation that Alibaba will (1) maintain its dominant position in China's e-commerce market; (2) continue to generate steady cash flow from its domestic retail and wholesale marketplaces to support its strong balance sheet and net cash position; and (3) not engage in larger-than-expected debt-funded acquisitions that will elevate gross debt/EBITDA toward 2.0x on a sustained basis.

Upward rating pressure is limited in the near term, because Alibaba's rating is already at the same level as that of the Government of China, where it conducts most of its operations and activities.

Downward rating pressure could arise if Alibaba (1) fails to fend off competition and experiences substantial declines in market shares or substantial disruptions in its integrated ecosystem that could adversely affect revenue growth and cash flow generation; (2) deviates from its stated financial policy and aggressively grows the loan portfolio size at AFSG beyond Moody's current expectations, thereby raising the risk of additional financial requirements from Alibaba if nonperforming loans rise; or (3) engages in aggressive acquisitions that strain its balance-sheet liquidity or raise its overall risk profile.

Financial indicators for a downgrade include the company's adjusted debt/EBITDA trending toward 2.0x, or a net debt position, both on a sustained basis. A sustained deterioration in the company's adjusted retained cash flow/debt from the current level of 70%-85% could also result in a downgrade. Furthermore, adverse developments in the regulatory framework that adversely affect Alibaba's operations or business model would also create downward rating pressure.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Founded in 1999 by Jack Ma and a group of partners, Alibaba Group Holding Limited is a Chinese e-commerce company that provides consumer-to-consumer, business-to-consumer, and business-to-business sales services in its various marketplaces. It also provides data-centric cloud computing services and digital media and entertainment services.

Alibaba completed its initial public offering on the New York Stock Exchange on 19 September 2014.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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

No Related Data.
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