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
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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