Fitch Rates Alibaba's Notes Final 'A+'
(The following statement was released by the rating agency) HONG KONG/SEOUL, December 11 (Fitch) Fitch Ratings has assigned China-based Alibaba Group Holding Limited's (A+/Stable) USD700 million 2.8% senior unsecured notes due 2023, USD2,550 million 3.4% senior unsecured notes due 2027, USD1,000 million 4.0% senior unsecured notes due 2037, USD1,750 million 4.2% senior unsecured notes due 2047 and USD1,000 million 4.4% senior unsecured notes due 2057 a final rating of 'A+'. The assignment of the final ratings follows the receipt of documents conforming to information already received. The final ratings are in line with the expected rating assigned on 26 November 2017. The notes are rated in line with Alibaba's senior unsecured rating of 'A+' as they rank pari passu with the issuer's existing and future senior unsecured debt. The proceeds from the senior unsecured notes will be used for general corporate purposes, including working capital needs, repayment of offshore debt and potential acquisitions of, or investments in, complementary businesses. KEY RATING DRIVERS Dominant Market Positions: Alibaba's ratings benefit from its dominant position in China's online shopping market. We estimate that the gross merchandise volume (GMV) transacted on Alibaba's China retail marketplaces accounted for over 70% of China's total online shopping GMV in 2Q17, based on iResearch data. The company's mobile platform continues to go from strength to strength, with monthly active users reaching 549 million in September 2017, compared with 450 million in September 2016. Alibaba also holds a market leader position in China's public cloud market, with over 40% revenue share in 2016, according to IDC. It was the third-largest infrastructure-as-a-service vendor globally in terms of revenue in 2016, according to Gartner. Thriving Ecosystem: As Alibaba's ecosystem grows, network effects draw more users, creating a virtuous cycle. The marketplaces are vital to merchants and highly valued by buyers. In addition, services offered by other participants - including the Alipay online payment system and 15 logistics partners - further enhance users' experience on Alibaba's platform. In the financial year ended 31 March 2017 (FY17), about 72% of GMV on Alibaba's China retail marketplaces was settled through Alipay and Cainiao Network and its logistics partners enabled the delivery of 16.6 billion packages from Alibaba's China retail marketplaces. Investments in New Businesses: We expect Alibaba to continue investing in its new retail model (integrating online-offline customer offerings), cloud computing, digital media and entertainment, international expansion, logistics services, local services and other new businesses, as the company aims to offer an integrated solution to merchants and consumers. These new businesses will weigh on its margins and require further investment in marketing, capex and acquisitions to solidify its market positions in the next few years. However, Alibaba's core commerce business has strong profitability and cash generation, which should be adequate to fund these ambitions. High Profitability and Cash Generation: We expect Alibaba to maintain high profitability and robust cash generation, driven by its core commerce operations. The company's reported adjusted EBITA margin, excluding non-cash expenses such as share-based compensation expenses, amortisation and impairment of goodwill, was 44% in FY17 and 42% in 2QFY18. The same measure for its core commerce business was 57% in 2QFY18. Possibility of Support for AFS: Alipay, although outside the group, is crucial to Alibaba's business. Fitch believes Alipay's parent, Ant Financial Services (AFS), would probably need to be supported by Alibaba were it to enter financial difficulties. However, we believe the risk of providing support to AFS is low. AFS operates an asset-light business model. Low Leverage: Fitch expects Alibaba to maintain a conservative capital structure with a strong net cash position in the next few years. Strategic investments and acquisitions and the execution of a USD6 billion two-year share buyback programme may reduce the net cash position in FY18. However, we expect robust free cash flow (FCF) generation to replenish the company's net cash position in the next three years. We expect Alibaba's funds flow from operations (FFO) adjusted leverage to stay below 1.5x on a sustained basis. Alibaba's management is committed to keeping its debt/EBITDA ratio under 1.5x. VIE Weaknesses Mitigated: Alibaba generates over 80% of revenue from its wholly owned subsidiaries in China and keeps almost all the cash and assets within these subsidiaries, rather than at the contractually controlled, consolidated and affiliated entities. The alignment of the objectives of Alibaba and its affiliates, and the company's continued good relationships with the government and regulatory authorities, mitigate the risks from the variable interest entity (VIE) arrangements. DERIVATION SUMMARY Alibaba's ratings reflect its strong business profile, driven by its dominant market position in China's online shopping market and thriving ecosystem, and its solid financial profile, with robust profitability and cash generation. The company also has abundant liquidity. We believe Alibaba's credit profile compares favourably with its internet peers, such as Baidu, Inc. (A/Stable), eBay Inc. (BBB/Stable), Expedia, Inc. (BBB-/Stable), but is similar to Tencent Holdings Limited (A+/Stable). KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Alibaba include: - maintaining its market dominance in China's online shopping market, which is likely to expand at a compound annual growth rate (CAGR) of over 20% in the next three years - revenue growth to remain robust at a CAGR of over 20% in the next three years - operating margin, excluding share-based compensation, at 35%-40% in the next three years - annual capex of CNY20 billion-27 billion in the next three years - USD6 billion share repurchase programme in FY18-FY19 - no cash dividend in the next three years RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Positive rating action is unlikely in the medium term, taking into account Fitch's expectation of profit growth. The agency may consider an upgrade if the company develops businesses that significantly diversify cash generation away from operations that are subject to Chinese government and regulatory risk. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Evidence of greater government, regulatory or legal intervention leading to an adverse change in the company's operations, profitability or market share - Major loss of market share in key products and services - Significant M&A that negatively affect the operations or the business profile - Decline in operating cash flow on a sustained basis - A shift to more aggressive financial policies, for example, a loss of its net cash position or FFO adjusted leverage above 1.5x (FY17: 1.3x) on a sustained basis. However, in itself, FFO adjusted leverage rising above this target is unlikely to lead to a downgrade should the company retain its strong net cash position and high FCF margin. LIQUIDITY Abundant Liquidity: Fitch expects Alibaba to maintain abundant liquidity in the medium term. Its readily available cash of CNY149 billion at end-September 2017 exceeded total debt of CNY92 billion. Debt due within one year amounted to about CNY16 billion at end-September 2017. In April 2017, Alibaba replaced its original undrawn USD3.00 billion revolving credit facility with a new USD5.15 billion revolving credit facility, which it has not yet been drawn upon. The revolving credit facility can provide further liquidity headroom. Contact: Primary Analyst Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Shelley Jang Director +822 3278 8370 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Date of Relevant Rating Committee: 17 November 2016 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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