Rating Action: Moody’s assigns A1 to Alibaba’s proposed senior notes; outlook stableGlobal Credit Research – 03 Feb 2021Hong Kong, February 03, 2021 — Moody’s Investors Service has assigned an A1 senior unsecured rating to the proposed USD notes to be issued by Alibaba Group Holding Limited. (A1 stable).The rating outlook is stable.Alibaba will use the proceeds for general corporate purposes and for eligible projects in connection with its sustainability notes.RATINGS RATIONALE”Alibaba’s A1 issuer rating reflects its integrated and diversified e-commerce platforms, which provide sustainable cost advantages that allow the company to generate solid profit margins and maintain strong credit quality with a solid net cash position,” says Lina Choi, a Moody’s Senior Vice President.”The rating also takes into account Alibaba’s well-established brand name and dominance in China’s (A1 stable) fast-growing e-commerce market; its track record of monetization through fees from online marketing, services and subscriptions; and transaction-based commissions,” adds Choi.The rating incorporates risks related to Alibaba’s aspiration to continue expanding its business scope within and outside China. As the company expands its businesses, Moody’s expects its currently high profit margins to be diluted because of the consolidation of strategic business initiatives such as Ele.me, Lazada and Cainiao Network. However, these new initiatives should also help the company grow its scale and expand its service offerings, and in turn strengthen its cash flow.The rating also considers increased regulatory risk, as evidenced by a recent antitrust investigation by the State Administration for Market Regulation (SAMR). While the investigation is credit negative and could limit Alibaba’s revenue and earnings growth, the company has a track record of working with regulators to make operational changes without materially hurting its solid business profile.In view of its ongoing investment requirement and heightened regulatory risks, Moody’s expects Alibaba to maintain a strong balance sheet with net cash position over the next one to two years, along with a prudent approach to investments and acquisitions. These factors will provide it with a buffer against further regulatory uncertainties.The rating also takes into account potential contingent liabilities associated with Ant Group Co., Ltd, in which Alibaba holds a 33% stake.Alibaba’s proposed senior unsecured notes will improve its debt maturity profile and expand its capacity to accommodate any funding needs over the next one to two years.The proposed notes will have limited impact on Alibaba’s debt leverage, as earnings growth in the coming one to two years should offset the increase in debt.Moody’s expects Alibaba’s revenue to grow around 20% per annum in the next one to two years from the RMB644.2 billion reported for the 12 months ended December 2020. This compares with 35% revenue growth for the fiscal year ended 31 March 2020. Moody’s also expects the company to maintain steady EBITDA margins of 20%-25%.As such, Moody’s expects Alibaba’s adjusted debt/EBITDA will stay around 1.0x-1.2x in the next one to two years, which is appropriate for its A1 ratings.Alibaba’s liquidity is excellent. As of 31 December 2020, it held RMB456 billion in cash and cash-like resources. Together with estimated annual operating cash flow of RMB180 billion-RMB210 billion, Alibaba’s internal cash flow is more than sufficient to cover its reported short-term debt of RMB15.0 billion, capital spending and investment needs.Moody’s has also considered the following environmental, social and governance (ESG) considerations.In terms of social factors, Alibaba is exposed to heightened scrutiny by regulators with respect to perceived anticompetitive behavior, in turn raising legal, regulatory and reputational risks. These risks could impede Alibaba’s business growth.Alibaba also faces moderate data privacy and security risks, as it generates and processes a large volume of personal, transaction, demographic and behavioral data. 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 considerations include the concentration of director selection voting power in Alibaba Partnership, which is comprised primarily of the company’s directors and executive officers. 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.However, these governance risks are mitigated by the balanced board composition, featuring a majority of independent nonexecutive directors. In addition, the company’s shareholder base is highly diversified and includes more than 200 shareholders across the world.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe 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 domestic retail and wholesale marketplaces to support its strong balance sheet with a solid net cash position, and not engage in larger-than-expected debt-funded acquisitions such that its financial profile will remain appropriate with its A1 ratings in the next 1 -2 years.An upgrade is unlikely, because Alibaba’s rating is already at the same level as China’s sovereign rating, a country where it 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 market shares or substantial disruptions in its integrated ecosystem that hurt revenue growth and cash flow; (2) deviates from its stated financial policy and aggressively grows loans at Ant Group beyond Moody’s current expectations, thereby increasing the risk of additional financial requirements from Alibaba; 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 been maintained around 70%-85% since 2015.Furthermore, adverse developments in the 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 Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, 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 (Alibaba) is a global leader in retail commerce, which 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 through Ant Group.Alibaba owns a 63% stake in Cainiao Network, an operator of a logistics data platform and a global fulfilment network leveraging on capacities of local partners.Alibaba completed its initial public offering on the New York Stock Exchange on 19 September 2014. 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