Moody's: Alibaba's (BABA) Q116 Results Support 'A1' Rating

Moody's Investors Service says that Alibaba Group Holding Limited's (NYSE: BABA) results for April-June 2015 — the first quarter of its 2016 fiscal year — support the company's A1 issuer and senior unsecured debt ratings, and the stable outlook on the ratings.

"Alibaba's consistently strong revenue growth is in line with Moody's expectations, and reflects the company's success in growing transaction volumes in its China retail market place, and the increasing monetization rates for its mobile channel," says Lina Choi, a Moody's Vice President and Senior Analyst.

In April-June 2015, Alibaba's China gross merchandize value (GMV) rose 34% year-on-year to RMB673 billion, with mobile comprising 55% of total GMV. Its revenue also grew 28% year-on-year to RMB20.2 billion in the same period.

Looking ahead, Moody's expects that the company's mobile revenue contribution will continue to exceed 50% over the next 12-18 months, as consumers increasingly access its marketplaces through mobile devices.

Moody's points out that the company's mobile monetization rate — which is at 2.15% — will trend closer to the monetization rates for personal computers of 2.5%-2.6%, as the company enriches services offered to buyers on mobile devices, and improves customer engagement on its platform.

Alibaba's adjusted EBITDA margin in April-June fell to 42% from 44% in the previous fiscal year ended 31 March 2015, due to the consolidation of acquired businesses — mainly UCWeb and AutoNavi — and to investments in new business initiatives, such as over-the-top TV services, mobile operating systems and local services.

Moody's believes that the company's growth in transaction volumes and increased monetization rate will help strengthen its profitability profile and keep its adjusted EBITDA margin stable at around 35%-40% over the next 12-18 months.

Accordingly, Moody's expects Alibaba to register an adjusted debt/EBITDA of around 1.5x and debt to capital below 25% over the next 12-18 months. Both ratios are appropriate for its current A1 ratings.

"Because Alibaba's cash position remains strong, the company can support its business expansion," adds Choi, who is also the Lead Analyst for Alibaba.

Alibaba's strong cash holdings and operating cash flow are adequate to cover its investments and payment obligations.

The company reported free cash holdings of RMB104 billion at 30 June 2015. It also generated strong operating cash flow of RMB10.4 billion in April-June 2015; an amount which was comparable to the RMB10.2 billion recorded in April-June 2014.

Moody's expects that Alibaba will further expand the reach of its ecosystem, enhance its mobile capabilities, and enrich its applications and products.

The recently announced acquisition in August 2015 of a 19.99% stake in the Chinese electronics chain, Suning Commerce Group Limited (unrated), is a case in point. Alibaba's gross investment in Suning totaled RMB28.3 billion, which will be net of the RMB14.3 billion cash from Suning's subscription to Alibaba shares.

In addition the company will need to fund its share repurchase program which Moody's estimates at $4 billion (RMB 25 billion) over the next two years.

Moody's expects that Alibaba will maintain a prudent financial policy and accommodate its investment and shareholder return requirements within the limits of its cash flow and cash resources.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Please see the Credit Policy 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 on its various marketplaces. It also provides online escrow payment services and data-centric cloud computing services.

Alibaba owns a 48% stake in China Smart Logistics Network, a nationwide delivery and fulfillment service provider.

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

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