In this file:


·         Fitch Affirms Alibaba at 'A+'; Outlook Stable

·         Charlie Munger Doubles Down On Alibaba



Fitch Affirms Alibaba at 'A+'; Outlook Stable


Fitch Ratings

07 Oct, 2021


Hong Kong - 07 Oct 2021: Fitch Ratings has affirmed China-based Alibaba Group Holding Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'A+'. The Outlook is Stable. The agency has also affirmed all the company's outstanding senior unsecured notes at 'A+'.


The affirmation reflects our expectation that Alibaba will maintain its key market positions and healthy relationships with China's government and regulatory authorities. Its ratings are underpinned by leadership positions in China's online shopping and cloud computing markets, robust free cash flow (FCF) generation and a highly conservative capital structure with a large net cash position.


The rapidly evolving regulatory environment of China's internet sector is likely to slow Alibaba's profit growth. However, the company's strong financial profile should act as a cushion and support higher investment and share repurchases. We believe ongoing rectification at Alibaba's 33%-owned fintech company, Ant Group Co., Ltd., will weaken its fintech contribution, but will not significantly hurt Alibaba's credit profile.


Key Rating Drivers


Regulatory Headwinds: We expect elevated regulatory risk in China's internet sector to continue to evolve, as the government's five-year plan is focused on antitrust enforcement to promote fair competition. We also expect greater government control of content and behaviour on the internet. This is likely to pressure short-term profit growth, but we believe Alibaba will maintain its market leadership in online shopping and cloud computing, supported by a large scale, comprehensive product offering, efficient digitalised supply-chain and fulfilment model and core competencies in cloud services.


Reinvesting Profit: Keen competition from Inc. and Pinduoduo Inc. in the commerce segment and Huawei Cloud, Tencent Cloud and Baidu AI Cloud in cloud services has led Alibaba to defend its market position by investing all its incremental profit in the financial year ending March 2022 (FY22) in technology, merchant support programmes to lower operating costs, user acquisition, merchandising, supply-chain capabilities, infrastructure development and new businesses. It also aims to expand its annual active consumers in China to over 1 billion, from 912 million in 1QFY22.


We expect the investment cycle to extend to FY23 or beyond, though it is likely to peak in FY22. The company is moving from its sole Mobile Taobao super app to encompass multi-app product metrics to meet consumer demand. We expect Alibaba to expand its scale and enhance its value proposition before refocusing on profitability. Its adjusted EBITA dropped by 8% yoy in 1QFY22 due to expanded losses from strategic investments.


Conservative Capital Structure: We expect Alibaba to maintain a highly conservative capital structure, with fund from operations (FFO) gross leverage of 1x or below and a large net cash position. Alibaba does not depend on rapid profit growth to maintain its strong financial profile and has abundant excess cash. We expect its marketplace-based core commerce business to remain the primary source of cash generation to fund capex, investments, acquisitions, its share repurchase programme and common prosperity spending, and forecast average annual FCF to exceed CNY150 billion.


Rectification of Ant: We do not think the rectification of Ant's key businesses under regulatory guidance will hurt Alibaba's credit profile, so long as Alipay's payment services are not interrupted. Attributable profit from Ant to Alibaba is non-cash, as Ant does not pay dividends to Alibaba. Furthermore, Alibaba's share of profit from Ant is small, totalling CNY20 billion in FY21 compared with Alibaba's operating EBIT of CNY140 billion (based on Fitch's adjustments). Any direct capital injections from Alibaba into Ant, if any, are also unlikely to impair Alibaba's financial profile.


VIE Structure Risk: We do not see any evidence that directives relating to variable interest entities (VIE), similar to those for compulsory education and training institutions, will be extended to the internet sector. The tighter regulations, which specifically target the education sector, prohibit related-party transactions and the control of schools in compulsory education via contractual agreements under VIE structures.


New regulations requiring companies that use VIE structures to obtain regulatory approval for overseas IPOs does not constrain the domestic operations of internet companies. Similarly, anti-monopoly guidelines, which have been extended to include VIE concentration, aim to regulate M&A of Chinese internet companies incorporated overseas and should not affect Alibaba, as it has already been listed. However, IPO plans of its unlisted investee companies could be deferred.


Derivation Summary


Alibaba's credit profile benefits from its leadership in China's online shopping and cloud computing markets, robust FCF generation and a highly conservative capital structure with large net cash position. Its credit profile compares favourably against that of internet peers, such as Baidu, Inc. (A/Stable), eBay Inc. (BBB/Positive) and Expedia Group, Inc. (BBB-/Negative), but is similar to that of Tencent Holdings Limited (A+/Stable). Alibaba's cash-generation ability is stronger than that of Baidu and eBay. The company had net cash of over CNY300 billion at end-June 2021, and we expect its average annual FCF to exceed CNY150 billion in the next few years.


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Charlie Munger Doubles Down On Alibaba


Brendan Ahern, Senior Contributor, Forbes

Oct 6, 2021


... Charlie Munger doubled his Alibaba position in Q3 according to an SEC filing. Mr. Munger’s Daily Journal Corporation isn’t as well known as his other job as Vice Chairman of Berkshire Hathaway.


Reuters noted that Fidelity’s global Chief Investment Officer said the firm is buying Chinese stocks after “indiscriminate” selling while their China PM said he is “putting more money to work there…risk-reward (for Chinese stocks) is stacking up quite well…the IT area is probably presenting the most opportunity right now.”


A Mainland media source had noted a large European asset manager increased its China internet stake though SEC filings haven’t confirmed that.


Remember our air pocket thesis on weak price action is driven by big investors stepping to the sidelines waiting for a green light to reenter the space as China is significantly underweight in global and EM funds...