Corporates

Technology / China

Alibaba Group Holding Limited

Presale Report
Ratings

Key Rating Drivers

Foreign Currency
Long-Term IDR
Senior unsecured
Proposed senior unsecured notes

A+
A+
A+(EXP)

Outlook
Long-Term Foreign-Currency IDR

Stable

Financial Data
Alibaba Group Holding Limited

Revenue (CNYm)
Operating EBITDA
(CNYm)
Operating EBITDA
margin (%)
Operating EBIT (CNYm)
Operating EBIT margin
(%)
Funds flow from
operations (CNYm)
Free cash flow (CNYm)
Total debt with equity
credit (CNYm)
Readily available cash
(CNYm)
FFO fixed-charge cover
(x)
FFO-adjusted leverage
(x)
FFO-adjusted net
leverage (x)

31 Mar
2014

31 Mar
2013

52,504
29,047

34,517
16,242

55.3

47.1

27,393
52.2

15,307
44.3

30,872

11,340

13,091
51,359

14,459
43,548

43,632

32,686

18.4

9.8

1.7

3.6

0.3

1.0

Dominant Market Position: The ratings reflect Alibaba Group Holding Limiteds dominant
position in Chinas online shopping market. Alibaba has developed a sophisticated ecosystem
that is difficult for rivals to replicate. The ratings also benefit from Alibabas robust profitability
and strong cash generation, reflecting its ability to monetise online shopping traffic through
proven online marketing and transaction-based services. The large size and potential for
sustainable growth in China helps mitigate Alibabas limited geographical diversification.
Thriving Ecosystem: Fitch Ratings believes Alibabas ecosystem has strong self-reinforcing
network effects that benefit its marketplace participants, who gain from the business growth
and success; the marketplaces are vital to merchants, and highly valued by buyers. In addition,
services offered by other participants, including the Alipay online payments system and 14
strategic logistics partners, further enhance the user experience on Alibabas platforms.
Proven Monetisation Model: Alibaba is a marketplace rather than a retailer, and its business
is crucial to the long-term success of many online merchants. Alibaba can scale rapidly without
the risks and capital requirements of sourcing, merchandising and holding inventory borne by
most traditional or online retailers. Alibaba has also developed a variety of monetisation
methods on its marketplaces.
Robust Cash Generation: Fitch expects Alibaba to maintain high profitability and sturdy cash
generation, due to its asset-light marketplace business model. The adjusted EBITDA margin
was 59% in financial year 2014 (FY14, to March 2014), excluding share-based compensation
expenses. We expect the FCF margin to be over 40% in the next two to three years.
Unaffected by Non-Ownership of Alipay: Fitch believes the non-ownership of Alipay does
not affect Alibabas credit quality. Under a 50-year agreement, Alipay provides Alibaba with
payment services at preferential terms, an arrangement overseen by Alibabas independent
directors. Further, Alibaba receives 37.5% of Ant Financial Services (Ant Financial, Alipays
parent entity) pre-tax profit. Alipay is crucial to Alibabas business, and the contracts ensure
this relationship will continue to benefit Alibaba.
Regulatory Risk Well Managed: The ratings reflect Fitchs expectation of Alibabas continued
close relationship with government and the regulatory authorities. However, credit strength
could be affected if this position were to change, for instance on variable interest equity (VIE)
entities, or internet content provider licence requirements for all marketing services.

Rating Sensitivities
Upgrade Unlikely: Fitch would be unlikely to consider an upgrade prior to the development of
new business lines which significantly diversifies cash generation away from China.
Related Research
Rating Technology Companies
(August 2012)

Analysts
Kelvin Ho
+852 2263 9940
kelvin.ho@fitchratings.com
Jason Pompeii
+1 312-368-3210
jason.pompeii@fitchratings.com

www.fitchratings.com

Operational Risks: We may downgrade Alibaba if: there is a sustained decline in operating
cash flow; M&A significantly affects the operational or business profile; there is a shift to more
aggressive financial policies leading to a loss of its net cash position or FFO-adjusted leverage
above 1.5x; or if evidence arises of adverse government, regulatory or legal intervention.

Liquidity and Debt Structure

Low Leverage: Fitch expects Alibaba to maintain a conservative capital structure with a strong
net cash position in the next few years. Alibaba is targeting a debt/EBITDA ratio below 1.5x.

13 November 2014

Corporates
Key Contents
Summary
Key Rating Issues
Issues Register
Financial Expectations
Financial Expectations Charts
Sector Credit Factors
Peer Analysis
Group Structure
Historical Financial Information
Reconciliation of Key Metrics

Figure 1

Page 2
Page 5
Page 6
Page 7
Page 8
Page 9
Page 10
Page 11
Page 12

China's C2C GMV Market

Share Movement
Taobao

eBay

Tencent

Others

Key Rating Issues

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Dominant Market Position

2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

Fitch expects Alibaba to continue to maintain its dominant market position in both the online
and mobile shopping markets in China in the short to medium term, which should enable it to
further improve monetisation and sustain its pricing power and cost advantages.

Source: iResearch

Figure 2

China's B2C GMV Market

Share Movement
Tmall
Dangdang
100%

JD+Tencent
Others

Alibaba has been able to defend competition from domestic and international rivals and
maintain its No. 1 status since 2006. According to iResearch, gross merchandise volume
(GMV) on Alibabas retail marketplaces accounted for 80% of Chinas total online shopping
GMV in 3Q14, while its mobile GMV represented 86% of Chinas total mobile GMV. For
business-to-business (B2B) platforms, Alibaba also holds a leading market share of 38% in
2013, according to iResearch.
Alibaba is also the worlds largest ecommerce company in terms of GMV. Its three retail
marketplaces Taobao for consumer-to-consumer (C2C), Tmall for business-to-consumer
(B2C) and Juhuasuan for group buying generated a combined GMV of USD250bn in 2013,
compared with eBay Inc.s (A-/RWN) USD83bn and Amazon.coms USD116bn. We expect
Alibabas GMV to surpass Walmarts total revenue in 2017.

Amazon

80%

60%

Robust Industry Growth; Sustainable Market Opportunity

40%
20%
2013

2012

2011

2010

2009

2008

2007

0%

Source: iResearch

Figure 3

China's Online Shopping

Market
(CNYbn)

6,000

2013-2017F
CAGR
31.4%

5,000
4,000
3,000
2,000
1,000

We believe that online shopping in China is more than just a replacement channel for offline
purchases, especially in lower-tier cities where there is unfulfilled demand as physical retail
stores networks are underdeveloped and their product offerings are weak. These retailers may
be by-passed by the growth in online shopping.
Chinas economy has long been reliant on manufacturing exports, but we believe that online
shopping could play a role in achieving the governments goal of raising domestic consumption
to drive further development and growth. Online shopping not only creates employment
opportunities, but also promotes development in rural China dramatically changing the
economies of hundreds of tiny towns, helping farmers boost their income, creating more jobs,
and facilitating Chinas urbanisation and the growth of domestic demand.

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014F
2015F
2016F
2017F

Fitch believes that Alibaba is the prime beneficiary of the rapid industry growth and substantial
market opportunity of Chinas online shopping market. Chinas online shopping market has
been growing rapidly, with a CAGR of 90% in 2005-2013. Nevertheless, online shopping
market size only represented 8% of Chinas retail sales in 2013. We see ample room for further
growth: iResearch expects Chinas online shopping GMV to grow at a CAGR of 31% in 20132017 to reach USD900bn.

Source: iResearch

Related Criteria
Corporate Rating Methodology (May 2014)

Alibaba Group Holding Limited

November 2014

Corporates
Thriving Ecosystem
Figure 4

Top E-commerce Platforms

by GMV (2013)
(USDbn)

Groupon

Otto Group

Source: Companies, iResearch

Mercado Libre

Staples

Walmart

Rakuten

eBay

JD.com

Alibaba

Amazon

300
250
200
150
100
50
0

As more merchants choose to trade on Alibabas platforms, the product range becomes more
appealing leading, in turn, to more buyers. Growth in buyers leads to a greater incentive for
new merchants to trade through Alibaba, leading to a continuing positive network effect. In this
respect, merchant and buyer growth can significantly reduce Alibabas reliance on a sales force
to drive traffic and incremental monetisation.

Sustainable Monetisation Model

Fitch believes that Alibabas open marketplace model that connects buyers and sellers suits
the specific needs in China. The model has proven to be highly popular among Chinese online
merchants and buyers. It has also proven to be scalable with a lower cost structure, and able to
gain significant traffic and positive network effect, with minimal capex.
Alibaba does not generate all its revenue from the GMV transacted on its platform, while its
revenue is highly correlated with GMV. It primarily derives revenue from online marketing
services where sellers pay Alibaba to acquire user traffic; commissions based on GMV for
transactions settled through Alipay, for Tmall; and membership fees. As Alibabas business
model is key to many Chinese online merchants long-term product distribution, online
merchants are willing to pay for Alibabas services to attract traffic and buyers.

Figure 5

Active Buyers (2013)

(m)
231

250

There were more than 8.5 million active sellers on Taobao as of end-June 2014. Alibaba is vital
to the livelihood of many merchants and other third-party service providers. As a result, the
interests of these participants are aligned with those of Alibaba, to ensure the continued
success of the companys ecosystem.

200
150

Unaffected by Non-Ownership of Alipay

100
21

11

Jumei

Vipshop

50

Dangdang

47

JD.com

Alibaba

Source: Companies

Alipay provides payment-processing and escrow services that are critical to Alibabas
operations and franchise. Alipay, although outside the Alibaba group, is crucial to Alibabas
business, and agreements with Alipay ensure that this relationship will continue to Alibabas
benefit. In FY14, 78.1% of GMV on Alibabas China retail marketplaces was settled through
Alipay. Alibaba divested Alipay in 1Q11, and no longer holds any stake.
Fitch believes the non-ownership of Alipay does not affect Alibabas credit quality, unlike
eBays proposed spin-off of PayPal. Under a long-term agreement, which has an initial term of
50 years and is automatically renewable for another 50 years, Alipay provides Alibaba with
payment services at preferential terms, an arrangement overseen by Alibabas independent
directors. Furthermore, Alibaba receives 37.5% of Ant Financials pre-tax profit.

Relationship with Ant Financial

We do not believe that Ant Financial represents a significant risk to Alibabas credit profile. Ant
Financial was set up by Alibabas founders, but is outside the Alibaba group. Ant Financial
owns Alipay, as well as some other financial services businesses. In August 2014, Alibaba
agreed to sell its SME loan business to Ant Financial, which we expect to be completed before
2015. Through this transaction, the financial guarantee company will also be transferred to Ant
Financial, and Alibaba will not guarantee the SME loans.

Figure 6

Alibaba's GMV Trends

(CNYbn)
1,200

B2C

C2C

1,000
800
600
400
200

Source: Company, iResearch

Alibaba Group Holding Limited

November 2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

Ant Financial will fund its business independently of Alibaba, although we would expect the
business to continue to operate primarily as an asset-light, agency-focused model, providing a
platform-based offering to enable third-party participants to offer and distribute financial
services products, leveraging off Alipays significant user database. We see the medium-term
planned transfer of the SME loan business to the banking business, in which Ant Financial will
hold a minority stake, as an additional step to reduce Ant Financials exposure to more capital
and credit intensive activities.

Corporates
Alibaba chairman Jack Ma is currently a major shareholder in Ant Financial. Mr Ma has
undertaken to reduce his economic interest in Ant Financial over the next three to five years to
a percentage that does not exceed 8.8% or a percentage that does not exceed his and his
affiliates interest in Alibaba.
As with Alipay, each related-party transaction between Alibaba and Ant Financial is overseen
by Alibabas independent directors.

Proposed Notes Not Guaranteed

Fitch does not consider subordination of the notes to be a key credit issue. On issuance,
neither Alibabas subsidiaries nor its controlled VIE entities will guarantee the proposed notes.
Therefore the notes are structurally subordinated to trade and funding creditors at these
entities. While the notes will be structurally subordinated on issuance to Alibabas existing
USD8bn syndicated term loan facility and the undrawn USD3bn revolving credit facility (RCF),
we expect the term facility to be repaid through the issue of the proposed notes and existing
cash on hand.
Under the terms of the RCF agreement, the guarantee and share security from subsidiaries to
the lenders will also be automatically released upon full refinancing of the term facility. If this
release has not taken effect within 30 days of closing, equal guarantees will be provided to the
notes holders, equivalent to those under the existing RCF and term loan facility. As a result, the
RCF will rank pari passu with the proposed notes.
In addition, we have not notched down the notes as, firstly the companys funding strategy is
not to raise significant structurally superior downstream debt. Secondly, the company is unlikely
to approach the threshold of 2.0x-2.5x prior-ranking debt/EBITDA at which we would consider
notching down the senior unsecured ratings, given its target gross debt/EBITA ratio of 1.5x.

VIE Structure Issue

Chinese law restricts foreign-equity ownership in internet and online advertising companies.
Alibaba operates its websites in China through contractually controlled, consolidated and
affiliated Chinese entities. These VIE arrangements are the usual mechanism for overseas
investors to participate in Chinas restricted sectors, and are a credit weakness as they may not
be as effective in providing control as direct ownership or may face legal challenges in the
future.
The ratings benefit from the fact that Alibaba generates over 90% of revenue from and keeps
almost all the cash and assets within its wholly owned subsidiaries in China rather than at the
contractually controlled, consolidated and affiliated entities. The alignment of Alibabas and its
affiliates objectives and the companys continued close relationships with government and
regulatory authorities, mitigate the risks from the VIE arrangements.

Alibaba Group Holding Limited

November 2014

Corporates
Rating Issues Register
Issue
Fitch view
Dominant position: GMV transacted on Alibabas
Alibaba enjoys first-mover advantage. It has also built a significant scale with powerful network effect
retail marketplaces accounted for 80% share of
and sophisticated ecosystem that are difficult for domestic and international rivals to replicate. Fitch
Chinas total online shopping GMV in 3Q14.
expects Alibaba to continue to maintain its dominant market position in China in the medium term,
which should enable it to further improve monetisation and sustain its pricing position and cost
advantages, hence generating solid cash flow.

Likelihood, timescale, rating impact

Likelihood: High

More information
Page 2

Timescale: Ongoing
Rating impact: Positive
Likelihood: High

Robust industry growth: Online shopping GMV

transacted on Alibabas marketplaces grew at a
CAGR of 90% during 2005 to 2013.

Fitch expects rising private consumption, further penetration of online shopping, and expanding variety
of products and services to drive the growth of Chinas online shopping market in the medium term.
iResearch expects Chinas online shopping GMV to grow at a CAGR of 31% in 2013-2017 to reach
USD900bn in 2017. We expect the rapid growth in Chinas online shopping to drive Alibabas robust
revenue growth and cash generation. The large size and potential for sustainable growth in Chinas
online shopping market helps mitigate Alibabas limited geographical diversification.

Page 2

Thriving ecosystem: Alibaba operates its

ecosystem as a platform for third parties, and it
does not engage in direct sales, compete with its
merchants, or hold inventory.

Alibaba has developed a thriving ecosystem which has raised barriers for new entrants or existing
Likelihood: High
rivals. Alibaba has strong self-reinforcing network effects that benefit the companys marketplace
Timescale: Ongoing
participants, who gain from the ecosystems growth and success. Alibabas marketplaces are central to
Rating impact: Positive
the ecosystem, with lots of buyers and sellers. Its relationships with Alipay and logistics/fulfilment
service companies are also very strategic and crucial in the value chain. In addition, to facilitate ecommerce transactions, Alibaba also develops a range of essential support services for
sellers/merchants to operate their businesses.

Page 3

Monetisation proven model: Alibaba primarily

derives revenue from online marketing services
where sellers pay marketing fees to acquire user
traffic, commissions based on GMV for
transactions settled through Alipay, and
membership fees.

Fitch believes that Alibabas open-marketplace model that connects buyers and sellers suits the specific Likelihood: High
needs in China. The model has been proven to be highly popular among Chinese online merchants and
Timescale: Ongoing
buyers. The business model has also proven to be scalable with a lower cost structure, and able to gain
Rating impact: Positive
significant traffic and network effects, with no product costs or inventory risk and minimal capex
requirement. We believe that there is scope for further monetisation upside.

Page 3

Robust profitability and cash generation:

Alibaba has registered solid and uninterrupted
revenue growth, with a CAGR of 70% between
FY05 and FY14. It also maintained a wide EBITDA
margin of 55% in FY14.

There may be short-term margin pressure due to increased investments in mobile product development Likelihood: High
and enhancement of infrastructure, while Fitch expects Alibabas profitability to be relatively steady in
Timescale: Ongoing
the next few years. This is due to its strong market positions in online and mobile commerce; pricing
Rating impact: Positive
power on its marketplace platforms; and also its solid ecosystem. Alibabas ability to generate robust
cash flow is due to its strong market position and its asset-light marketplace model. We expect Alibaba
to continue to generate strong cash flow, with an FCF margin of over 40% in the next few years. We
also expect Alibabas net cash to exceed USD10bn in the next 12-18 months.

Page 5

Unaffected by Non-ownership of Alipay: Alibaba

does not have any equity stake in Alipay, but Alipay
is crucial to Alibabas business.

Fitch believes that the non-ownership of Alipay does not affect Alibabas credit quality. Under a 50-year Likelihood: High
long-term agreement, Alipay provides Alibaba with payment services at preferential terms, an
Timescale: Ongoing
arrangement overseen by Alibabas independent directors. Furthermore, Alibaba receives 37.5% of Ant
Rating impact: Neutral
Financials pre-tax profit. Alipay, although outside the group, is crucial to Alibabas business, and the
contracts ensure that this relationship will continue to benefit Alibaba.

Page 3

Structural weakness in VIEs: Alibaba, registered

in the Caymen Islands, operates its websites in
China through consolidated VIEs with whom it has
contractual relationships.

Alibaba has entered contractual arrangements with its VIEs such that Alibaba receives substantially all Likelihood: Low
of the economic benefits from its VIEs, exercises effective control over them, and holds an exclusive
Timescale: Ongoing
option to purchase all or part of the equity interests in the VIEs when and to the extent permitted by
Chinas law. Alibaba keeps almost all the cash and assets within its wholly owned subsidiaries in China Rating impact: Neutral
rather than at the contractually controlled VIEs.

Page 3

Timescale: Ongoing
Rating impact: Positive

Source: Fitch

Alibaba Group Holding Limited

November 2014

Corporates
Sector Performance and Expectations
(CNYm)
Revenue
Growth (%)

FY12
20,025
n.a.

FY13
34,517
72.4

FY14
52,504
52.1

Operating EBITDA
Operating EBITDA margin (%)

6,347
31.7

16,242
47.1

29,047
55.3

14,073
43.2

Operating EBIT
Operating EBIT margin (%)
Gross debt

5,477
27.4
1,283

15,307
44.3
43,548

27,393
52.2
51,359

12,278
37.7
63,893

21,744

32,686

43,632

109,911

Readily available cash

1HFY15 Expectation
32,600 Alibabas revenue growth to be driven mainly by Chinas online
50.0 shopping GMV, as online merchants will be willing to pay for Alibabas
services to attract traffic and buyers. We expect over 40% revenue
growth in FY15 and around 35% in FY16. Revenue growth remained
robust in 1HFY15, driven mainly by a 47% yoy growth in GMV
transacted on Alibabas marketplaces.
Alibabas margins to come under some pressure in FY15, due to
higher investment in mobile product development and enhancement of
infrastructure; increased spending on new business development and
customer loyalty programmes; as well as dilution from recently
acquired entities. However, margins should rebound from FY16, driven
by improving mobile monetisation and continued rapid revenue growth.

The proposed US dollar notes may raise overall debt after refinancing
of the USD8bn syndicated loan. However, the sale of the SME loan
business will lead to a CNY10bn reduction in debt. The company
targets a debt/EBITDA ratio below 1.5x.
Strong operating cash generation to drive the growth in readily
available cash. The FCF margin to stay over 40% in the next two to
three years. The proceeds from the recent IPO should also help fund
acquisitions to be made in FY15.

Source: Company/Fitch

Fitchs internally generated expectations for key leverage and coverage metrics are shown on
the next page.

Cash Flow
Figure 7

Alibaba's Capex Trend

Capex (LHS)

(CNYbn)

Capex-to-sales (RHS)

12

16%
14%
12%
10%
8%
6%
4%
2%
0%

10
8

6
4
2

FY17F

FY16F

FY15F

FY14

FY13

FY12

Source: Company, Fitch estimates

Alibaba has strong operating cash generation. CFO grew at a CAGR of 69% during FY12 to
FY14 to USD4.2bn. Alibabas CFO was higher than that of Tencent Holdings Limited, Baidu
Inc. (A/Stable) and eBay. Alibabas high cash generation is due mainly to the rapid growth in
Chinas online shopping market, the companys higher profitability, and also the fact that its
business model is an asset-light marketplace model. Fitch expects Alibabas FCF margin to
stay above 40% in the next three years, driven by robust growth in Tmall GMV and rising
mobile monetisation.

Credit Metrics
Fitch expects Alibaba will be able to maintain a conservative capital structure with a strong net
cash position in the next few years. M&A will remain a feature of the Chinese internet industry,
while we expect Alibabas FCF to be strong enough to fund most of the companys acquisition
ambitions in the next few years. Furthermore, Alibaba targets a debt/EBITDA ratio below 1.5x.
We also expect Alibabas net cash to exceed USD10bn in the next 12-18 months.

Debt Structure
Figure 8

Alibaba's CFO and FCF

CFO

(CNYbn)

FCF

80

70

At end-September 2014, Alibabas readily available cash balance of CNY110bn far exceeded
its interest-bearing debt of CNY63.9bn. Of this debt, CNY3.8bn was unsecured short-term bank
loans, CNY10.6bn was secured borrowings related to SME loan businesses, and the remaining
CNY49.5bn was mainly the USD8bn syndication loan. The company also obtained a USD3bn
revolving credit facility in August 2014, which is undrawn.

60
50

40
30
20
10

FY17F

FY16F

FY15F

FY14

FY13

FY12

Source: Company, Fitch estimates

Alibaba Group Holding Limited

November 2014

Corporates
Alibaba Group Holding Limited Technology Median A+ Median Source: Company data; Fitch.

Fitchs expectations are based on the

agencys internally produced,
conservative rating case forecasts. They
do not represent the forecasts of rated
issuers individually or in aggregate. Key
Fitch forecast assumptions include:
online shopping GMV to represent
16% of Chinas retail sales by FY18,
up from 8.5% in FY14;
Alibabas overall market share to
remain above 70% over the rating
horizon;

Leverage

Interest Cover

including Fitch expectations

including Fitch expectations

4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

50.0
40.0
30.0
20.0
10.0
0.0

2010

2011

2012

2013

2014F 2015F

Debt Maturities and Liquidity at 30 Sep 2014

Debt maturities

CNYma

Sep 2015
Sep 2016
Sep 2017
After Sep 2017
Readily Available Cash
Undrawn Committed Facilities

14,551
29,752
5,875
14,816
109,911
18,458

Principal amounts excluding unamortized upfront fees

Source: Company

slight margin pressure in FY15, but to

rebound gradually in FY16 and FY17;

no cash dividend to be declared.

Definitions
Leverage: Gross debt plus lease
adjustment minus equity credit for
hybrid instruments plus preferred
stock divided by FFO plus gross
interest paid minus interest received
plus preferred dividends plus rental
expense.
Interest cover: FFO plus gross interest
paid minus interest received plus
preferred dividends divided by gross
interest paid plus preferred dividends.
FCF/revenue: FCF after dividends
divided by revenue.

Alibaba Group Holding Limited

November 2014

2012

2013

60%
50%
40%
30%
20%
10%
0%
-10%

2011

2012

2013

Capex/CFO

including Fitch expectations

including Fitch expectations

70%
60%
50%
40%
30%
20%
10%
0%

100%

2010

2014F 2015F

including Fitch expectations

FFO Profitability

2014F 2015F

80%
60%
40%
20%
0%

2011

2012

2013

2014F 2015F

AGH's Revenue Mix (FY14)

International
commerce
9%
Cloud computing
& internet
infrastructure
1%
Others
3%
Source: Company

2010

2011

2012

2013

2014F 2015F

Alibaba's Revenue Mix (FY14)

Others
7%

China
commerce
86%

FFO profitability: FFO divided by

revenue.
For further discussion of the
interpretation of the tables and graphs
in this report, see Fitchs Interpreting
the New EMEA and Asia-Pacific
Corporates Credit Update Format,
dated 25 November 2009 and
available at www.fitchratings.com.

2011

FCF/Revenues

2010

capex/sales ratio of around 14%-15%;

M&A reduced to CNY5bn-10bn in
each of the next two to three years,
from over CNY60bn in FY15;

2010

Pay-for
performance
45%

Membership
fees & VAS
10%

Commission
24%

Other online
marketing
services
6%
Source: Company

Display
marketing
8%

Corporates

Alibaba Group Holding Limited

November 2014

Corporates
Immediate Peer Group Comparative Analysis

Peer Group
Issuer

Country

A+
Alibaba Group
Holding Limited

China

Sector Characteristics
Operating Risks

A
Baidu, Inc.

China

A
eBay Inc.

United States

BBB
Expedia, Inc.

United States

Competition with other major service providers, changes in user preferences, and rapid
development of competing business models and services are the major operating risks for the
internet industry.

Financial Risks
Financial risks facing dominant internet companies are generally limited as long as a viable
monetisation model exists. However, debt-funded M&A has the potential to significantly raise
financial risks. The agency expects investment-grade internet companies to continue to
generate strong FCF.

Peer Group Analysis (2013)

Issuer Rating History
Date

FC LT
IDR

Outlook/
Watch

13 Nov 14

A+

Stable

Revenue (USDm)
EBITDAR margin (%)
CFO (USDm)
FCF (USDm)
FFO-adjusted leverage (x)
FFO-adjusted net leverage (x)

Alibaba#
A+/Stable
8,463
55.7
4,252
2,106
1.7
0.3

Baidu
A/Stable
5,276
44.2
2,278
1,670
1.7
-1.4

eBay
A/RWN
16,047
34.5
4,995
3,745
1.0
0.2

Expedia
BBB/Stable
4,771
19.9
763
379
1.8
1.6

: FY14 figures (financial year ended 31 March 2014) for Alibaba

Source: Fitch, companies

Key Credit Characteristics

Internet companies in general exhibit wide profit margins, low leverage and strong FCF.
Important factors in differentiating ratings include the scale and network effect; the place in the
value chain; diversity of service platforms; market position; and technology leadership.

Overview of Companies
Alibaba Group Holdings Limited (A+/Stable) the dominant online shopping platform in
China, with an 80% market share in terms of GMV in 3Q14, and the countrys leading B2B
platform with around a 38% market share in 2013. It is also the worlds largest ecommerce
company in terms of GMV.
Baidu, Inc. (Baidu, A/Stable) the dominant search engine in China, with a search revenue
market share above 80% in 9M14, and the second-largest search engine globally. Its
businesses are diversified, while online advertising income contributes the vast majority of
operating profit.
eBay Inc. (eBay, A/RWN) leading global provider of online commerce and payment
services, principally via eBay Marketplaces and PayPal, respectively. The ratings are
supported by its strong financial flexibility and liquidity. Its ratings were downgraded to A
from A and placed on Rating Watch Negative in October 2014 following the companys
announcement that it will spin off PayPal in 2H15.
Expedia, Inc. (Expedia, BBB/Stable) the worlds largest online travel agency (OTA). Its core
websites include the flagship expedia.com as well as hotels.com, hotwire.com for discount
travel services, Egencia for corporate travel services, and eLong.com in China.

Alibaba Group Holding Limited

November 2014

Corporates
Figure 9

Simplified Group Structure Diagram

SoftBank Corporation
LTM consolidated
EBITDA
JPY2,063bn
32.0%

Jack Ma

Yahoo! Inc.
LTM consolidated
EBITDA
USD895m

7.6%

Alibaba Group Holding Limited

A+/Stable
LTM adjusted EBITDA
CNY35,199m

15.4%

Free float

45.0%

CNY3.8bn short-term borrowings

USD8bn syndicated loan
CNY1.2bn other long-term borrowings
CNY10.6bn secured borrowings

Source: Fitch, Issuer IPO prospectus. As at September 2014.

This diagram is a stylised summary of Fitch's understanding of the key features of the issuer
group's legal structure at the date of publication. It is based on publicly available information. It
cannot include all relevant details, or all subsidiaries, and may change over time.

Alibaba Group Holding Limited

November 2014

10

Corporates
Alibaba Group Holding Limited
FINANCIAL SUMMARY

Profitability
Revenue
Revenue Growth (%)
Operating EBIT
Operating EBITDA
Operating EBITDA Margin (%)
FFO Return on Adjusted Capital (%)
Free Cash Flow Margin (%)
Coverages (x)
FFO Gross Interest Coverage
Operating EBITDA/Gross Interest Expense
FFO Fixed Charge Coverage (inc. Rents)
FCF Debt-Service Coverage
Cash Flow from Operations/Capital Expenditures
Debt Leverage of Cash Flow (x)
Total Debt with Equity Credit/Operating EBITDA
Total Debt Less Unrestricted Cash/Operating EBITDA
Debt Leverage Including Rentals (x)
Annual hire lease rent costs for long-term assets (reported and/or estimate)
Gross Lease Adjusted Debt/Operating EBITDAR
Gross Lease Adjusted Debt /FFO+Int+Rentals
FFO Adjusted Net Leverage
FCF/Lease Adjusted Debt (%)
Debt Leverage Including Leases and Pension Adjustment (x)
Pension and Lease Adjusted Debt /EBITDAR + Pension Cost
Balance Sheet Summary
Readily Available Cash
Restricted/Not Readily Available Cash
Short-Term Debt
Long-Term Senior Debt
Subordinated debt
Equity Credit
Total Debt with Equity Credit
Off-Balance-Sheet Debt
Lease-Adjusted Debt
Fitch- identified Pension Deficit
Pension Adjusted Debt
Cash Flow Summary
Operating EBITDA
Gross Cash Interest Expense
Cash Tax
Associate Dividends
Other Items before FFO (incl. interest receivable)
Funds from Operations
Change in Working Capital
Cash Flow from Operations
Total Non-Operating/Non-Recurring Cash Flow
Capital Expenditures
Dividends Paid
Free Cash Flow
Net (Acquisitions)/Divestitures
Net Equity Proceeds/(Buyback)
Other Cash Flow Items
Total Change in Net Debt
Working Capital
Accounts Receivable Days
Inventory Days
Accounts Payable Days

Alibaba Group Holding Limited

November 2014

31 Mar 2014
CNYm
Year End

31 Mar 2013
CNYm
Year End

31 Mar 2012
CNYm
Year End

52,504
52.11
27,393
29,047
55.32
38.63
24.93

34,517
72.37
15,307
16,242
47.06
27.09
41.89

20,025
n.a.
5,477
6,347
31.70
20.58
54.06

21.03
29.61
18.44
1.24
5.52

11.87
20.72
9.75
2.45
5.78

452.25
396.69
30.84
8.35
4.27

1.77
0.27

2.68
0.67

0.20
(3.22)

217
1.81
1.72
0.31
24.66

251
2.76
3.62
1.02
31.74

226
0.47
0.41
(2.50)
350.24

1.81

2.76

0.47

43,632
4,921
10,364
40,995
n.a.
n.a.
51,359
1,736
53,095
n.a.
53,095

32,686
3,687
5,448
38,100
n.a.
n.a.
43,548
2,008
45,556
n.a.
45,556

21,744
3,312
1,283
n.a.
n.a.
n.a.
1,283
1,808
3,091
n.a.
3,091

29,047
(1,220)
(722)
n.a.
3,767
30,872
(4,493)
26,379
(8,304)
(4,776)
(208)
13,091
(17,166)
1,923
5,287
3,135

16,242
(912)
(1,469)
n.a.
(2,521)
11,340
3,136
14,476
2,589
(2,503)
(103)
14,459
(15,244)
(23,319)
(7,219)
(31,323)

6,347
(16)
(461)
(9)
1,617
7,478
1,788
9,266
3,728
(2,168)
n.a.
10,826
(1,151)
616
(2,807)
7,484

1
n.a.
n.a.

2
n.a.
n.a.

1
n.a.
n.a.

11

Corporates
Reconciliation of Key Financial Metrics
Reconciliation of EBITDAR and FFO
(CNYm)
Reconciliation of EBITDA
Alibabas reported profit from operations
Add
Yahoo TIPLA amendment payment
Impairment of goodwill and intangible assets
Other income
Depreciation expense
Amortization expense
Operating lease expenses
Fitchs definition of operating EBITDAR
Reconciliation of funds from operations
Alibabas reported net cash generated from operating activities
Less
Change in working capital
Fitchs definition of funds from operations

31 Mar 2014

31 Mar 2013

24,920

10,751

0
44
2,429
1,339
315
217
29,264

3,487
175
894
805
130
251
16,493

26,379

14,476

(4,493)
30,872

3,136
11,340

Source: Company, Fitch

Alibaba Group Holding Limited

November 2014

12

Corporates

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Alibaba Group Holding Limited

November 2014

13