OREANDA-NEWS. Fitch Ratings has affirmed Alibaba Group Holding Limited's (Alibaba) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'A+'. The Outlook is Stable.

KEY RATING DRIVERS
Dominant Market Position: The ratings reflect Alibaba's dominant position in China's online shopping market. Alibaba has developed a sophisticated ecosystem that is difficult for rivals to replicate. Based on iResearch's data, gross merchandise volume (GMV) transacted on Alibaba's China retail marketplaces accounted for a 77% share of China's total online shopping GMV in 2Q15, while mobile GMV transacted on Alibaba had an 84% share of China's total mobile retail GMV in the same period.

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 payments system and 15 strategic logistics partners - further enhance the users' experience on Alibaba's platform. The recent investment in consumer electronics retail chain Suning will strengthen Alibaba's order fulfilment and delivery ability to smaller cities and rural areas.

Asset-Light, Monetisation-Proven Model: Alibaba has developed a marketplace business model that is crucial to many online merchants' long-term success. The company can expand 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, which are well received by merchants and buyers.

Robust Profitability and Cash Generation: Fitch expects Alibaba to maintain high profitability and robust cash generation due to its asset-light marketplace business model. The reported adjusted EBITDA margin was 53% in FY15 and 51% in 1HFY16, excluding non-cash share-based compensation expenses. Even after taking into account of the proposed privatisation of online video company Youku, which has higher content acquisition and production costs, we expect Alibaba's free cash flow (FCF) margin to stay above 30% in the next three years.

Low Leverage: Fitch expects Alibaba will be able to maintain a conservative capital structure with a strong net cash position in the next few years, after taking into account its USD4bn share buyback programme. M&A will remain a feature of the Chinese internet industry, while we expect Alibaba's FCF to be strong enough to fund most of its M&A ambitions in the next few years. The acquisition of the Suning stake and the proposed privatisation of Youku will be funded by internal resources. Alibaba aims to manage its debt/EBITDA ratio within 1.5x.

Issues of Counterfeits: The problem of counterfeit items offered or sold through Alibaba's marketplaces will continue to expose the company to legal or regulatory intervention risk, and may diminish the attractiveness of its marketplaces. Luxury goods distributor Kering filed a lawsuit against Alibaba in May 2015, and there are certain purported shareholder class-action lawsuits. To combat the problem, Alibaba has revamped its anti-fake goods procedures and also rendered help to sellers to establish their own brands. The impact of counterfeiting on Alibaba has been limited to date - as witnessed from the growing GMV, the steady rise in active buyers, and average spending.

Ant Financial Services: Alipay, although outside the group, is crucial to Alibaba's business. Fitch believes that Alipay's parent, Ant Financial Services (AFS), would probably need to be supported by Alibaba if it were to encounter financial difficulty. However, Fitch believes that the risk of providing support to AFS is low. AFS continues to operate primarily as an asset-light, agency-focused business. In July 2015, AFS completed a large fundraising that was led by China's National Social Security Fund, China Post and other Chinese investors.

VIE Weaknesses Mitigated: 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 Alibaba's and its affiliates' objectives, and the company's continued good relationships with the government and regulatory authorities, mitigate the risks from the variable interest entity (VIE) arrangements.

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 grow at a CAGR of over 20% in the next four years;
- revenue growth to remain robust at over 20% yoy in FY16, and the proposed privatisation of Youku to drive further revenue growth to over 40% yoy in FY17;
- EBITDA margin, excluding share-based compensation, at 45%-50% in the next three years;
- capex to exceed CNY8bn in FY16 and over CNY10bn in FY17 before tapering off in FY18
- no cash dividend in the next three years.

RATING SENSITIVITIES
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- 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;
- sustained decline in operating cash flow;
- a shift to more aggressive financial policies, for example a sustained loss of its net cash position or sustained funds flow from operations (FFO)-adjusted leverage above 1.5x (FY15: 1.5x). However, in itself, FFO-adjusted leverage rising above this target will not be likely to lead to a downgrade should the company retain its strong net cash position and high FCF margins.

Positive: Alibaba's short- to medium-term rating is at its ceiling, and takes 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.

LIQUIDITY
Abundant Liquidity: Fitch expects Alibaba to continue to generate robust FCF and maintain abundant liquidity in the medium term. Its readily available cash of CNY105.7bn at end-September 2015 significantly exceeded total debt of CNY54.2bn. Debt due within one year amounted to only CNY1.4bn at end-September 2015. In addition, Alibaba had an unutilised USD3bn revolving credit facility, which can provide further liquidity headroom.

FULL LIST OF RATING ACTIONS

Long-Term Foreign-Currency IDR affirmed at 'A+; Outlook Stable
Foreign-currency senior unsecured class rating affirmed at 'A+'
USD300m floating rate senior notes due November 2017 affirmed at 'A+' rating
USD1bn 1.625% senior notes due November 2017 affirmed at 'A+' rating
USD2.25bn 2.500% senior notes due November 2019 affirmed at 'A+' rating
USD1.5bn 3.125% senior notes due November 2021 affirmed at 'A+' rating
USD2.25bn 3.600% senior notes due November 2024 affirmed at 'A+' rating
USD700m 4.500% senior notes due November 2034 affirmed at 'A+' rating