On Tuesday, corporate bond research firm Gimme Credit maintained its Underperform rating on Alibaba (NYSE:BABA) bonds, despite noting the company's solid cash generation, which allows it to service its debt comfortably.
The firm noted that Alibaba's stock has faced significant pressure over the past three years, and its third-quarter earnings call last month did not present a convincing case for improved earnings growth, leaving bondholders with little expectation of meaningful upside.
Alibaba's management has been exploring various strategies, including selling non-core businesses and consolidating its core e-commerce and cloud computing operations. The company aims to leverage artificial intelligence to enhance synergies between these sectors. However, the effectiveness of this strategy remains uncertain, according to Gimme Credit, which added that the international e-commerce segment continues to operate at a loss.
The board's recent decision to approve a $25 billion increase in the company's buyback program, bringing the total to about $36 billion over the next three years, alongside a new dividend policy, suggests a focus on shareholder yield rather than debt reduction, said the firm. Management has indicated they may consider financing these initiatives through the debt market if necessary.
"Alibaba’s EBITDA was RMB 192 billion (FY22/23: RMB 175 billion). That implies an interest coverage ratio of 25x, which leaves ample room for unexpected declines in business," wrote analysts at Gimme Credit. The company's gross leverage ratio stood at 0.9x as of December 31, 2023, with more cash than debt on its balance sheet. However, there is no strong indication that revenue growth will pick up pace, as reflected in the nearly 70% decline in Alibaba's stock price over the past three years.
The firm explained that the z-spread on Alibaba's 4.5% November 2034 bonds is currently 123 basis points, which is at the lower end of the 120-360 basis point range observed in the last two years, suggesting limited potential for spread tightening. Alibaba's 3.4% December 2027 bonds are trading at a z-spread of 93 basis points, in comparison to Tencent's 3.595% January 2028 bonds at 98 basis points. Given these factors, Gimme Credit has reaffirmed its underperform rating on Alibaba's bonds.