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Bulletin: Alibaba's Organizational Revamp Is Credit Neutral For Now

This report does not constitute a rating action.

HONG KONG (S&P Global Ratings) May 22, 2023--It's too early to tell whether new details about major organizational changes at Alibaba Group Holding Ltd. will strengthen its credit profile in the longer-term. For now, the changes are likely credit neutral, with the benefits of improved cash flow and profitability offset by the possibility of higher shareholder returns, further investments in its China commerce businesses, and fewer growth opportunities at its wholly owned subsidiaries.

The new information about the reorganization accompanied Alibaba's fiscal fourth quarter earnings announcement.

Alibaba (A+/Stable/--), a China-based e-commerce platform, will benefit from fresh capital via initial public offerings (IPOs) of some subsidiaries, along with plans to cut spending at loss-making subsidiaries. The divestitures, or spinoffs, of its subsidiaries are unlikely to materially affect Alibaba's credit worthiness, despite the hit to diversity. This is because of the subsidiaries' minimal contributions to earnings and cash flow. The company will retain 100% ownership of Tmall and Taobao--its key profit and cash flow drivers.

Alibaba noted the importance of shareholder returns, as well as investing in the Tmall and Taobao businesses to drive scale. This focus could offset some of its targeted margin improvement and new capital inflow. A potential shift in the company's financial policy could also limit the improvement in the company's already large financial buffer. Alibaba is already cash rich, with strong cash flows. It will take time to assess whether its focus on growth-oriented subsidiaries' profitability could miss broader opportunities.

Plans to spin off Cloud Intelligence Group (CIG) came as a surprise to us. This is especially true considering cloud computing was one of Alibaba's three major pillars--the other two being consumption and globalization. Alibaba explained that CIG has a clear business plan with very different business characteristics from the rest of its consumer business portfolio. But the company also spoke about the importance of generative AI driving innovations across its business lines. Therefore, it is important to understand how the group will maintain such synergies with the cloud business once it has been spun off.

Alibaba reported results for the fourth quarter of fiscal 2023 (year ended March 31). China commerce revenue growth and margins came in below our expectations, but were largely in line with peers such as We kept our fiscal 2024 revenue growth, EBITDA margin, and cash flow estimates largely unchanged at about 7%, 22%, and about Chinese renminbi (RMB) 175 billion, respectively. This assumes the spinoff of the cloud business does not occur sooner than we expect; the current timeline is within the next 12 months.

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Primary Contact:Clifford Waits Kurz, CFA, Hong Kong 852-2533-3534;
Secondary Contact:Cathy Lai, Hong Kong 852-2533-3569;

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