Alibaba Assigned 'A1' By Moody's in First Time Rating, Outlook Stable

Moody's has assigned Chinese e-commerce giant Alibaba and its proposed multi-tranche senior unsecured notes A1 issuer rating, with outlook stable.

This is the first time that Moody's has assigned ratings to Alibaba. The shares of the company rallied to a record of 119.3 yuan on Thursday but fell to 114.70 yuan by the end of the day.

Moody's said an integrated ecosystem and Alibaba's large scale create a virtuous cycle. As more merchants and consumers use its marketplaces, transaction volumes rise, which in turn attracts more sellers and then buyers, the rating agency said.

"The A1 rating reflects Alibaba's integrated e-commerce platform, which provides sustainable cost advantages, and allows the company to generate high profit margins and maintain a strong level of credit quality," said Lina Choi, a Moody's Vice President.

"The rating also considers Alibaba's well-established brand name and dominance in China's fast-growing e-commerce market, as well as its track record of monetization through fees from online marketing, services and subscriptions as well as commissions."

Alibaba's marketing and traffic-generation costs are low, thereby yielding high profit margins, Moody's said.

The result is an increase in revenue-generating opportunities for Alibaba as reflected in its consistently strong revenue growth of 51% for 12 months ended 30 September, 2014, to 63bn yuan.

AliPay

Another factor that attracts consumers and merchants is AliPay, the escrow payment system that is integral to Alibaba's business model and gives the company an advantage over many of its peers, Moody's said.

"We believe that Alibaba will maintain its dominant position in China's e-commerce market over the medium to long term, given the large amount of time and resources it will take to replicate such an integrated ecosystem," Choi said.

Alibaba's EBITDA margin will stay around 45% in fiscal 2015 and 2016 -- compared to 55-60% some two years ago -- as the company invests in product development and marketing, Moody's said.

But this margin would still be higher than the 35-40% levels at its peers, reflecting the benefits of its scale, brand equity and independent third-party business model, the rating agency said.