Economic, social fallout cloud China internet credit into 2023
A weak economy, social fallout from China's zero-Covid policy and regulatory risks could continue to weigh on the outlook for China's internet industry into 2023. Consumers might continue to rationalize their spending on non-essentials, benefiting platforms that sell local services and essential goods. Capex spending, technological upgrades, and higher sales and marketing costs might pressure internet issuers' free cash flows, but their financial flexibility and net cash positions should continue to support their investment-grade credit profiles. Regulatory risks around the "common prosperity" policy, content censorship and cybersecurity remain an overhang.
Local services see demand Growth Continuing Into 2023
Chinese consumers might continue to spend on essentials instead of discretionary items as they tighten spending with the economy slowing. With parts of China's zero-Covid policy staying in place, online retail remains resilient due to the government's curbs on citizens' mobility and forced closure of stores to prevent transmission of Covid-19 cases. Going into 2023, we expect online retail growth could continue to grow faster than China's total retail sales.
Local services such as food and grocery delivery should continue to grow rapidly in 2023. E-commerce could also pick up quickly if we see a rebound in macro and consumer sentiment. Online ads’ recovery could lag as a weak economy and Covid-19 cases have weighed on online advertisers’ marketing budgets, while the impact of regulation persists.
China internet issuers earnings trend
Free Cash Flow to Support Tech's Capex, Investment
The strategic focus of many Chinese internet issuers may have shifted toward cost efficiency and managing growth, but capex and investment remain significant for upgrading technological capabilities, supply chains and diversification into new business areas that drive sales. Most issuers' free cash-flow generation should remain solid, supporting their capex and investments without hurting their credit quality. Free cash flow may also support dividends and share buybacks and allow companies to wait until volatility normalizes before returning to the debt markets. Meituan's on-track recovery in cash flow might continue into 2023, alleviating fallen-angel risks, despite ongoing spending on warehouses, commissions and user incentives, which position the company as one of the strongest food-delivery and local consumer-services platforms.
Fantasia's potential debt plan
Financial flexibility remains key credit buffer
Substantial cash buffers and solid financial flexibility are the key catalysts supporting China internet issuers' investment-grade credit, despite weak economic growth and a regulatory overhang. The sector saw cash climb to $222 billion as of end-June, enough to pay off all outstanding debt, while uncommitted credit facilities exceeded $7 billion. Rising interest rates might make the issuers less willing to tap the offshore bond market, but their access to multi-financing tools and solid cash-flow generation should be able to support their capex and investment in addition to dividends and share-repurchase plans. Most internet issuers have slowed their pace of investment and focus on cost optimization, and we think their large cash positions should keep liquidity robust. -- Cecilia Chan
China internet issuers net cash position
Regulatory risk around common prosperity, content, cybersecurity
Regulatory risks remain a large overhang for the China internet sector in 2023, particularly in food-delivery, advertising and online-entertainment subsectors. Data security, which seeks to prevent the misuse of personal data and improper data collection and storage, will dominate the overall internet sector. Higher rider costs resulting from the "common prosperity" policy have yet to be fully reflected and the degree of impact will depend on economic conditions. Content censorship could affect online advertising and entertainment platforms, which in turn might lead to additional auditing costs and technological upgrades. Approval of content, in games or other forms of entertainment, is expected to remain tight. These regulatory risks will not only pose challenges to operations but could also lead to higher costs and penalties. -- Catherine Lim
China internet issuers' Penalties Table
