Credit Update: Alibaba’s fortress balance sheet anchors its credit profile amid elevated AI spend

Increasing monetisation of Cloud/AI businesses strengthens earnings resilience

  
While China E-commerce provides the earnings floor, the Cloud Intelligence segment is emerging as the key driver of incremental growth. Revenue grew 32.5% YoY to RMB 116.5b in 9MFY26, with growth accelerating sequentially from 26% in 1QFY26 to 34% in 2Q and 36% in 3Q – an uncommon trajectory for a business of this scale. Notably, AI-related product revenue has delivered triple-digit YoY growth for 10 consecutive quarters and now contributes more than 20% of external cloud revenues.

 
Crucially for bondholders, this growth is translating into earnings. Adjusted EBITA increased 28.7% YoY to RMB 10.5b in 9MFY26, with margins holding steady at roughly 9%. The ability to scale while maintaining margin discipline underscores the segment’s potential to become a consistent and meaningful earnings contributor alongside China E-commerce.

 
Adoption metrics further reinforce this trajectory. The Qwen family of models surpassed 1 billion cumulative downloads as of January 2026, while the Qwen consumer app exceeded 300 million monthly active users by February 2026. Despite this traction, we believe the monetisation cycle remains in its early stages. As usage scales, inference-related revenue should grow faster than the underlying infrastructure cost curve, supporting gradual margin expansion. Alibaba Cloud’s market-leading position also provides structural support. Its full-stack AI ecosystem– spanning foundation models (Qwen), inference infrastructure, and enterprise deployment platforms (Model Studio, Platform for AI)–creates meaningful switching costs, strengthening customer retention while supporting both revenue and margin expansion.

 
Looking ahead, we expect Cloud Intelligence to become the group’s primary EBITA growth driver. Management has guided for sustained cloud revenue momentum, supported by increasing demand for model services, token consumption, and application-layer usage. Pricing is also expected to trend upward gradually through contract renewals and new customer wins. Taken together, we see scope for EBITA margins to expand from the current ~9% toward the low-teens, setting the stage for a structurally stronger and more diversified earnings profile.

Chart 3: Historical revenue growth for Cloud EBITA + increase in Cloud EBITA margin 

Source: Company data, iFAST compilations. 
Data as of 31 December 2025

Fortress balance sheet with ample liquidity and decent coverage

 
On the liquidity front, as of 31 December 2025, Alibaba holds RMB 128.2b in cash and RMB 180.0 b in short-term investments, amounting to a total available liquidity of RMB 308.2 billion. Against total borrowings of RMB 262.7b (including RMB 24.7b in short-term borrowings), this translates into a net cash position of RMB 45.5b, providing a meaningful buffer to support its ongoing investment cycle. As seen in Table 2 below, while the group’s net cash position has moderated in recent years due to rising capex, it remains firmly positive.

 
In terms of coverage, TTM interest coverage (adjusted EBITA / gross interest expense) stands at 10.3x (see table 2 below), indicating ample capacity to service its interest obligations. Notably, this level of coverage likely reflects a trough of the group’s adjusted EBITA, given the temporary pressure from elevated subsidy spending during the recent price war. As profitability in the China E-commerce segment normalises, we expect coverage to improve correspondingly.

  
On the cash flow front, TTM OCF came in at RMB 94.3b (9.3% margin), below historical averages (see chart 4 below). Looking ahead, we expect OCF to recover, supported by a reduction in subsidy intensity and stabilisation in core China e-commerce profitability.

 
Capex, however, has trended sharply higher, driven by investments in both quick commerce infrastructure and cloud capacity. While we expect capex to remain elevated–and potentially increase further in the near term–we believe Alibaba’s normalised OCF generation, together with its strong liquidity position, is sufficient to absorb these outlays.  Government support, including subsidies covering up to 50% of qualifying data centre costs, should also help offset part of the investment burden.

 
Consequently, FCF is likely to remain under pressure in the near to intermediate term. Although FCF swung to an outflow of RMB 29.3b in 9MFY26, we expect this to be cyclical rather than structural. As OCF recovers, FCF should gradually revert to positive territory over the medium term. Our base case does not assume a sustained period of negative FCF, but rather a cyclical dip driven by capex investments.
  

Chart 4: Increasing capex pressuring Alibaba’s free cash flow generation

Source: Company data, iFAST compilations. 
Data as of 31 December 2025

Table 2: Leverage & Credit metrics have moderated, but remain solid 

Bond recommendations

Table 3: About Alibaba's bonds

Overall, Alibaba’s credit profile has softened because of the intense price war and increasing capex spend to grow its cloud and quick commerce segments. Looking ahead, regulatory relief should support a normalisation of China's e-commerce profitability, while increasing AI monetisation provides an additional tailwind – together, these factors should stabilise the group’s credit profile. That said, we emphasise that the planned increase in Capex spend should continue pressuring FCF. Overall, our base case for Alibaba’s credit profile is to stabilise moving forward.

 
As seen in Table 3 above, we compare Alibaba’s outstanding bonds against the comparable outstanding issues of its Chinese tech peers. In general, we find Alibaba’s bonds to be fairly priced. Against comparable US sovereigns of similar tenors, we highlight a decent 25-50+bps yield spread, given the strong A rating of both Alibaba and its bonds.

 
For investors looking for an alternative to US sovereigns, Alibaba’s outstanding bonds are a worthwhile consideration, given the improving operating outlook.

 
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds NIL positions, and the analyst who produced this report holds NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.