Softbank: China Tech Exposure

CreditSights Research
Mary Pollock, CFA
Oliver Burke

EXECUTIVE SUMMARY
  • Softbank’s exposure to the Chinese tech sector, most notably via Alibaba, has become a pain point. The decline in Alibaba’s share price over the last nine months, the issues for both Didi and Truck Alliance since their June IPOs, and the impact on the other VF1 & VF2 Chinese tech investments which are not yet clear (ByteDance? The education focused companies?) are all negatives for SBG.
  • The decline in Alibaba’s share price since its October 2020 peak has knocked around $81 bn off the value of Softbank’s stake. Alibaba is still far and away SBG’s largest investment. We have long viewed it as a key pillar of support for the credit story. It is unclear when the government’s moves to rein-in the Chinese tech sector, or investors’ concerns regarding this issue, will abate.
  • Softbank uses its Alibaba stake in several ways across the group, notably via margin loans and prepaid forward contracts. This is evidence of the complexity of SBG, which we have long highlighted as a negative for creditors. In this piece we include an overview of all the entities which hold BABA shares.
  • We estimate SBG has around $18 bn of margin loans collateralized by BABA shares. We recognize that these are non-recourse to SBG in principle, however in practice, we expect SBG would not hesitate to inject further collateral or cash if a margin call were to occur. Liabilities related to its BABA prepaid forwards were $25 bn at F4Q20 pro forma for the April settlement in cash of one contract for $2.9 bn.
  • We estimate Softbank’s LTV is up to >31% based on current market prices. The full impact of the decline in Chinese tech stocks will not be reflected in F1Q21 results being reported tomorrow, as these results are through June 30, 2021. SBG may provide detail on a write-down of Didi or possibly other private ventures, though we expect management would prefer to be patient at this stage.
  • SOFTBK bonds have come under pressure in recent weeks, and we expect spreads to continue to widen if the uncertainty overhanging the Chinese tech sector continues to worsen. Softbank reports F1Q21 results on August 10th, and we will provide a more detailed review of our recommendation at that time.
RELATIVE VALUE

Softbank’s exposure to the Chinese tech sector has unsurprisingly become a pain point. Softbank’s most high-profile investments in Chinese tech include its 25% stake in Alibaba, the VF1’s 21.5% stake in Didi and the VF1’s investment in ByteDance (the owner of TikTok). Via the VF1 & VF2 it also owns stakes in at least 20 additional Chinese companies based on our estimates, though the majority are still private. One reason we had been more positive on SBG this year was the buoyant equity market and the likelihood that this would support the VF1/VF2’s IPO pipeline. Recent developments out of China will at a minimum delay planned IPOs for Chinese tech companies and impact SBG’s investments with public floats, most notably Alibaba, pushing-up SBG’s LTV and increasing the risk to the group more broadly. There is also potential for the developments to impact the valuations of the private investments held via the VF1/VF2 – we would flag that education focused companies (VIPThink, Global Online Education, Zuoyebang Education) are at risk given the myriad of regulation introduced in late July.

TMT
Softbank: China Tech Exposure

Mary Pollock, CFA
Sr Analyst - TMT
Oliver Burke
Sr Analyst - TMT & Healthcare

Tech

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