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Fundamental View

AS OF 08 Dec 2022
  • We affirm our Market perform recommendation on Baidu as we remain constructive on Baidu’s credit outlook, but we see better value in Tencent. The spread differences between Baidu’s $-bond complex and A-rated US tech and A-rated China corporates are currently above historical averages. We prefer Baidu’s short-dated bonds (maturity < 5-years).

  • We expect Baidu to maintain its healthy credit profile and net cash position in the next 6-12 months. The negative COVID impact would likely last into 1Q23, but we expect significant recovery in advertising demand as China gradually reopens in 2Q23. In addition, we expect Baidu to maintain tight cost control measures, which should support its profit margins and cash flow generation. Baidu also sees limited near-term impact from the US chip restrictions.

Business Description

AS OF 08 Dec 2022
  • Founded in 2000, Baidu started out as an internet search provider and has since added another two segments, transaction services and iQIYI. Transaction services include Baidu Nuomi, Baidu Deliveries, Baidu Mobile Game, Baidu Wallet, and Baidu Maps. iQIYI is an online video platform with a content library that includes licensed movies, television series, cartoons, and other programs.
  • "Baidu Core" (primarily marketing services triggered by internet search queries) made up around 77% of 3Q22 revenues, but generated the majority of Baidu's operating profit. Baidu's other key segment, iQIYI, turned profitable from 1Q22.
  • Baidu has also been pouring investment into artificial intelligence (AI), self-driving vehicles, and smart bikes. According to the company, Baidu has been deploying AI since 2010 - 2011 and launched Apollo, its autonomous driving platform, in 2017.
  • According to market analytics firm, Strategy Analytics and Canalys, Xiaodu Smart Display ranked #1 in shipments globally in 2019, 2Q20, 3Q20, 4Q20 and 1Q21, while Baidu Xiaodu smart speakers ranked #1 in shipments in China in 9M21, and 1Q22.
  • Baidu has a market capitalization of RMB 276 bn as of 8 December 2022.

Risk & Catalysts

AS OF 08 Dec 2022
  • Any regulatory clampdowns abroad and domestically (e.g. US SEC delisting, potential US investment ban, antitrust rules, data security and personal information protection laws) may adversely affect the business of Baidu. The interpretation of Chinese laws and regulations involves some degree of uncertainty.

  • Baidu was included in the Holding Foreign Company Accountable Act list in March 2022, which may potentially result in a trading prohibition of its ADRs from 2023 and a delisting in 2024.

  • There are regulatory risks given the corporate structure which uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs).

  • Baidu has made significant investments into long-term AI-related projects, which may take time to turn profitable. vA potential escalation of the US chip restriction could have a material negative impact its AI cloud related busines.

Key Metrics

AS OF 08 Dec 2022
RMB bn LTM 2Q22 FY21 FY20 FY19 FY18
Debt to Book Cap 30.0% 29.7% 30.4% 30.0% 27.1%
Net Debt to Book Cap n/m n/m n/m n/m n/m
Debt/Total Equity 42.8% 42.2% 43.8% 42.8% 37.1%
Debt/Total Assets 24.8% 24.1% 24.8% 24.4% 21.8%
Gross Leverage 5.5x 5.1x 4.0x 5.7x 3.3x
Net Leverage n/m n/m n/m n/m n/m
Interest Coverage 5.5x 5.2x 6.7x 4.3x 10.4x
EBITDA Margin 14.2% 14.3% 19.4% 12.0% 19.2%
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CreditSights View

AS OF 08 Dec 2022

We affirm our recommendation on Baidu to Market perform. Baidu’s revenues surprised to the upside in 4Q22, and EBITDA margin improved YoY. The company also maintained a robust net cash position, with improvement in its debt metrics. We expect Baidu’s revenue growth to rebound in FY23, thanks to recovering online advertising revenues, a continued strong growth of cloud and autonomous business revenues and iQiyi’s new subscriber acquisitions. However, its EBITDA margins may trend lower as the company ramps up R&D for its AI and autonomous driving businesses. We expect Baidu’s debt metrics and cash flow generation to remain healthy in FY23. We think Baidu trades tight compared to Alibaba and Tencent, and we have a preference for its short-dated $ bonds for higher yields than its long-end.

Recommendation Reviewed: February 23, 2023

Recommendation Changed: August 31, 2022

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