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Fundamental View
AS OF 30 May 2023We maintain our Market perform recommendation on Baidu following its strong 1Q23 results. Baidu posted a solid beat in revenues and EBITDA, and maintained its healthy leverage metrics. Baidu maintained its good cost controls, which led to a better EBITDA margin and improved FOCF in 1Q23. We expect Baidu to maintain healthy debt metrics in FY23, and believe the company is well positioned to benefit from China’s macro recovery. Management sees continued recovery of online advertising in 2Q23 and opportunities in generative AI.
However, we think Baidu’s $ bonds are expensive compared to Alibaba and Tencent. For those seeking exposure to Baidu, we prefer Baidu short-end (24, 25s, 26) on a total return basis, as its yield curve is relatively, and we prefer Baidu 26 and 30s for spread investors.
Business Description
AS OF 30 May 2023- 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 75% of 1Q23 revenues, but generated the majority of Baidu's operating profit. Baidu's other key segment, iQIYI, turned profitable only 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. Baidu also launched ERNIE bot in Mar-23, a generative AI chatbot based on a large language model
- Baidu has a market capitalization of RMB 312.6 bn as of 30 May 2023.
Risk & Catalysts
AS OF 30 May 2023Any regulatory clampdowns abroad and domestically (e.g. 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.
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. A potential escalation of the US chip restriction could have a material negative impact its AI related business (ie. cloud, ernie bot, autonomous driving).
Key Metrics
AS OF 30 May 2023RMB bn | FY19 | FY20 | FY21 | FY22 | LTM 1Q23 |
---|---|---|---|---|---|
Debt to Book Cap | 30.0% | 30.4% | 29.7% | 28.5% | 28.3% |
Net Debt to Book Cap | n/m | n/m | n/m | n/m | n/m |
Debt/Total Equity | 42.8% | 43.8% | 42.2% | 39.8% | 39.5% |
Debt/Total Assets | 24.4% | 24.8% | 24.1% | 23.4% | 23.5% |
Gross Leverage | 3.5x | 2.7x | 3.3x | 2.8x | 2.6x |
Net Leverage | n/m | n/m | n/m | n/m | n/m |
Interest Coverage | 7.2x | 9.8x | 8.2x | 11.4x | 11.9x |
EBITDA Margin | 19.7% | 28.5% | 22.6% | 26.8% | 28.3% |
CreditSights View
AS OF 17 May 2023We maintain our Market perform recommendation on Baidu following its strong 1Q23 results. Baidu posted a solid beat in revenues and EBITDA, and maintained its healthy leverage metrics. Baidu maintained its good cost controls, which led to a better EBITDA margin and improved FOCF in 1Q23. We expect Baidu to maintain healthy debt metrics in FY23, and believe the company is well positioned to benefit from China’s macro recovery. Management sees continued recovery of online advertising in 2Q23 and opportunities in generative AI. However, we think Baidu’s $ bonds are expensive compared to Alibaba and Tencent. For those seeking exposure to Baidu, we prefer Baidu short-end (24, 25s, 26) on a total return basis, as its yield curve is relatively, and we prefer Baidu 26 and 30s for spread investors.
Recommendation Reviewed: May 17, 2023
Recommendation Changed: August 31, 2022
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India

