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Fundamental View
AS OF 16 Apr 2024- We maintain our M/P recommendation on Baidu (A3/NR/A) post its largely in-line but uninspiring 4Q23 results. Revenues were up 5.7% YoY and EBITDA margin expanded. CFO also increased YoY which was used in AI related capex and investments, debt reduction and share buybacks; debt metrics largely improved in 4Q23. Baidu trades ~5-6 bp wider than Alibaba and Tencent despite being rated 1-2 notches lower (average of A1 & A3 China corp: 20 bp). With spreads trading at historical lows, we see limited catalyst for Baidu to significantly further tighten given our marginally weaker credit outlook on the company: we expect its topline growth to decelerate and EBITDA margin to decline; we also do not expect its AI initiatives to boost its financials over the near-term. We prefer Baidu’s 2030s.
Business Description
AS OF 16 Apr 2024- Founded in 2000, Baidu started out as a search engine business and began its development into artificial intelligent (AI) since 2010.
- Baidu Core is the main revenue driver of the company (79% of 4Q23 revenues) which provides search-based, feed-based and other online marketing services (total: 55% of 4Q23 revenues), as well as products and services from new AI initiatives (24% of 4Q23 revenues); Baidu's AI initiatives include AI cloud (enterprise & public sector cloud, and personal cloud), Intelligent Group Driving (Apollo Go, Apollo auto solutions, and intelligent EVs under Jidu Auto), Mobile Ecosystem (Baidu App, ERNIE Bot, Haokan and Baidu Post), and other growth initiatives (ie. Xiaodu smart devices powered by DuerOS smart assistant and AI chips).
- iQiyi accounts for the remaining revenues of Baidu; iQIYI is an online video platform with a content library that includes licensed movies, television series, cartoons, and other programs.
- Baidu launched ERNIE bot in Mar-23, a generative AI chatbot powered by ERNIE, Baidu's in-house foundation model.
- Baidu has a market capitalization of RMB 244.2 bn as of 16 April 2024.
Risk & Catalysts
AS OF 16 Apr 2024- Any 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 16 Apr 2024RMB bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Debt to Book Cap | 30.0% | 30.4% | 29.7% | 28.5% | 25.0% |
Debt/Total Equity | 42.8% | 43.8% | 42.2% | 39.8% | 33.4% |
Debt/Total Assets | 24.4% | 24.8% | 24.1% | 23.4% | 20.8% |
Gross Leverage | 3.5x | 2.7x | 3.3x | 2.8x | 2.0x |
Interest Coverage | 7.2x | 9.8x | 8.2x | 11.4x | 13.0x |
EBITDA Margin | 19.7% | 28.5% | 22.6% | 26.8% | 31.4% |
CreditSights View
AS OF 29 Feb 2024We maintain our M/P recommendation on Baidu (A3/NR/A) post its largely in-line but uninspiring 4Q23 results. Revenues were up 5.7% YoY and EBITDA margin expanded. CFO also increased YoY which was used in AI related capex and investments, debt reduction and share buybacks; debt metrics largely improved in 4Q23. Baidu trades ~9 bp wider than Alibaba and Tencent despite being rated 1-2 notches lower (average of A1 & A3 China corp: 25 bp). With spreads trading at historical lows, we see limited catalyst for Baidu to significantly further tighten given our marginally weaker credit outlook on the company: we expect its topline growth to decelerate and EBITDA margin to decline; we also do not expect its AI initiatives to boost its financials over the near-term. We prefer Baidu’s 2030s.
Recommendation Reviewed: February 29, 2024
Recommendation Changed: August 31, 2022