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Sector: Media and Telecommunications
Baidu
- Sector: Media and TelecommunicationsTechnology
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 10 Dec 2024We maintain M/P on Baidu (A3/NR/A) post its 3Q24 results; revenues contracted as expected, with adverting and iQiyi revenues continuing to decline; EBITDA margin trended up on disciplined R&D expenses, and FOCF weakened on higher working capital investments; Baidu’s net cash contracted due to higher investments, but gross debt metrics improved. We expect Baidu’s credit metrics to marginally improve over the next 12 months; we expect topline growth to pick up as advertising revenues gradually recover and AI cloud revenues remains strong, and EBITDA margin to trend up; we expect FOCF to narrow due to higher working capital investments, but debt metrics to improve. The better credit outlook is likely priced in as Baidu trades inside Asia A and A- corporates. We prefer Alibaba and Tencent.
Business Description
AS OF 10 Dec 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 3Q24 revenues) which provides search-based, feed-based and other online marketing services (total: 56% of 3Q24 revenues), as well as products and services from new AI initiatives (23% of 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 236.3 bn as of 10 December 2024.
Risk & Catalysts
AS OF 10 Dec 2024Any 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 Metric
AS OF 10 Dec 2024| RMB bn | FY20 | FY21 | FY22 | FY23 | LTM 3Q24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 30.4% | 29.7% | 28.5% | 25.0% | 22.3% |
| Debt/Total Equity | 43.8% | 42.2% | 39.8% | 33.4% | 28.7% |
| Debt/Total Assets | 24.8% | 24.1% | 23.4% | 20.8% | 18.5% |
| Gross Leverage | 2.7x | 3.3x | 2.8x | 2.2x | 1.9x |
| Interest Coverage | 9.8x | 8.2x | 11.4x | 12.1x | 13.4x |
| EBITDA Margin | 28.5% | 22.6% | 26.8% | 29.2% | 29.7% |
CreditSight View Comment
AS OF 22 Nov 2024We maintain M/P on Baidu (A3/NR/A) post its 3Q24 results; revenues contracted as expected, with adverting and iQiyi revenues continuing to decline; EBITDA margin trended up on disciplined R&D expenses, and FOCF weakened on higher working capital investments; Baidu’s net cash contracted due to higher investments, but gross debt metrics improved. We expect Baidu’s credit metrics to marginally improve over the next 12 months; we expect topline growth to pick up as advertising revenues gradually recover and AI cloud revenues remains strong, and EBITDA margin to trend up; we expect FOCF to narrow due to higher working capital investments, but debt metrics to improve. The better credit outlook is likely priced in as Baidu trades in Asia A and A- corporates. We prefer Alibaba and Tencent.
Recommendation Reviewed: November 22, 2024
Recommendation Changed: August 31, 2022
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Search topics about wealth insights and investments.JD.com
- Sector: Media and TelecommunicationsTechnology
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 10 Dec 2024We maintain our Market perform recommendation on JD (A3/A-/NR) post its 3Q24 results; the company’s topline growth and margin improved but FOCF turned negative due to higher inventory investment; net cash shrunk while gross debt metrics were flat compared to 2Q24. We expect JD’s credit profile to marginally improve in FY25, which we view as largely priced in. The better debt metrics may be driven by its Home Appliance Trade-In Alliance program which supports topline growth and a continued expansion of the higher-margin 3P sales may result in better EBITDA margin; we expect JD to cover its increased shareholder rewards with FOCF. JD’s $ bonds trade inside A- rated Asian corporates, which we view as fair given its large scale and net cash position. We continue to prefer BABA and TENCNT.
Business Description
AS OF 10 Dec 2024- JD is one of China's leading e-commerce and retail infrastructure service providers.
- JD has a large fulfillment infrastructure which includes over 1,600 warehouses operated by the company, and 2,000 cloud warehouses operated by third-party warehouse owner-operators under JD Logistics Open Warehouse Platform. Its warehouse network had an aggregate gross floor area of approximately over 32 mn square meters, as of 31 December 2023.
- JD has 3 operating segments, namely (1) JD Retail (86% of 3Q24 revenues), which includes JD Health and JD Industrials, and the segment mainly engages in online retail, online marketplace and marketing services in China; (2) JD Logistics (17%) which includes both internal and external logistic businesses; and (3) New businesses (2%) which consist of Dada, JD Property, Jingxi and overseas businesses.
- JD had a market capitalization of RMB 484.0 bn as of 10 December 2024.
Risk & Catalysts
AS OF 10 Dec 2024While Chinese regulators have adopted a friendlier stance towards tech companies, any regulatory clampdowns may still adversely affect the business of JD (e.g. antitrust rules, data security & personal data protection laws).
Intensifying competition amongst Chinese eCommerce platforms with the entrance of new live-streaming/short-form video platforms and group buying discount platforms may result in slower topline growth and weaker EBITDA margin for JD as its increase its user/merchant incentives and promotional activities to defend its market share.
There are regulatory risks involving the use of variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs). Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.
Key Metric
AS OF 10 Dec 2024| RMB mn | FY20 | FY21 | FY22 | FY23 | LTM 3Q24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 12.5% | 12.2% | 19.2% | 18.8% | 22.9% |
| Debt/Total Equity | 14.2% | 13.8% | 23.7% | 23.1% | 29.7% |
| Debt/Total Assets | 7.5% | 6.9% | 10.9% | 10.9% | 13.7% |
| Gross Leverage | 1.4x | 1.8x | 1.9x | 1.5x | 1.7x |
| Interest Coverage | 20.1x | 16.1x | 16.3x | 15.5x | 17.8x |
| EBITDA Margin | 3.0% | 2.0% | 3.3% | 4.1% | 4.6% |
CreditSight View Comment
AS OF 15 Nov 2024We maintain our Market perform recommendation on JD (A3/A-/NR) post its 3Q24 results; the company’s topline growth and margin improved but FOCF turned negative due to higher inventory investment; net cash shrunk while gross debt metrics were flat compared to 2Q24. We expect JD’s credit profile to marginally improve in FY25, which we view as largely priced in. The better debt metrics may be driven by its Home Appliance Trade-In Alliance program which supports topline growth and a continued expansion of the higher-margin 3P sales may result in better EBITDA margin; we expect JD to cover its increased shareholder rewards with FOCF. JD’s $ bonds trade inside A- rated Asian corporates, which we view as fair given its large scale and net cash position. We continue to prefer Alibaba and Tencent.
Recommendation Reviewed: November 15, 2024
Recommendation Changed: November 21, 2022
Who We Recommend
BMO Financial
Hyundai Motor
Toronto Dominion
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Search topics about wealth insights and investments.PLDT
- Sector: Media and TelecommunicationsTechnologyTechnology Media and Telecommunications
- Sub Sector: Telecommunications
- Country: Philippines
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Fundamental View
AS OF 13 Nov 2024PLDT’s FY23 and 1H24 results were stable as expected; we see a modestly improving FY24 credit outlook aided by resilient EBITDA growth and residual PHP 14 bn of tower sales, which could offset persisting high capex and dividends.
A potential stake sale of the data center business could drive further deleveraging.
While the spillover of a PHP 33 bn capex overrun to FY24-FY25 could weigh on free cash flows, we draw mild comfort that it was likely not due to fraud but rather a management misstep.
Business Description
AS OF 13 Nov 2024- PLDT is a leading telecom operator in the Philippines, competing alongside its main rival Globe Telecom in a predominant duopoly.
- PLDT provides 2G/3G/4G mobile, fixed-line, broadband, enterprise data, and other digital services to retail and corporate customers.
- PLDT operates through 2 main business segments – “Wireless Services” and “Fixed Line Services”.
- Its “Wireless” segment offers mobile voice, mobile SMS, mobile data and mobile broadband services to retail customers in the Philippines. These services are marketed under the “Smart Postpaid”, “Smart Prepaid”, "Sun Postpaid" and “TNT Prepaid” brands.
- Its “Fixed Line Services” segment provides fixed line voice, corporate data and home broadband services to retail and corporate customers in the Philippines.
- PLDT commercially launched 5G services on a small-scale basis in Jul-2020. It currently has over 3,000 5G sites nationwide.
- PLDT maintains dominant market shares in the mobile data, voice and SMS space (FY21 revenue market share [RMS] of 47% vs Globe 52%), the fixed line voice space (FY21 RMS of 90% vs Globe 10%), and the home broadband space (FY21 RMS of 45% vs Globe 31%).
- PLDT is backed by three established corporate groups, namely First Pacific (~15% stake), NTT Corporation (~12% stake) and JG Summit Holdings (~7% stake).
Risk & Catalysts
AS OF 13 Nov 2024Aggressive expansion by new entrant DITO over the next 2-4 years could chew away at PLDT’s market share and restrain recoveries in average revenues per user (ARPU).
PLDT incurs significant capex that has restrained improvements in its leverage metrics and free cash flows. This is worsened by a recent capex overrun that has induced mild corporate governance uncertainties (though these have eased in recent months).
Consistently high dividend payouts could worsen PLDT’s already negative free cash flows.
PLDT is exposed to $/PHP depreciation risks ($300 mn 2050 bond is fully unhedged).
Key Metric
AS OF 13 Nov 2024| PHP bn | FY21 | FY22 | FY23 | 9M23 | 9M24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 68.3% | 71.9% | 73.3% | 72.9% | 74.1% |
| Net Debt to Book Cap | 62.3% | 65.7% | 69.3% | 68.0% | 71.3% |
| Debt/Total Equity | 215.2% | 256.2% | 273.9% | 269.6% | 286.2% |
| Debt/Total Assets | 43.8% | 46.8% | 49.6% | 50.0% | 52.1% |
| Gross Leverage | 2.8x | 2.9x | 2.9x | 3.0x | 3.0x |
| Net Leverage | 2.6x | 2.7x | 2.8x | 2.8x | 2.9x |
| Interest Coverage | 8.1x | 7.4x | 6.5x | 6.9x | 6.2x |
| EBITDA Margin | 50.7% | 48.7% | 49.1% | 52.2% | 51.8% |
CreditSight View Comment
AS OF 13 Nov 2024We have a Market perform recommendation on PLDT. PLDT 2031 trades fairly to Globe 2030, Axiata 2030, and Bharti 2031. We do not like the PLDT 2050 that provides a low spread pickup of just 13 bp wider versus the PLDT 2030. We are comfortable with PLDT’s sturdy credit profile aided by a resilient broadband business and tower sales (PHP 15.3 bn to close in FY24), cushioning high capex and dividends. A minority stake sale of its data center business is also credit positive. Corporate governance fears have also eased post its capex overrun in end-2022. We are watchful of strong competition in the mobile space due to DITO’s ramp up.
Recommendation Reviewed: November 13, 2024
Recommendation Changed: May 31, 2022
Who We Recommend
BMO Financial
Hyundai Motor
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