TLTP
HONG KONG
Moody’s Investors Service has affirmed Baidu Inc’s A3 issuer and senior unsecured ratings, and has revised the rating outlook to stable from positive.
“The rating affirmation reflects Baidu’s demonstrated ability to recover from temporary business disruptions, its improved debt leverage and excellent liquidity position, which reflect its prudent financial policies,” said Lina Choi, a Moody’s Senior Vice President.
“Meanwhile, the rating outlook was changed to stable as we believe its management remains committed to a credit profile consistent with the company’s A3 ratings and prefers to retain its excess financial capacity and balance sheet flexibility,” added Choi.
Baidu’s A3 issuer rating reflects the company’s position as the leading Chinese-language internet search engine and one of the largest providers of online advertising services in China.
The rating also considers Baidu’s steady free cash flow, disciplined acquisitions and demonstrated ability to recover from temporary business challenges.
However, Baidu’s rating is constrained by China’s competitive internet market, increasing acquisition risks related to the company’s efforts to build an artificial intelligence- (AI) powered platform, and potential reputational risks associated with its deconsolidated financial service business, Du Xiaoman Financial. Baidu has been a minority shareholder of Du Xiaoman since April 2018.
Moody’s expects that the resumption of economic activities as China gains control of the coronavirus pandemic will benefit the online advertising industry and Baidu. The company has since 2017 developed a number of AI-enhanced products and services and, as a result, will continue to generate stable revenue and cash flow growth around 5.0%-7.0% per annum in the next 12-18 months.
Additionally, if Baidu completes its acquisition of YY.com as scheduled, Moody’s estimates it will bring an additional RMB10-12 billion in revenue and RMB3-3.5 billion in EBITDA, on a fully consolidated basis.
Baidu’s profit margins and earnings have recovered steadily from a brief period of heavy investment in new business initiatives in H1 2019, driven by the gradual monetization of new initiatives such as its cloud and AI-enhanced newsfeed, and prudent cost-control measures. Nevertheless, the company will need to continue investing in its new products and strengthening user stickiness. As a result, Moody’s expects Baidu’s adjusted EBITDA margin will decline moderately from 39.8% for the 12 months ended 30 September 2020.
The company has several ongoing projects that will require investment, which along with its new shareholder-return requirements, underscore its management’s preference for financial flexibility.
Its new AI-related products and services, such as autonomous driving, AI Cloud and DuerOS voice assistant, are still in the early development and fast growth phases, while iQiyi, Baidu’s fully consolidated online video subsidiary, will require heavy investment for content creation and acquisition.
