Hong Kong, December 23, 2020 -- 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," says 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," adds Choi.
RATINGS RATIONALE
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.
Meanwhile, the company announced on 8 December that it had upsized
its share repurchase program to USD4.5 billion from USD3 billion,
covering potential market repurchases through to 2022.
Moody's therefore expects Baidu's leverage will rise to around
2.5x in the next 12-18 months, which still places
the company appropriately in the A3 rating category. The company's
leverage had improved steadily to 1.84x for the 12 months ended
30 September 2020 from the peak of 2.6x recorded at 30 September
2019.
Baidu has excellent liquidity and a good net cash position. It
had around RMB145.3 billion (USD22.4 billion) in cash,
cash equivalents and short-term investments as of 30 September
2020. This strong cash balance, together with its estimated
operating cash flow of around RMB19.6 billion (USD3 billion),
should be sufficient to cover its investment needs and RMB15.9
billion in debt (including a RMB4.6 billion short-term operating
lease liability) maturing over the next 12 months.
Baidu's issuer rating is not affected by subordination to claims
at the operating company level. This is because the holding company:
(1) owns key licenses to operate its business, and (2) benefits
from contractual cash flow upstreams from its operating companies,
which mitigate structural subordination risk.
Baidu's ratings also consider the following environmental, social
and governance factors.
The company bears social risks related to privacy and data security.
The risk level is moderate because Baidu transmits and stores confidential
data and other types of sensitive records from users, customers,
distributors, content providers and Baidu Union partners to provide
security-critical services, including banking, autonomous
driving and healthcare, which expose the company to legal,
regulatory or reputational risks in the event of a cybersecurity breach.
These could include claims, fewer growth opportunities, rising
operating costs or declining user growth and engagement.
Baidu complies with legal and regulatory requirements for the collection,
processing, retention and protection of data by implementing an
up-to-date data security system, which mitigates the
above risks.
In terms of governance, Moody's has considered the high concentration
of voting power in the company's key shareholder, Robin Yanhong
Li. However, this risk is partially mitigated by (1) the
company's track record as a listed and regulated entity on the New
York Stock Exchange; and (2) its track record of maintaining a prudent
financial policy that has provided buffers amid market volatilities.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that Baidu will
maintain metrics consistent with its A3 rating, including strong
credit quality through the business cycles, excellent liquidity,
prudent financial policy and a solid net cash position. These factors
will provide buffers against the company's future investment needs
and any financial or reputational risks associated with Du Xiaoman,
its 41%-owned financial services subsidiary.
Moody's could upgrade Baidu's ratings if (1) the company maintains
a strong financial profile while growing its core search business by monetizing
new product initiatives; (2) it remains prudent in its investments
and new AI-related business initiatives; (3) it demonstrates
a balanced use of its funding channels as it expands its business scale
and scope while maintaining a strong financial profile; and (4) if
Du Xiaoman does not require additional funding from its shareholders,
including Baidu.
Financial metrics indicative of an upgrade include adjusted debt/EBITDA,
including adjustments for loss provisions at Du Xiaoman, declining
to 2.0x or lower on a sustained basis.
Downward rating pressure could emerge if Baidu (1) fails to maintain a
steady EBITDA because of a deterioration in its market position and a
subsequent decline in its market share, which in turn affects its
revenue growth and/or cash flow generation; (2) engages in aggressive
investments or acquisitions that strain its balance-sheet liquidity
or increase its overall risk profile; or (3) experiences financial
stress at or capital calls from Du Xiaoman.
Financial metrics indicative of a downgrade include adjusted debt/EBITDA
rising above 2.5x-2.8x or a net debt position,
both on a sustained basis. Moody's will also monitor for
any sustained deterioration in the company's retained cash flow/debt,
which has stayed at around 15.0%-35.0%
since 2015.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Established in 2000 and listed on the NASDAQ in 2005, Baidu Inc.
(Baidu) is the dominant company in China's internet search market.
It has a combined personal computer (PC) and mobile traffic share of more
than 65% in the Chinese online search market. Baidu continues
to improve the search experience by adding and optimizing features,
including news feeds, voice search and image search.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Lina Choi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
