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Rating Action:

Moody's affirms Baidu's A3 ratings; outlook remains stable

08 Mar 2022

Hong Kong, March 08, 2022 -- Moody's Investors Service has affirmed Baidu Inc.'s A3 issuer and senior unsecured ratings. The outlook remains stable.

"The rating affirmation reflects Baidu's steady growth through revenue diversification, stable credit profile and excellent liquidity position, which reflect its prudent financial policies," says Lina Choi, a Moody's Senior Vice President.

"Despite Baidu's lower profit margin due to its steadily growing Artificial Intelligence (AI)-enabled businesses, Moody's expects increasing monetization and cost optimization measures to help Baidu maintain a steady earnings stream," 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 (A1 stable).

The rating also considers Baidu's steady free cash flow, steady growth through revenue diversification, and prudent financial management.

However, Baidu's rating is constrained by China's competitive internet market, execution risks and margin pressure related to the company's efforts to build an AI powered platform, which carry a lower profit margin than its core online marketing services.

The rating also considers 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 Baidu to grow its revenue by 8%-10% per annum in the next 12-18 months, as the company continues to monetize its AI-enabled businesses to partially offset the slowdown in core search revenue. Baidu reported 12% growth in online marketing revenue for the 12 months ended 31 December 2021, compared with over 70% growth in AI-enabled new businesses during the same period. The slowdown in online marketing revenue growth was driven by decelerating economic growth in the second half of 2021, and the negative impact from regulatory policies on certain sectors such as education and property. Advertisers in these sectors cut their online advertising budgets as a result.

In 2021, Baidu's AI-enabled businesses contributed around 17% of total revenue, up from 12% reported in 2020. Such contribution has started to diversify Baidu's revenue stream and will gradually reduce its reliance on the search business.

Although AI-enabled businesses carry lower margins than the search business and have resulted in a structural decline in Baidu's consolidated margins, Moody's expects gradually increasing monetization of these businesses and cost optimization measures in search and digital content segments will help maintain steady earnings generation.

iQiyi, Baidu's fully-consolidated digital content subsidiary, announced that it aimed to achieve non-GAAP breakeven operating income in 2022. iQiyi reported an EBITDA loss of around RMB3 billion in 2021, which resulted in a 9% operating margin drag for Baidu's consolidated EBITDA.

Moody's forecasts Baidu's adjusted EBITDA margin will be stable at around 30% over the next 12-18 months, as the negative effects of a shifting revenue mix toward lower-margin segments are offset by the company's cost optimization measures.

At the same time, Moody's expects Baidu to continue investing in its AI-enabled businesses. The company also reported that it had cumulatively repurchased USD2.9 billion worth of stock under its 2020 share repurchase program. Baidu upsized its share repurchase program to USD4.5 billion from USD3 billion in December 2020, covering potential market repurchases through 2022.

Moody's therefore projects Baidu's leverage, as measured by adjusted debt/EBITDA, will rise slightly to around 2.6x-2.7x in the next 12-18 months, from 2.4x the rating agency estimates at the end of 2021.

Baidu has excellent liquidity, with a good net cash position. The company had around RMB180 billion in cash, cash equivalents and short-term investments as of 31 December 2021, with RMB17.5 billion in debt (including a RMB2.9 billion short-term operating lease liability) maturing over the next 12-18 months.

Moody's expects Baidu's planned capital spending and acquisitions to be adequately covered by its estimated operating cash flow of around RMB30 billion and its cash on hand. This strong cash balance, together with the strong and stable cash flow from its core search business, should be sufficient to cover its investment needs.

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 upstreamed from its operating companies, which mitigate structural subordination risk.

Baidu's ratings also consider the following environmental, social and governance factors.

The online services sector is exposed to social risks related to privacy and data security. The risk level is moderate for Baidu because the company 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. However, this risk is partially tempered by (1) the company's track record as a listed and regulated entity on the NASDAQ and the Stock Exchange of Hong Kong; and (2) its track record of maintaining a prudent financial policy that has provided a buffer amid market volatility.

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 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-3.0x 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 Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 2000, listed on the NASDAQ in 2005 and the Stock Exchange of Hong Kong in 2021, 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 70% in the Chinese online search market. In recent years, Baidu has also developed AI-enabled services such as AI Cloud and intelligent driving business.

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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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

No Related Data.
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