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.
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The first name below is the lead rating analyst for this Credit Rating
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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
