Hong Kong, August 17, 2021 -- Moody's Investors Service has assigned an A3 senior unsecured rating
to the proposed USD notes to be issued by Baidu Inc. (A3 stable).
Baidu will use the proceeds to refinance its existing debt and for general
corporate purposes. An equivalent amount of the net proceeds from
the Sustainability Bonds will be used to finance or refinance the company's
Eligible Projects, pursuant to its Sustainable Finance Framework.
RATINGS RATIONALE
"Baidu's proposed senior unsecured notes will improve its debt maturity
profile and expand its capacity to accommodate any funding needs over
the next 12-18 months," says Lina Choi, a Moody's
Senior Vice President.
"The proposed notes will only have a moderate impact on Baidu's
debt leverage, as the company's earnings growth in the coming
6-12 months should offset the increase in debt," adds
Choi.
Baidu's A3 issuer and senior unsecured ratings continue to reflect 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 takes into consideration Baidu's steady
free cash flow, disciplined acquisitions and demonstrated ability
to recover from temporary business challenges.
At the same time, 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.
Moody's expects Baidu's revenue to grow around 15%-18%
in 2021 from the RMB107 billion it reported for the 12 months ended December
2020. Moody's also expects the company to maintain EBITDA margins
of around 30%. As such, Moody's expects Baidu's adjusted
debt/EBITDA will stay around 2.5x in the next 12-18 months,
which is appropriate for its A3 ratings.
Baidu's liquidity is excellent. The company reported a solid net
cash position. It had around RMB169 billion ($26.2
billion) in cash, cash equivalents and short-term investments
as of 30 June 2021.
But the company's investment needs remain high, including for AI-related
new businesses, digital content creation and potential acquisitions.
In view of its ongoing investment needs and regulatory requirements,
Moody's still expects Baidu to maintain a solid net cash position over
the next 12-18 months, along with a prudent approach to investments
and acquisitions. These factors will provide it with a buffer against
potential uncertainties.
Moody's has also considered the following environmental, social
and governance (ESG) considerations.
In terms of social factors, Baidu transmits and stores confidential
data and other types of sensitive records to provide security-critical
services, exposing it to legal, regulatory or reputational
risks in the event of a cybersecurity breach. However, Baidu
has yet to experience any major compliance and regulatory violations in
its data handling framework, supported by its robust security system.
In terms of governance considerations, Moody's has taken into account
the high concentration of voting power in the company's key shareholder.
However, this risk is mitigated by (1) a balanced board composition,
featuring mostly independent non-executive directors, and
the fact that its audit committee is entirely comprised of independent
directors; and (2) the company's long track record as a listed entity
with a prudent financial policy and a solid net cash position, backed
by stable cash flow generation.
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 policies and a solid net cash position.
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 funding channels as it expands its business scale and
scope while maintaining a strong financial profile; and (4) 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.
Baidu's rating could be downgraded if the company fails to maintain 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 or cash flow generation; engages in aggressive
investments or acquisitions that strain its balance-sheet liquidity
or increase its overall risk profile; or 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 remained at 15%-35% 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 a leading 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. Baidu also
offers Artificial Intelligence (AI)-enabled products and services
with an infrastructure consists of AI chips, deep learning framework
and core AI capabilities, as well as an open AI platform to facilitate
wide application and use.
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
