Hong Kong, April 01, 2020 -- Moody's Investors Service has assigned an A3 senior unsecured rating to
the proposed USD notes to be issued by Baidu Inc. (A3 positive).
The rating outlook is positive.
Baidu will use the proceeds to refinance existing debt and for general
corporate purposes.
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,
because the majority of the proceeds will be used for debt refinancing,"
adds Choi.
Baidu reported a net cash position of RMB72.8 billion at 31 December
2019. But the company's investment needs remain high,
including for AI-related new businesses, digital content
creation and acquisition at its online video subsidiary iQiyi.
At the same time, Moody's expects Baidu's revenue growth will
moderate on the back of China's slowing economic growth, which could
stall improvement in its leverage.
In view of China's slowing economic growth, Moody's expects
Baidu will maintain a solid net cash position over the next 12-18
months, along with a prudent approach to investments and acquisitions.
Baidu's solid net cash position and prudent financial policy also
provide it with a buffer against the volatile operating environment,
and should help underpin an improvement in its debt leverage towards 2.0x
from 2.3x at 31 December 2019.
Baidu's A3 issuer rating reflects the company's position as the leading
Chinese internet search engine, and the largest provider of online
advertising services in China. It also takes into consideration
Baidu's steady free cash flow generation, disciplined acquisition
appetite, and track record of recovering from temporary business
challenges.
However, the rating is constrained by: (1) China's competitive
internet market; (2) rising acquisition risks related to the company's
efforts to build an AI-powered platform; and (3) potential
reputational risks associated with Du Xiaoman Financial.
Moody's has also considered the following environmental, social
and governance (ESG) factors in its credit assessment
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.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety. Moody's expects Baidu's online advertising revenue
and cash flow in 2020 will be affected by China's slowing economic
growth due to the breadth and severity of the shock the coronavirus outbreak
has triggered.
In terms of governance considerations, Moody's has taken into account
the high concentration of voting power in the company's key shareholder,
Robin Yanhong Li. 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 and regulated entity with a prudent financial policy and a
solid net cash position, backed by stable cash flow generation.
The positive outlook reflects Baidu's increased business scale and
solid credit profile.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/research/Business-and-Consumer-Service-Industry--PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
Moody's could upgrade Baidu's ratings if: (1) it maintains
its strong financial profile while growing its core search business through
monetizing new product initiatives; (2) it remains prudent in its
investments and AI-related new business initiatives; (3) it
demonstrates a balanced use of all funding channels as it expands its
business scale and scope, while maintaining a strong financial profile;
and (4) Du Xiaoman will not require additional funding from its shareholders,
including Baidu.
The rating outlook could revert to stable if Baidu (1) fails to maintain
a steady EBITDA trend because of a decline in its market share,
in turn affecting 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 the company's adjusted
debt/EBITDA trending towards 2.0x-2.5x 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 30%-50% since
2015.
Established in 2000 and listed on the NASDAQ in 2005, Baidu Inc.
is a leading player in China's Internet search market, capturing
more than 80% of the market by revenue and in excess of 70%
by PC and mobile page views. In addition to its online search engine,
Baidu offers a wide range of diversified products that boost traffic and
enhance user stickiness.
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
