Hong Kong, October 06, 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 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,"
says Lina Choi, a Moody's Senior Vice President.
"The rating also takes into consideration Baidu's steady free cash
flow, disciplined acquisitions and demonstrated ability to recover
from temporary business challenges," adds Choi.
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'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.
The proposed notes will only have a moderate impact on Baidu's debt leverage,
as earnings growth in the coming 6-12 months should offset the
increase in debt.
Moody's expects Baidu's revenue to grow around 10% in 2021
from the RMB106 billion reported for the 12 months ended June 2020.
Moody's also expects the company to maintain steady EBITDA margins
of around 25%.
As such, Moody's expects Baidu's adjusted debt/EBITDA
will stay around 2.0x in the next 12-18 months, which
is strong for its A3 ratings.
Baidu's liquidity is excellent. The company reported a net
cash position of RMB75 billion at 30 June 2020.
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 requirement and China's slowing economic
growth, Moody's 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,
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 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 positive outlook reflects Baidu's increased business scale and solid
credit profile.
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.
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.
is a leading player in China's Internet search market, capturing
a combined personal computer (PC) and mobile traffic share of more than
65% in the Chinese online search market. 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
