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Rating Action:

Moody's revises Baidu's ratings outlook to stable from negative

 The document has been translated in other languages

14 Mar 2018

Hong Kong, March 14, 2018 -- Moody's Investors Service has revised the outlook on Baidu Inc.'s A3 issuer and senior unsecured ratings to stable from negative.

Moody's has also affirmed Baidu's A3 issuer and senior unsecured ratings.

RATINGS RATIONALE

"The change to a stable ratings outlook reflects Baidu's stronger level of financial flexibility — driven by the strengthened credit quality of its core search business — which provides a buffer against the financial risks associated with its Financial Services Group," says Lina Choi, a Moody's Vice President and Senior Credit Officer.

Baidu's solid operational performance in 2017 and new product initiatives will result in sustainable cash flow generation over the next two years. New products such as dynamic advertisements, optimized cost per click and newsfeed will enhance the user search experience and provide merchants with more accurate targeting tools. These initiatives should help Baidu generate 16%-20% in revenue growth per annum in 2018 and 2019.

The company also reduced its exposure to loss making and lower margin businesses, which will help improve its profitability. Divestment from Baidu Deliveries and Baidu Games and the conversion of iQiyi's (Baidu's majority owned online video subsidiary) USD1.23 billion convertible bond into equity have structurally reduced margin drag and capital requirements for the company. Consequently, Baidu's reported EBITDA margins should prove stable at around 25%-30% in 2018 and 2019.

Baidu's strengthening of its core business and the conversion of iQiyi's convertible bonds into equity have helped Baidu deleverage. As of the end of 2017, Moody's estimates that the company's leverage — excluding liabilities from the Financial Services Group (FSG) — fell below 2.0x. Moody's expects that Baidu's core business leverage will continue to decline over the next two years to below 1.5x.

More importantly, the company reported a net cash position — excluding FSG assets — of around RMB18.4 billion at 31 December 2017 compared to RMB8.5 billion at 30 June 2017. The solid net cash position provides a financial buffer to accommodate capital requirements, if any, from FSG.

"The stable outlook also reflects our expectation that Baidu will continue to manage and contain risks associated with FSG," adds Choi.

At 31 December 2017, total FSG assets measured approximately RMB45 billion, which was equivalent to 18% of Baidu's total assets. This ratio was stable, given the 16% recorded at 30 September 2017, and is in line with Moody's expectation that Baidu's financial assets should stay below 20% of its total assets.

FSG remains exposed to financial and reputation risks. Specifically, financial risk from the uncertain quality of retail borrowers, potential loan write-offs and the funding of the micro-lending business. And, reputation risk from its selling of wealth management products to retail investors — primarily Baidu's search users — who potentially demonstrate limited investing experience.

Baidu has proactively managed these risks through the employment of experienced professionals, data and reliable assessment systems, partnering with banks, and controlling asset levels.

Moody's estimates that even incorporating FSG liabilities, Baidu's adjusted debt/EBITDA will gradually decline toward 2.0x by the end of 2019. The gradual deleveraging, together with its solid net cash position, support the A3 ratings.

Baidu's A3 issuer rating reflects the company's position as the leading Chinese language Internet search engine, and the largest provider of online advertising services in China. It also reflects China's favorable industry growth trends, and a large addressable market. In particular, Moody's points out that Baidu has the opportunity to show sustainable growth in user traffic and online advertising revenue.

The issuer rating also takes into consideration Baidu's steady free cash flow generation, disciplined acquisition appetite, and track record of recovering from temporary business disruptions. At 31 December 2017, the company had around RMB100 billion in cash and equivalents and short-term investments, providing ample liquidity and sufficient financial resources to develop new products and services for evolving Internet technologies and user preferences.

However, the rating is constrained by: (1) China's competitive Internet market; (2) rising acquisition risks relating to the company's efforts to build an artificial intelligence-powered platform; and (3) financial and reputational risks associated with its principal-model finance operations.

Baidu's ratings could be upgraded if the company: (1) continues to maintain a strong financial profile, while growing its core search business through the monetization of new product initiatives; (2) is successful in reducing its exposure to financial, reputation and execution risk related to the FSG businesses; and (3) reduces adjusted debt/EBITDA — including adjustments for loss provisions from FSG — for the core search business to below 1.5x on a sustained basis.

On the other hand, downward ratings pressure could emerge if Baidu:

(1) Fails to maintain a steady EBITDA trend, due to a substantial decline in its market share, which could affect its revenue growth and/or cash flow generation;

(2) Experiences significant financial impairment or capital calls from its FSG businesses, or grows the FSG business beyond 20% of its total assets; or

(3) Engages in aggressive acquisitions that pressure its balance sheet liquidity or raise its overall risk profile.

Financial indicators for a downgrade include the following two factors on a sustained basis: (1) adjusted debt/EBITDA — including adjustments for loss provisions from FSG — for the core search business above 2.0x; or (2) the inability to maintain a net cash position.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. 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 dominant 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 ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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
VP - Senior Credit Officer
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

Gary Lau
MD - Corporate Finance
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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