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July 25 (The following statement was released by the rating agency)
Fitch Ratings says that Baidu, Inc.'s (Baidu;
A/Stable) continued solid performance in 2Q14 reinforces our belief that Baidu's
cross-channel leadership in search advertising in China will continue to sustain
its credit profile, which will also be supported by its continued investments in
the mobile platform and new technologies.
Fitch expects there will continue to be strong growth in Baidu's mobile revenues
in the next two to three years due to the company's leading positions in mobile
search, mobile map and app distribution, which are the three key entry points to
the internet. Its search app, Mobile Baidu, had 70m daily active users and its
mobile map app had 200m monthly active users in 2Q14. In addition, the combined
Baidu and 91 Wireless platform distributes over 130m app downloads daily.
Fitch believes that Baidu will continue to benefit from increasing budgets for
advertising on the mobile platform. In 2Q14, mobile search traffic again was the
major driver of Baidu's overall traffic growth. In terms of monetisation, Baidu
reported that the number of paid clicks, cost-per-click and click-through rates
are improving, largely due to the company's investments in mobile and
technologies such as deep learning. As a result, Baidu's revenue grew at 59% yoy
in 2Q14 and mobile revenue reached 30% of its 2Q14 revenue.
Baidu's margins are likely to recover in the next two years after the transition
to develop its mobile platform. Baidu is committed to further strengthen its
market position and will continue to invest in its mobile services. This may
constrain margin improvements in the short term. However, margins should recover
when mobile monetisation further improves and spending stabilises. In 2Q14,
Baidu's EBIT margin rebounded to 30% from 25% in 1Q14, due to a slowdown in
pre-installation spending and content costs.
Fitch expects Baidu to maintain strong financial flexibility and ample liquidity
over the medium term. The company generated strong cash flow in 2Q14 with net
operating cash flow increasing to CNY4.1bn from CNY3.6bn in 1Q14. Including
short-term investments, where the company parks its surplus cash, Baidu had
unrestricted cash of CNY12.4bn and near cash of CNY36.3bn at end-June 2014,
which together were equivalent to 200% of its total debt.
Baidu currently is well above the floor of its ratings' limits. However, Fitch
may downgrade the ratings if there is evidence of greater government, regulatory
or legal intervention leading to an adverse change in the company's operations,
profitability or market share; Baidu's operating EBIT margin drops to below 10%
(35.0% in 2013); pre-dividend free cash flow/sales ratio falls below 10% (31.7%
in 2013); or funds flow from operations-adjusted leverage rises above 2x (1.7x
for 2013), all on a sustained basis.
For the short to medium term, Baidu profile is at its ratings' ceiling and takes
into account Fitch's expectation of profit growth. Fitch may consider an upgrade
if the company develops businesses that materially diversify cash generation
away from operations that are subject to Chinese government and regulatory risk,
provided such diversification does not damage the company's financial profile.