Aug 28 (The following statement was released by the rating agency)
Fitch Ratings has assigned Baidu Inc.'s (Baidu, A/Stable) USD1bn 3.25% senior
unsecured notes due 2018 a final rating of 'A'.
The assignment of the final rating follows the receipt of documents conforming
to information already received. The final rating is in line with the expected
rating assigned on 30 July 2013. The notes are rated at the same level as
Baidu's Issuer Default Rating as they constitute direct, unconditional,
unsecured and general obligations of the company.
Key Rating Drivers
Dominant market position: The ratings reflect Baidu's dominance in the internet
search market in China with a traffic market share of over 80%. The ratings also
benefit from the company's strong profitability and balance sheet, reflecting
its cash generation ability through a proven performance-based, online marketing
service to half a million advertisers targeting hundreds of millions of Chinese
Strong competitive advantages: Fitch believes that technological innovation,
plus high levels of brand recognition and consumer satisfaction, has enabled
Baidu consistently to defend its high market share in a rapidly growing market.
Its brand, intellectual property and market share present high barriers to entry
for potential competitors. The company also has managed its relationship with
the government and other regulatory bodies well.
Solid performance: Baidu's Q213 operating results remained solid with robust
revenue growth of 38.6% yoy and a steady EBIT margin of 38.4% (Q113: 37%). It
added 58,000 online active customers in Q213 - the highest quarterly net
addition to date. In addition, the adoption of its mobile platform gained
further momentum with higher mobile revenues. Mobile revenues for the first time
accounted for over 10% of its total revenues in Q213.
Strong cash generation: Baidu generated free cash flow (FCF)/sales of around 40%
for the period of 2008 to 2012 and continued to maintain a net cash position as
of end-June 2013. Fitch expects Baidu to maintain strong financial flexibility
with sound profitability, ample liquidity and prudent leverage over the medium
Foreign ownership restrictions: Chinese law restricts foreign equity ownership
in internet, online advertising and employment agency companies in China. Baidu
operates its websites in China through contractually controlled consolidated
affiliated Chinese entities. These variable interest equity (VIE) arrangements
are the usual mechanism for overseas investors to participate in China's
restricted sectors and are a credit weakness as they may not be as effective in
providing control as direct ownership or may face legal challenge in the future.
VIE weaknesses mitigated: Fitch takes comfort from the fact that Baidu generates
over 70% of revenues from, and keeps almost all the cash and assets within, its wholly owned
subsidiaries in China rather than at the contractually controlled, consolidated
affiliated entities. The agency is also reassured by the alignment of Baidu's
and affiliates' objectives and the company's continuing good relationship with
the government and regulatory authorities.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
- Evidence of greater government, regulatory or legal intervention leading to an
adverse change in the company's operations, profitability or market share
- Decline in operating EBIT margin to below 10% (37.8% in H113)
- Decline in pre-dividend FCF/sales ratio to below 10% (42.3% for 2012)
- Increase in funds from operations-adjusted leverage to above 2x (1.3x for
Positive: For the short-to-medium term, Baidu's rating is at its ceiling and
takes into account Fitch's expectation of profit growth. The agency may,
however, consider an upgrade if the company develops businesses that materially
diversifies cash generation away from operations which are subject to Chinese
government and regulatory risk.