SEOUL/SYDNEY/SINGAPORE, November 06 (Fitch) Fitch Ratings
has assigned Baidu Inc.'s (Baidu) Long-Term Foreign- and
Local-Currency Issuer Default Ratings (IDRs) of 'A'. The Outlook
is Stable. The agency has also assigned Baidu's proposed USD
senior notes an expected rating of 'A(EXP)'. A full rating
breakdown is provided below.
The ratings reflect Baidu's dominance in the internet search
market in China with an over 85% traffic market share. The
ratings also benefit from strong profitability and balance sheet
reflecting its ability to monetise internet traffic, through a
proven performance-based, online marketing service to half a
million advertising customers targeting hundreds of millions of
Chinese internet users.
Fitch believes that technological innovation plus high
levels of brand recognition and consumer satisfaction have
enabled Baidu consistently to increase its market share in a
rapidly growing market. The company's 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
Baidu has generated free cash flow (FCF)/sales of around 40%
for the period of 2008 to 2011 and continued to maintain a net
cash position as of end-September 2012. Fitch expects Baidu to
maintain strong financial flexibility with sound profitability,
ample liquidity and prudent leverage over the medium term.
Fitch notes that Chinese law restricts foreign equity
ownership in internet, online advertising and employment agency
companies in China. Baidu, registered in the Caymen Islands,
operates its websites in China through consolidated affiliated
Chinese entities with whom it has contractual relationships.
These variable interest equity (VIE) arrangements are a credit
weakness as they may not be as effective in providing control as
direct ownership. However, Fitch notes that VIE structures are
the usual mechanism for overseas investors to participate in
sectors which are subject to China's investment restrictions.
In addition, 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 the contractually controlled, consolidated
affiliated entities. The agency is also reassured by the
alignment in Baidu's and affiliates' objectives and the
company's continuing good relationship with the government and
The proposed USD senior notes are rated at the same level as
Baidu's rating as they represent direct, unconditional,
unsecured, and unsubordinated obligations of the company.
However, as is typical in Chinese global bond issues the notes
will be structurally subordinated to all existing and future
obligations and other liabilities of Baidu's subsidiaries. Fitch
does not believe this risk to be material given that most of
Baidu's consolidated debt will be at the parent level.
The notes' final rating is contingent upon receipt of final
documents conforming to information already received.
List of rating actions:
Long-Term Foreign- and Local-Currency IDRs assigned at 'A';
Foreign-currency senior unsecured rating assigned at 'A'
Proposed USD notes assigned at 'A(EXP)' What could trigger a
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% (52.7% in
Q312) -Decline in pre-dividend FCF/sales ratio to below 10%
-Increase in funds from operations-adjusted leverage to
above 2x (0.5x at end-2011)
Positive: For the short-to-medium term, Baidu's rating is at
its 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 which are subject to Chinese government and