December 2, 2016 / 9:05 AM / a year ago

Fitch Affirms Baidu at 'A'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, December 02 (Fitch) Fitch Ratings has affirmed China-based Baidu, Inc.'s (Baidu) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'A' and foreign-currency senior unsecured rating of 'A'. The Outlook is Stable. A full list of rating action is at the end of this commentary. KEY RATING DRIVERS Leading Market Position: Baidu's ratings benefit from its dominant market position in China's internet search engine. The company held a revenue market share of about 80% in 2015, according to iResearch. We expect Baidu to remain the platform of choice for advertisers to promote their products on search engines in China. Technological innovation plus high levels of brand recognition and consumer satisfaction have enabled Baidu consistently to defend its high market share. Rules Inflict Short-Term Pain: We expect China's implementation of new online advertising regulations and Baidu's higher, self-imposed standards on verification of its customers to put pressure on Baidu's profitability in the short term. However, the more stringent measures should help restore consumer confidence and foster healthier development of China's internet industry over the longer term. Given its strong competitive advantages in scale-based network effects and technology innovation, we expect Baidu's profitability to recover gradually in 2017. Substantial Losses in New Businesses: We expect substantial losses in Baidu's new businesses to continue to weigh on the company's profitability in the next two to three years. However, we believe Baidu will take a disciplined approach to expenses and focus on return on investment. In addition, the high profitability of its search services should help cushion the losses from new businesses. In 3Q16, transaction services and online video services reduced Baidu's non-GAAP operating margins by 21.4 and 7.7 percentage points respectively. Solid Cash Generation: We expect solid free cash flow (FCF) generation from Baidu's search services, although cash generation in 2016 may be affected by the new online advertising regulations and Baidu's enhanced customer verification process. We expect operating cash flow (CFO) from its search services to remain strong and help stabilise the company's overall FCF margin at 15%-20% over the longer term. Baidu's FCF margin has remained relatively high, although it dropped to 18% in 2015, from 20%-45% in 2012-2014. VIE Weaknesses Mitigated: 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 alignment of Baidu's and its affiliates' objectives and the company's continued good relationships with the government and regulatory authorities mitigate the risks from the variable interest entity (VIE) arrangements. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Baidu include: - Revenue growth of about 6% in 2016 and 15%-20% in 2017-2018 - Operating margin, excluding share-based compensation, at 14%-15% in 2016-2017 before improving to 19% in 2018 - Annual capex of CNY7bn-8bn in 2016-2018 - No cash dividend and the USD2bn share buyback programme to be completed by end-2017 - Strong liquidity position to be sustained in 2016-2018 RATING SENSITIVITIES 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 - Material loss of market share in key products and services - Significant M&A that negatively affect the operations or the business profile - Sustained decline in operating cash flow - operating EBIT margin sustained below 10% (2015: 20%) - a shift to more aggressive financial policies, for example a sustained loss of its net cash position or sustained funds flow from operations (FFO)-adjusted leverage above 2.0x (2015: 3.1x). However, FFO-adjusted leverage rising above this target alone will not lead to a downgrade should the company retain its strong net cash position and high FCF margins. Positive: The ratings take into account Fitch's expectation of profit growth and a positive rating action is unlikely in the medium term. The agency may consider an upgrade if the company develops businesses that materially diversify cash generation away from current operations, provided such diversification does not damage the company's financial profile. LIQUIDITY Ample Liquidity: We expect Baidu to continue to maintain a large net cash balance. At end-September 2016, Baidu had cash and short-term investments of CNY78bn. This compared with total debt of CNY40bn, which included redeemable non-controlling interests at subsidiaries. In addition, the company arranged USD2bn of syndicated loan facilities in 1H16, of which only USD500m was drawn down as of September 2016. FULL LIST OF RATING ACTIONS Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'A'; Outlook Stable Foreign-currency senior unsecured class rating affirmed at 'A' USD750m 2.250% senior notes due November 2017 affirmed at 'A' USD1bn 3.250% senior notes due August 2018 affirmed at 'A' USD1bn 2.750% senior notes due June 2019 affirmed at 'A' USD750m 3.000% senior notes due June 2020 affirmed at 'A' USD750m 3.500% senior notes due November 2022 affirmed at 'A' USD500m 4.125% senior notes due June 2025 affirmed at 'A' Contact: Primary Analyst Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 19/F., Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Shelley Jang Director +822 3278 8310 Committee Chairperson Steve Durose Senior Director +61 2 8256 0307 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Summary of Financial Statement Adjustments: Historical and projected operating EBITDA and operating EBIT are adjusted so that non-cash stock-based compensation is not treated as an expense. Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1015726 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below