China’s largest search engine, Baidu, Inc.’s BIDU US$1.25 billion proposed senior notes were assigned “A3” rating by Moody's Investors Service – the credit rating agency of Moody’s Corporation. Moody’s granted the rating based on its strong business profile and performance.
The A3 rating carries a positive outlook. Moody's anticipates sustainable growth in Baidu’s user traffic and online advertising services in the growing Chinese market.
Additionally, Moody’s remains optimistic about Baidu’s strong dominance in the mobile search market and its continuous efforts to develop new products. Moreover, Baidu continues to gain market share through acquisitions and has significant long-term growth potential in the mobile market. The mobile segment accounted for 50% of Baidu's total revenue in the last reported quarter, up significantly year over year.
Moreover, the rating agency remains encouraged by Baidu’s steady free cash flow generation, conservative financial management, and the strategy to expand globally through acquisition. According to Moody’s, the senior notes offering will further enhance the liquidity profile of the company and give Baidu even more funds to make new investments.
However, the rating also takes into account the increasingly competitive Internet market in China, integration risks related to new acquisitions and a decrease in profit margins due to higher research & development (R&D) expenses. The rating also takes into account the increased regulatory and legal risks associated with Baidu's business and corporate structure.
Moody's might consider a rating upgrade to the rating if Baidu continues to expand its mobile monetization rate, while maintaining its traffic. Also, the company should be able to expand EBITDA margins in excess of 25–27%, keep debt to EBITDA level below 1.5x, and continue to increase its profits and sales.
Baidu provides Internet search services in the Chinese language as well as a Chinese language search platform for businesses to reach their customers. In the recently reported first-quarter results, Baidu’s revenues of RMB12.7 billion ($2.05 billion) jumped 34% year over year, backed by new offerings in search and app distribution. However, the bottom line missed the Zacks Consensus Estimate by 4 cents due to higher-than-expected R&D expenses.
At quarter-end, the company had cash and short-term investments balance of RMB58.57 billion versus RMB58.08 billion in the prior quarter. The company had RMB40.27 billion in total debt (long-term plus short-term) on its balance sheet. Currently, the company’s debt-to-total capitalization ratio is approximately 6.0%, which will increase after the issuance of these notes.
We believe that Baidu has a strong balance sheet which will help it to capitalize on investment opportunities like product promotions amid increasing competition from rivals like Alibaba and Tencent Holdings Ltd. The company could also use the cash to make strategic acquisitions, further improving its growth prospects.
Currently, Baidu has a Zacks Rank #3 (Hold). Some stocks that are performing well at the current levels are Blue Calypso, Inc. BCYP, Healthstream Inc. HSTM and LendingClub Corporation LC. Both these stocks have a Zacks Rank #2 (Buy).
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