03.07.2015, 08:44
Fitch Rates Baidu's Notes Final 'A'
OREANDA-NEWS. Fitch Ratings has assigned Baidu Inc.'s (Baidu; A/Stable) USD750m 3.000% senior unsecured notes due 2020 and USD500m 4.125% senior unsecured notes due 2025 final ratings of 'A'.
The assignment of the final ratings follows the receipt of documents conforming to information already received. The final ratings are in line with the expected rating assigned on 23 June 2015. 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 Positions: Baidu's ratings reflect its dominance in China's search engine market with a revenue share of over 80%. Baidu has also established itself as the clear leader in mobile maps and app distribution in China with market share of 62% by daily active users and 42% by average daily app distribution, respectively. We expect Baidu's dominance in these gateways - search, maps and app distribution - along with its technology focus and broad portfolio of apps, will help expand its business opportunities in mobile marketing, online-to-offline (O2O) and key selected verticals.
Widening Lead with Innovation: Fitch believes that technological innovation plus high levels of brand recognition and consumer satisfaction have allowed Baidu to consistently defend its high market share. Baidu said it is committed to investing in new products and services, as well as in technologies, such as deep learning and artificial intelligence. It is revamping its search engine to direct users to services more relevant to their locations and time and that allow them to perform transactions on Baidu's platform or its partners' verticals. These should further widen Baidu's technology lead against rivals in search.
Investing for Long-Term Prospects: Fitch believes higher pressure on profit margins over the next 12-24 months, from increasing spending on sales and marketing and investments in new mobile verticals and O2O initiatives, will not impair Baidu's credit quality as it is investing for its long-term prospects. Baidu has strong execution ability and solid cash generation. In addition, the fundamentals of its core search products remain solid with robust traffic growth and improved monetisation, particularly on the mobile platform.
Strong Cash Generation: Fitch expects Baidu to maintain strong cash generation. Baidu generated free cash flow (FCF) margin of over 20% in 2014. We also expect its FCF will be large enough to help fund most of its investments in building its ecosystem. While funds flow from operations (FFO)-adjusted leverage may exceed 2x in the short-term (2014: 2.4x), we expect solid EBITDA growth to drive deleveraging to below 2x in the next two to three years. In addition, we expect Baidu to retain strong net cash position in the medium term.
Regulatory Risk Well Managed: The ratings reflect Fitch's expectation of Baidu's continued close relationships with government and regulatory authorities in China. Credit strength could be affected if this position were to change, for instance on variable interest equity entities, or internet content provider licence requirements for all marketing services. 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 and affiliated entities.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- revenue to rise by more than 35% in 2015 and continue to grow at more than 30% in 2016
- EBITDA margin to fall to 25%-30% in 2015-2017
- capex to increase to CNY8bn-10bn for 2015-2017
- strong liquidity position to be sustained in 2015-2017
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
- sustained decline in operating cash flow
- failure to maintain a net cash position
- a shift to more aggressive financial policies that result in sustained FFO-adjusted leverage above 2x
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 current operations, provided such diversification does not damage the company's financial profile.
LIQUIDITY
Ample Liquidity: We expect Baidu to maintain ample liquidity over the medium term. Including short-term investments, where the company parks its surplus cash, Baidu had unrestricted cash of CNY13bn and near cash of CNY45bn at end-March 2015, which together are equivalent to 224% of its total debt.
The assignment of the final ratings follows the receipt of documents conforming to information already received. The final ratings are in line with the expected rating assigned on 23 June 2015. 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 Positions: Baidu's ratings reflect its dominance in China's search engine market with a revenue share of over 80%. Baidu has also established itself as the clear leader in mobile maps and app distribution in China with market share of 62% by daily active users and 42% by average daily app distribution, respectively. We expect Baidu's dominance in these gateways - search, maps and app distribution - along with its technology focus and broad portfolio of apps, will help expand its business opportunities in mobile marketing, online-to-offline (O2O) and key selected verticals.
Widening Lead with Innovation: Fitch believes that technological innovation plus high levels of brand recognition and consumer satisfaction have allowed Baidu to consistently defend its high market share. Baidu said it is committed to investing in new products and services, as well as in technologies, such as deep learning and artificial intelligence. It is revamping its search engine to direct users to services more relevant to their locations and time and that allow them to perform transactions on Baidu's platform or its partners' verticals. These should further widen Baidu's technology lead against rivals in search.
Investing for Long-Term Prospects: Fitch believes higher pressure on profit margins over the next 12-24 months, from increasing spending on sales and marketing and investments in new mobile verticals and O2O initiatives, will not impair Baidu's credit quality as it is investing for its long-term prospects. Baidu has strong execution ability and solid cash generation. In addition, the fundamentals of its core search products remain solid with robust traffic growth and improved monetisation, particularly on the mobile platform.
Strong Cash Generation: Fitch expects Baidu to maintain strong cash generation. Baidu generated free cash flow (FCF) margin of over 20% in 2014. We also expect its FCF will be large enough to help fund most of its investments in building its ecosystem. While funds flow from operations (FFO)-adjusted leverage may exceed 2x in the short-term (2014: 2.4x), we expect solid EBITDA growth to drive deleveraging to below 2x in the next two to three years. In addition, we expect Baidu to retain strong net cash position in the medium term.
Regulatory Risk Well Managed: The ratings reflect Fitch's expectation of Baidu's continued close relationships with government and regulatory authorities in China. Credit strength could be affected if this position were to change, for instance on variable interest equity entities, or internet content provider licence requirements for all marketing services. 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 and affiliated entities.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- revenue to rise by more than 35% in 2015 and continue to grow at more than 30% in 2016
- EBITDA margin to fall to 25%-30% in 2015-2017
- capex to increase to CNY8bn-10bn for 2015-2017
- strong liquidity position to be sustained in 2015-2017
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
- sustained decline in operating cash flow
- failure to maintain a net cash position
- a shift to more aggressive financial policies that result in sustained FFO-adjusted leverage above 2x
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 current operations, provided such diversification does not damage the company's financial profile.
LIQUIDITY
Ample Liquidity: We expect Baidu to maintain ample liquidity over the medium term. Including short-term investments, where the company parks its surplus cash, Baidu had unrestricted cash of CNY13bn and near cash of CNY45bn at end-March 2015, which together are equivalent to 224% of its total debt.
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