Key Highlights:* Fitch Ratings has assigned Baidu's USD2 billion zero-coupon exchangeable bonds due 2032 a final senior unsecured rating of 'A'. * The bonds are rated in line with Baidu's senior unsecured rating of 'A', as they rank pari passu with its existing and future senior unsecured debt. * Baidu's ratings are underpinned by its dominant market position in China's search engine market and leadership in artificial intelligence (AI) technologies. Original Press Release: Hong Kong, March 14 -- Fitch Ratings, Inc. issued the following news release: Fitch Ratings has assigned China-based Baidu, Inc.'s (A/Stable) USD2 billion zero-coupon exchangeable bonds due 2032 a final senior unsecured 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 7 March 2025. The bonds are rated in line with Baidu's senior unsecured rating of 'A', as they rank pari passu with its existing and future senior unsecured debt. The bonds are exchangeable at the option of bondholders into cash equivalent to their pro rata shares of Trip.com Group Limited's ordinary shares, which are listed on the Hong Kong Stock Exchange. If bondholders choose to make the exchange, Baidu may elect to deliver Trip.com'sHong Kong-listed shares in lieu of cash, or a combination of cash and shares. Trip.com is a leading global one-stop travel platform that operates a portfolio of brands, including Ctrip, Qunar, Trip.com and Skyscanner. Baidu holds a 7.1% equity stake in Trip.com. Bond proceeds will be used to repay certain existing debt, pay interest and for general corporate purposes. We treat the exchangeable bonds as 100% debt. Key Rating Drivers Solid Business Profile: Baidu's ratings are underpinned by its dominant market position in China's search engine market and leadership in artificial intelligence (AI) technologies. The company is the preferred platform for advertisers to promote products and services via search engine marketing in China, as its search engine is one of the most effective forms of performance-based advertising. It is also well positioned in the AI market, with significant advancements in its widely adopted foundation model, ERNIE. Short-Term Advertising Challenges: We expect China's challenging macroeconomic environment to continue to pressure Baidu Core's online marketing revenue in the short term. Baidu is enhancing its search product by integrating more generative AI content into search results, but has not started monetising this content. Baidu Core's online marketing revenue is likely to recover more gradually, as Baidu focuses on refining generative AI-related search features over immediate monetisation. Moreover, advertising clients, mainly SMEs, are particularly sensitive to economic conditions. Robust AI Cloud Growth: We expect AI cloud services to mitigate the pressure on Baidu Core's online marketing revenue and forecast AI cloud services to account for 71% of Baidu Core's non-marketing revenue in 2025. This is up from 69% in 2024, when AI cloud services revenue rose by 17% to CNY21.8 billion, fuelled by wider enterprise adoption across various use cases and operational applications as well as increased market recognition of Baidu's technical capabilities and AI expertise. The cloud business maintains a positive non-GAAP operating profit. Depressed Profitability at iQIYI: Intense competition for premium content remains the key risk to a profit recovery at iQIYI, Inc., a leading Chinese online video service partly owned by Baidu. Despite this, a hit drama series in January marked a strong start to 2025 and iQIYI plans to further enhance content quality and operational efficiency, with initiatives focused on producing high-quality content for mainstream and female audiences, tapping into social trends and adopting dynamic scheduling based on user engagement. We proportionately consolidate iQIYI into Baidu's financial metrics. Disciplined Cost Control: Baidu's strategic focus on cost efficiency should support profitability amid economic pressure and rising AI investment. Reported adjusted EBITDA from Baidu Core dropped by 4% in 2024, but we believe operational efficiency will improve in the medium term, driven by plans to monetise AI-generated search results, expand the market presence of its unique AI architecture and capability and narrow losses in its autonomous driving business. Conservative Capital Structure: We expect Baidu to retain a large net cash position, although EBITDA gross leverage is likely to temporarily exceed 2.5x in 2025 due to short-term EBITDA pressure and new debt. Its net cash and robust free cash flow generation should be more than sufficient to fund its shareholder returns. Baidu spent over USD1.0 billion on share repurchases since 2024, with USD3.3 billion remaining under its share repurchase programme at the time of the 4Q24 results announcement. This programme is effective until end-2025. VIE Structure a Credit Weakness: We do not expect major adverse regulatory changes to variable interest entities (VIEs) in China's internet sector, though any negative developments could impact Baidu's credit strength. This is because Baidu's VIE arrangements are a credit weakness, as it does not own its VIEs, but controls them via contractual relationships. VIE structures are the typical mechanism for foreign investors to participate in Chinese sectors that are subject to foreign ownership restrictions. Peer Analysis Baidu's rating is underpinned by its strong market position in China's search engine market, robust cash generation from its search and newsfeed businesses and conservative capital structure, with a large net cash position. Baidu has further strengthened its status as a leading AI technology provider in China, with increasing profit contribution from its AI cloud services, which should enhance the profitability of Baidu Core's non-online marketing segment. Profitability and cash generation from its search and newsfeed businesses are sufficient to fund AI development, with longer-term growth and cash generation to come from integrating AI technology to enhance, rebuild and create its enterprise and consumer products and services. Baidu's credit profile is stronger than that of internet peers, such as Meituan (BBB/Positive), Vipshop Holdings Limited (BBB/Stable) and Expedia Group, Inc. (BBB/Stable), but is weaker than that of Alibaba Group Holding Limited (A+/Negative) and Tencent Holdings Limited (A+/Negative), which are larger and have greater revenue diversification. Baidu's cash-generation ability is also weaker than that of Alibaba and Tencent. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer * Flattish revenue growth in 2025, accelerating to a mid-single-digit rate in 2026-2027 (2023: 7%) on the basis of proportionate consolidation of iQIYI * Operating EBIT margin of around 20%-22% in 2025-2027 (2023: 22%) on the basis of proportionate consolidation of iQIYI * Capex/sales ratio of around 7% in 2025-2027 (2023: 10%) on the basis of proportionate consolidation of iQIYI * Total share repurchases of USD5.5 billion-6.0 billion in 2025-2027 (2024: USD1.0 billion) RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: * Evidence of greater government, regulatory or legal intervention leading to an adverse change in the company's operation, profitability or market share * Material loss of market share in key products and services * Significant M&A that negatively affect operations or the business profile * Sustained decline in operating cash flow * A shift to more aggressive financial policies, for example, a loss of its net cash position or EBITDA gross leverage remaining above 1.7x for a sustained period. However, EBITDA gross leverage rising above this target alone will not lead to a downgrade should Baidu retain its strong net cash position and high free cash flow margin. Factors that could, individually or collectively, lead to positive rating action/upgrade: * The ratings already take into account our expectation of profit growth, with positive rating action not probable in the medium term. Liquidity and Debt Structure We expect Baidu to maintain a large net cash balance. It had fully consolidated cash and short-term investments of about CNY127 billion at end-2024, with a significant portion invested in time deposits and wealth-management products from state-owned banks. Baidu also had CNY99 billion in long-term time deposits and held-to-maturity investments. This is against fully consolidated debt, including redeemable non-controlling interests, of about CNY81 billion. Issuer Profile Baidu operates the largest and most widely used search engine in China. It is also a leading domestic AI company in areas such as foundation models, generative pre-trained transformers, autonomous driving platforms, autonomous ride-hailing, smart speakers and cloud services. Summary of Financial Adjustments Our analytical approach for Baidu proportionally consolidates its 45%-owned online video subsidiary, iQIYI. We have also adjusted operating EBITDA by deducting amortisation and impairment of licensed copyrights and produced content. Date of Relevant Committee 17 October 2024 REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included. ESG Considerations The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. [Category: Telecom, Telecom Operators, Procurement and Sales, Financial Results] Source: Fitch Ratings, Inc. |
