Baidu to Sell USD Denominated Senior Notes

Zacks Equity Research

Reportedly, China’s largest search engine, Baidu, Inc. (BIDU) has recently announced that it intends to sell benchmark-sized U.S. dollar-denominated bonds. The bonds will be sold to international as well as U.S. investors, as it is registered with the Securities and Exchange Commission.

The benchmark includes only USD-denominated debt that is due to mature in less than five years. A benchmark represents an amount of at least $500 million, but the exact amount to be raised by Baidu remains unclear.

Baidu stated that the net proceeds would be used for general corporate purposes. Goldman Sachs (Asia) L.L.C. and J.P. Morgan Securities LLC will act as joint book-running managers for the offering.

Moody’s Investor Services – the credit rating agency of Moody’s Corporation – assigned an “A3” rating to the proposed notes. The A3 rating carries a stable 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 growth potential in the mobile market over the long term. The mobile segment accounted for more than 20% of Baidu's total revenue in the last reported quarter, up significantly from the year-ago quarter.

Baidu provides Internet search services in the Chinese language. It also offers a Chinese language search platform for businesses to reach their customers. In the last reported quarter, Baidu’s revenues of RMB9.497 billion ($1.528 billion) were up 59.1% year over year, supported by new offerings in search and app distribution. Also, the company’s bottom line beat the Zacks Consensus Estimate by 22 cents. 

At quarter-end, the company had cash and short-term investments balance of RMB39.94billion versus RMB38.69billion in the prior quarter. The company had RMB25.20 billion in total debt (long-term plus short-term) on its balance sheet. Currently, the company’s debt-to-total capitalization ratio is 5.7%, 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. (TCEHY). Baidu could also use the cash to make strategic acquisitions, further improving its growth prospects. In 2013, the company acquired companies for more than $2 billion to maintain its dominance.

Additionally, the senior notes offering will bring down its cost of capital, thus strengthening the company’s balance sheet and supporting growth.

Currently, Baidu has a Zacks Rank #3 (Hold). Other stocks that are performing well at the current levels include LivePerson Inc. (LPSN) and Rovi Corp. (ROVI). Both these stocks sport a Zacks Rank #1 (Strong Buy).

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