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    Baidu Baidu Document Transcript

    • Global Equity Research 03 January 2011 Overweight Baidu.com BIDU, BIDU US Price: $100.01 2011 To Be Another Year of Solid Growth Price Target: $120.00 2011 to be another year of solid growth: We expect Baidu’s revenues to Internet see 57% Y/Y growth to reach $1.83B in FY’11. We believe medium-term AC Dick Wei revenue drivers are: (1) continued gradual improvement in monetization (852) 2800-8535 from Phoenix Nest, (2) secular trend in growth of search usage and search dick.x.wei@jpmorgan.com advertising in China, (3) growth in eCommerce–related advertising, (4) J.P. Morgan Securities (Asia Pacific) Limited increasing mobile search usage, and (5) upside from contextual advertising. Ritesh Gupta As a result, we believe ARPU growth will be faster than advertiser number (91-22) 6157 3307 growth. ritesh.z.gupta@jpmorgan.com FY’10 margin expansion to remain intact in FY’11: Baidu’s operating J.P. Morgan India Private Limited margins expanded in 2010 to 50.3% vs. 38.0% in FY09 driven by lower Imran Khan TAC, and leverage over bandwidth and operating expenses. We expect the (1-212) 622-6693 company to be able to maintain this margin level in 2011. However, further imran.t.khan@jpmorgan.com expansion will be limited with the potential increase in contextual search J.P. Morgan Securities LLC advertising. Our 2011 operating margin forecast is 50.3%. Price Performance Rising eCommerce trend may add upside: Baidu should also benefit from 110 the growing B2C eCommerce market in China. Increasing competition among B2C eCommerce companies and strong growth in eCommerce sales $ 70 volume should help drive search ad demand on Baidu’s platform. Baidu has 30 already seen fast growth in eCommerce–related search demand – during Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 3Q10, Baidu reported the number of online retail advertisers doubled Y/Y. BIDU share price ($) NASDAQ Composite (rebased) Maintain OW with Dec-11 PT of US$120: Our price target implies 53.3x YTD 1m 3m 12m FY11E, and 39.7x FY12E diluted adjusted EPS, on the back of 53% and Abs 141.7% -7.7% -4.4% 136.2% 35% EPS growth for FY11E and FY12E, respectively, or 1.3x PEG (based Rel 126.2% -13.3% -16.6% 119.7% on 2012E P/E and long-term growth of 30%). Risks to our PT include slower-than-expected revenue growth and a potential macro slowdown. Positive on market potential: Using various references to the US and Korea search markets, we estimate China’s search market size could reach US$3B-US$4.6B by 2013. This compares to our current 2013 forecast of US$3.4B and US search market 2009 size of US$15B. Reuters: BIDU, Bloomberg: BIDU US US$ in millions, year-end December US$MM, YE-Dec FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E Net Sales 651.4 1,168.0 1,828.7 2,514.2 ROE (%) 40 53 48 40 52-Week range US$38.5-115.2 Operating Profit (EBIT) 235.1 573.9 887.3 1,212.6 ROIC (%) 39 53 47 39 Shares Outstg 348Mn EBITDA 296.0 654.0 993.4 1,350.7 Qtr GAAP EPS (US$) 1Q 2Q 3Q 4Q Avg daily value US$996M Pre Tax Profit 246.5 585.0 910.1 1,250.8 EPS FY09 0.08 0.16 0.21 0.18 Avg dly volume 10.7Mn Reported Net profit 217.5 507.4 790.1 1,073.7 EPS FY10E 0.20 0.35 0.45 0.45 Index (NASD) 2,667 Reported EPS (US$) 0.62 1.45 2.21 2.98 EPS FY11E 0.42 0.53 0.62 0.64 Free float 75% P/E (x) 158.6 68.5 44.7 33.2 1M 3M 12M Dividend Yld (%) 0% Adj. EPS * 0.66 1.49 2.25 3.02 Abs. Perf.(%) -9.7 -3.3 132.6 Market Cap US$34.5B Adj. P/E (x) 149.9 66.7 44.0 32.8 Rel. Perf.(%) -14.9 -15.5 115.2 Price Target US$120 EV/EBITDA 115.3 52.2 34.4 25.3 Cash 671 1,172 2,101 3,315 Price Date Dec 29, 2010 P/B (x) 49.5 27.7 16.3 10.5 Equity 696 1,243 2,117 3,278 Y/E BPS (US$) 2.0 3.6 6.1 9.4 Source: Company data, J. P. Morgan estimates, Bloomberg. * Note: Excluding share-based compensation expense. Pricing data as of 29 December 2010.
    • Dick Wei Global Equity Research (852) 2800-8535 03 January 2011 dick.x.wei@jpmorgan.com Key Drivers for 2011 On the monetization side We expect three major revenue drivers: (1) Continued improvement in Phoenix Nest algorithm will likely increase Baidu’s search monetization potential. We believe both click through and coverage ratios will gradually increase, driven by better quality ads being served in more search results. In addition, large numbers of customers will also lead to keyword pricing increase. As such, we believe the company is likely to see higher revenue per search next year. (2) Upside from eCommerce advertisers: eCommerce in China is expected to experience strong growth over the next few years, with online B2C retailers offering a wide selection of good-quality products at low prices. Logistics, as well as trust and safety, have improved significantly over the past year. We expect competition among eCommerce merchants likely to increase, and as a result an increase in advertising spending on search. Indeed, Baidu has already seen the number of eCommerce advertisers double Y/Y during 3Q10. We believe the eCommerce segment could account for a double-digit percentage of revenues for Baidu in 2011. (3) Contextual advertisements are likely to be another growth driver in the medium term. The company has been investing its R&D capability to improve its contextual search technology. We note that a significant portion of Google China’s revenue comes from contextual search. Contextual advertisements will create a win-win situation for Baidu as well as content providers who have not been able to monetize their content properly. On search queries side We believe the search market in China is still in the early stages of growth as (1) internet penetration still has good upside, (2) increasing amount of Chinese content is available online, (3) higher reliance on search in daily life. To further enhance users’ search experience, the company focuses on box computing initiatives. (1) Open Data platform (Aladdin) providing users with more dynamic and comprehensive information. (2) Open Application platform to provide users with their more common application–related needs such as web-based games, eBooks, software, etc. Thirty percent of general search queries on Baidu are applications related. We believe improvements in search quality should further increase the number of search queries per user. Cost side Baidu Union optimization: The company’s new revenue-sharing policy has been effective in enhancing Baidu Union's traffic quality and lowering traffic acquisition costs in 2010. Contextual ads to increase TAC in 2011: However, a decrease in TAC from currently search box-related traffic would be balanced by a rise in payouts related to contextual advertising. Contextual advertising usually has higher payout ratios for third-party websites. If contextual becomes very successful, TAC could move up 90
    • Dick Wei Global Equity Research (852) 2800-8535 03 January 2011 dick.x.wei@jpmorgan.com back to the low teens level as a percentage of revenue. We currently forecast TAC at 10% of revenues in 2011. New Businesses The Video and eCommerce businesses are still in the early stages of growth. We believe the company could maintain its strategy of taking a minority stake in new businesses by providing traffic. We believe the company could make more acquisitions over the next two to three years, when the revenue growth rate slows. Active Online Marketing Customers and Average Quarterly Spending Trend 1Q08 2Q08 3Q08 4Q08 2Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10E Active Online Mktg. Customers 161,000 181,000 194,000 197,000 185,000 203,000 216,000 223,000 221,000 254,000 272,000 282,880 QoQ Chg. (%) 3.9% 12.4% 7.2% 1.5% -6.1% 9.7% 6.4% 3.2% -0.9% 14.9% 7.1% 4.0% YoY Chg. (%) 43.8% 41.4% 35.7% 27.1% 14.9% 12.2% 11.3% 13.2% 19.5% 25.1% 25.9% 26.9% Avg Qtly Spending / Customer (Rmb) 3,557 4,432 4,733 4,576 4,379 5,402 5,918 5,652 5,852 7,533 8,292 8,541 QoQ Chg. (%) -3.2% 24.6% 6.8% -3.3% -4.3% 23.4% 9.5% -4.5% 3.6% 28.7% 10.1% 3.0% YoY Chg. (%) 45.1% 41.6% 36.4% 24.5% 23.1% 21.9% 25.0% 23.5% 33.6% 39.5% 40.1% 51.1% Source: Company reports, J.P. Morgan estimates. Quarterly TAC Trend Long-term TAC as % of Total Revenue 16.0% 16.0% 250,000 18% 14,000 18% 15.3% 15.3% 15.7% 9.1% 14.5% 16% 13.3% 8.9% 13.2% 16% 9.7% 12.7% 12,000 200,000 11.8% 14% 13.1% 14% 10,000 11.5% 12% 150,000 10.2% 12% 9.7% 10% 9.0% 8,000 10% 8% 100,000 6.3% 8% 6% 6,000 6% 50,000 4% 4,000 2% 4% 2,000 0 0% 2% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10E 0 0% 2005 2006 2007 2008 2009 2010E 2011E TAC (LHS, Rmb '000s) TAC as % of rev enue (RHS, %) Total Rev enue (Left, RMB millions) TAC as % of total rev enue (Right) Source: Company reports, J.P. Morgan estimates. Source: Company reports, J.P. Morgan estimates. 91
    • Dick Wei Global Equity Research (852) 2800-8535 03 January 2011 dick.x.wei@jpmorgan.com Rating and Price Target We maintain our Overweight rating on Baidu as it remains one of the dominant market leaders in China’s online search market, which is still in an early high-growth stage. Google’s potential exit from China is likely to be beneficial to Baidu as well. With China’s search market around five to six years behind the US in terms of monetization, we believe the risks are on the upside that the search ad market could develop at a faster pace, with lack of other well-established offline SME marketing platforms and the network of distributors and sales agencies. We maintain our Dec 2011 price target of US$120. Our price target implies 53.3x FY11E, and 39.7x FY12E diluted adjusted EPS, on the back of 53% and 35% EPS growth for FY11E and FY12E respectively, or 1.3x PEG (based on 2012 P/E and long-term growth of 30%). (1) DCF valuation We use a 15-year DCF valuation for Baidu, with an estimated 17% long-term growth rate from 2020E-25E. Our nominal case DCF valuation is based on a WACC of 12% and 0% terminal growth. Based on the assumptions, our DCF valuation is US$120.4. We also performed some near-term revenue growth sensitivity analysis on a potential growth slowdown. Our current forecast implies 2012-2015E CAGR to be 30%. If we assume near-term growth to slow down to 25%, our DCF valuation is US$120, with a terminal growth rate at 3% Baidu—DCF Model FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E Sales growth 77.2% 55.2% 37.5% 33.4% 31.0% 25.9% 22.0% 21.0% 20.0% 20.0% 20.0% EBIT margin 49.1% 48.5% 48.2% 46.2% 45.9% 45.4% 45.2% 45.2% 45.2% 45.2% 45.2% NOPAT margin 42.4% 41.9% 41.1% 39.3% 39.1% 38.7% 38.5% 38.5% 38.5% 38.5% 38.5% Year-end net fixed assets turns 5.0 6.3 6.9 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 Year-end net working capital turns -7.2 -7.5 -7.6 -7.0 -7.0 -7.0 -7.0 -7.0 -7.0 -7.0 -7.0 Year-end net other assets turns 22.5 35.6 49.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 Cash operating taxes as % of EBIT 13.7% 13.6% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% Year-end Invested capital turns 9.5 18.2 30.7 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 Source: J.P. Morgan estimates. DCF Sensitivity Analysis Terminal growth (%) 0% 1% 2% 3% 4% 5% 6% 7% 10.0% 167.6 175.6 185.7 198.6 215.8 239.9 276.1 336.3 11.0% 140.9 146.5 153.2 161.6 172.4 186.9 207.1 237.4 WACC 12.0% 119.9 123.8 128.4 134.0 141.1 150.2 162.3 179.2 13.0% 103.1 105.8 109.0 112.9 117.7 123.6 131.2 141.4 14.0% 89.4 91.4 93.7 96.4 99.7 103.6 108.6 115.0 15.0% 78.2 79.6 81.3 83.2 85.5 88.2 91.6 95.8 Source: J.P. Morgan estimates. (2) PEG ratio analysis At our PT of US$120, Baidu trades at 1.3x PEG (based on 2012 P/E and long-term growth of 30%), or 1.5x PEG (based on 2011E P/E and 2012E EPS growth of 35%). 92
    • Dick Wei Global Equity Research (852) 2800-8535 03 January 2011 dick.x.wei@jpmorgan.com As a reference, the S&P 500 currently trades at 12x forward P/E with the next three- year CAGR of 7%, or a PEG of 1.7x. (3) Market size potential Using various references to the US and Korea search markets, we estimate China’s search market size could reach US$3B-US$4.6B by 2013. This compares to our current 2013 forecast of US$3.4B and US search market 2009 size of US$15B. Please also refer to the chart below for analysis of market size comparison with US/Korea market. Other factors that could lead to positive surprises to our forecast include faster-than- expected inflation and RMB appreciation. Risks to Our Rating and Price Target Downside risks to our rating and price target include: Slower-than-expected online search growth: This would be due to Baidu’s execution, economic slowdown, government policy changes, fraudulent clicks causing a general decline in ROI, and availability of an alternative more effective advertising form. Potential margin decline: While we expect Baidu to see a slight increase in TAC, upside surprise to TAC could come from a ramp-up of contextual search on affiliate sites and partnerships with new affiliate members. In addition, higher bandwidth cost increases, higher marketing expenses, and higher R&D could lead to a margin decline. Large infrastructure-related expense: During the early phase of search advertising growth, Baidu could invest in servers and bandwidths more significantly than we forecast. While this would be a positive in the long term, the share price could be impacted in the near term due to lower earnings. Unsuccessful new initiatives: Baidu began investments in Japan in 2007 with US$15million in expenses. The company also invested in a video site (Qiyi.com) and eCommerce site (JV with Rakuten). If these ventures were unsuccessful or required additional financing, Baidu could take an investment loss. 93
    • Dick Wei Global Equity Research (852) 2800-8535 03 January 2011 dick.x.wei@jpmorgan.com Baidu: Summary of financials Income statement Ratio analysis US$ in millions, year-end December %, year-end December FY08 FY09 FY10E FY11E FY12E FY08 FY09 FY10E FY11E FY12E Revenues 465.5 651.4 1,168.0 1,828.7 2,514.2 Gross Margin 64.0 63.8 72.6 72.4 71.6 Cost of Goods Sold 167.5 235.8 320.4 504.4 713.9 EBITDA margin 45.4 45.4 56.0 54.3 53.7 Gross Profit 298.0 415.6 847.6 1,324.3 1,800.3 Operating Margin 34.3 36.1 49.1 48.5 48.2 R&D Expenses 36.2 55.9 97.5 157.2 216.3 Net Margin 32.8 33.4 43.4 43.2 42.7 SG&A Expenses 90.0 112.1 162.9 266.9 357.2 R&D/sales 7.8 8.6 8.3 8.6 8.6 Share-based Expense 12.2 12.6 13.3 12.8 14.1 SG&A/Sales 19.3 17.2 13.9 14.6 14.2 Operating Profit (EBIT) 159.6 235.1 573.9 887.3 1,212.6 EBITDA 211.4 296.0 654.0 993.4 1,350.7 Sales growth 100.9 39.9 79.3 56.6 37.5 Interest Income, net 6.9 4.8 9.1 22.3 37.6 Operating Profit Growth 119.7 47.3 144.1 54.6 36.7 Investment Income (Exp.) 0.0 0.0 0.0 1.0 1.0 Net profit growth 82.6 42.6 133.3 55.7 35.9 Other Income (Exp.) 2.9 6.7 2.1 0.6 0.6 Diluted EPS growth 82.5 42.4 131.7 53.0 34.7 Earnings before tax 169.4 246.5 585.0 910.1 1,250.8 Tax 16.9 29.0 77.7 120.0 177.1 Net Income (Reported) 152.5 217.5 507.4 790.1 1,073.7 Net debt to total capital -86.2 -96.4 -94.3 -99.3 -101.1 Net Income (Adjusted) * 164.8 230.2 520.7 803.0 1,087.9 Net debt to equity -86.2 -96.4 -94.3 -99.3 -101.1 US$ Diluted EPS (GAAP) 0.44 0.62 1.45 2.21 2.98 Asset Turnover 81.2 72.2 75.3 72.3 65.7 Adj. Diluted EPS * 0.47 0.66 1.49 2.25 3.02 Working Capital Turns (X) 2.1 1.6 1.6 1.4 1.1 BPS 1.3 2.0 3.6 6.1 9.4 ROE 44.3 40.1 53.5 47.7 40.3 DPS 0.0 0.0 0.0 1.0 1.0 ROIC 42.8 39.4 52.7 46.6 39.2 Shares Outstanding (Mn) 348 348 350 357 360 Balance sheet Cash flow statement US$ in millions, year-end December US$ in millions, year-end December FY08 FY09 FY10E FY11E FY12E FY08 FY09 FY10E FY11E FY12E Cash and cash equivalents 388 671 1,172 2,058 3,248 Net Income 153 218 507 790 1,074 Accounts receivable 14 24 39 57 76 Depr. & Amortisation 40 48 67 91 121 Inventories 0 0 0 0 0 Change in working capital 24 70 51 110 121 Others 14 15 48 69 93 Other 38 13 13 13 14 Current assets 415 709 1,259 2,184 3,416 Cash flow from operations 254 348 638 1,005 1,330 LT investments 2 2 8 7 7 Capex / Investments -59 -82 -159 -147 -191 Net fixed assets 129 146 233 286 355 Others -34 0 -5 0 0 Other LT assets 28 44 52 50 50 Cash flow from investing -93 -82 -164 -147 -191 Total assets 573 902 1,551 2,528 3,829 Free cash flow 195 267 480 858 1,139 Liabilities Equity raised/ (repaid) -9 17 18 59 72 ST loans 0 0 0 0 0 Debt raised/ (repaid) 0 0 0 0 0 Payables 62 110 128 194 270 Other 4 -3 1 0 0 Others 62 95 179 260 347 Dividends paid 0 0 0 0 0 Total current liabilities 124 205 307 454 617 Cash flow from financing -5 14 19 59 72 Long term debt 0 0 0 0 0 Other liabilities 0 1 1 1 1 Net change in cash 176 283 501 886 1,189 Total liabilities 124 206 308 455 618 Beginning cash 211 388 671 1,172 2,058 Shareholders' equity 450 696 1,243 2,074 3,211 Ending cash 388 671 1,172 2,058 3,248 Source: Company data and J.P. Morgan estimates. *Note: Excluding share-based compensation expenses. 94