The document is a team project report analyzing Baidu, the leading Chinese search engine company. It provides an overview of Baidu's business, including its products and services, industry and competitive landscape. The report also includes in-depth financial analysis of Baidu's income statements, balance sheets, cash flows and key ratios over several years. It finds that Baidu has experienced very strong revenue growth and high profit margins, and maintains a very liquid balance sheet with no long-term debt issues.

2. Customers. Baidu designs and delivers online marketing services on via www.baidu.com to P4P (“pay for play”) customers and other customers who require tailored online marketing solutions. The auction-based P4P services enable customers to bid for priority placement of their links in keyword search results. The firm believes it was the first auction-based P4P service provider in China. The online advertising services allow customers to use both query sensitive and non-query sensitive advertising services, including text links, graphical advertisements and other forms of online advertising. The P4P customers are those who primarily use auction-based P4P services, and tailored solutions customers are those to whom the firm provides marketing solutions, which may consist of one or more forms of online advertising services as well as P4P services. In the fourth quarter of 2008, the firm had over 197,000 active online marketing customers. Customers keep a deposit with Baidu and are expected to replenish this amount at a certain level. Tailored online marketing solutions are provided on net terms and result in accounts receivable.

4. As with most companies that profit from their intellectual capital, Baidu has relatively high net and operating profit margins, both of which are comfortably over 30%.

6. The firm’s current and quick ratios are both well above 3. The firm certainly has more than enough cash from operations to support its current and total liabilities.

8. Strong CFO is a good sign given such a young company, as it has exhibited a quick move towards strong positive cash flows from core operations.

10. CFI indicates that Baidu is growing rapidly both through organic growth and acquisition.

11. Short-term investments make up a large portion of CFI activities. Most of these investments are comprised of fixed-rate securities in commercial banks with original maturities of less than one year and are guaranteed. These should indicate that Baidu is looking to preserve cash on hand to use in emergency situations and is managing its cash conservatively when not being used for other purposes.

14. Selling, General and Administrative: These costs will jump in 2009 for all scenarios based on the 20-F forecast that the company is switching from a “word of mouth” model to a more serious marketing effort. The best case scenario assumes economies of scale as SG&A falls from 26% of revenue in 2009 to 23% of revenue of 2014. The likely case assumes 26% of revenue every year. The worst case assumes diseconomies of scale, resulting in an increase from 26% of revenue in 2009 to 29.4% in 2014.

17. Cash: Cash was targeted between 59-64% of total assets. The initial calculation was based on that year’s total assets plus implied dividends.

18. Marketable Securities: Marketable securities were held to the average percentage of marketable securities to cash over the prior three years.

19. Accounts Receivable: Accounts receivable were held to a constant percentage of sales.

20. Other Current Assets: This account includes prepaid expenses, advances to suppliers, interest receivables and other miscellaneous accounts. This was held to a gradually decreasing percentage of total assets based on prior trends.

21. All other asset accounts (e.g., deferred tax assets) were forecast as a constant percentage of total assets.

22. Accounts Payable: This item consists of several components including customer deposits, accrued expenses, deferred revenue and deferred income. Of these components, customer deposits and accrued expenses comprised approximately 90% of the account, split equally. Based on prior trends, this account does not appear to correlate with revenue and thus was forecast as a percentage of total assets.

23. Deferred Revenue: Includes any development contracts paid for by customers but not actually delivered by the firm. This was forecast as a constant (and small) percentage of total assets as there appeared to be no correlation with sales.

24. All other liability accounts: The firm has no debt, long- or short-term.

25. Additional Paid-In Capital: As the company appears to be cash flow positive going forward, there was no need to project additional capital. Thus, the value of this account was held constant going forward.

26. Accumulated Other Comprehensive Income: The firm holds cash and marketable securities in U.S. dollars. Assuming further devaluation of the dollar and/or appreciation of the renminbi, foreign exchange losses will continue to rise. This loss in AOCI is expressed as a constant percentage of total assets.

28. 20-F is still GAAP, so interpreting the financial statements worked better than expected. However, some accounting items were found in unusual places.

29. Some balance sheet assets found in strange places. Customer deposits, prepaid expenses, etc.

30. ROA decomposition did not seem right because of high cash balances; used Google ratios as a sanity check.

32. Morningstar Document Research (http://documentresearch.morningstar.com)

33. Reuters Provestor

34. S&P Fair ValueAppendix Financial StatementsBalance Sheet and Income Statement (2005 – 2008) Forecasting Sanity Checks2008) Valuation AssumptionsWeighted Average Cost of CapitalRisk-free rate: 10-year T-note as of 11/27/2009: 3.21%Risk premium: 6%, derived from 70 year U.S. stock market history (“Estimating Equity Risk Premiums.” Damodaran, 1999).Valuation Sensitivity AnalysisLikely Case Valuation using FCFE – Likely CaseValuation using FCFE – Best CaseValuation using FCFE – Worst Case