BAIDU final (1)

Yiwei HeYunxin Jia

Introduction Business Description

Financial Analysis Valuation Risk conclusion

IntroductionFinancial Data Ticker(Bloomberg) BIDU

Market Capitalization

76 b

Beta 2.7

Shares Outstanding

350.61 million

Return on Equity 32.63%

Return on Assets 18.03%

Cash Flow Per Basic Share

39.42

Trailing P/E 35.86%

Diluted EPS TTM 30.02

#31 Innovative Companies (#6 in 2013)#723 Global 2000#1639 in Sales#392 in Profit#1597 in Assets#175 in Market value

At a Glance

Asia's Fab 50 Companies

8/30/2013 8/30/20140

50

100

150

200

250

NASDAQ Baidu

Stock Performance•Industry: Computer Services•Founded: 2000•Country: China•CEO: Robin Li•Website: http://www.baidu.com•Employees: 31,676•Sales: $3.2 B at 2013


Financial Analysis Valuation Risk conclusion

Investment StrategyRecommendation: HoldTarget Price: $205.34

Sep 22 2014

Sep 222013

Sep 222012

-9.8% 31.6% 46.9%

Market

• In China, Baidu is the biggest research engine, it allows Baidu holds 19% of global visitors

• Revenue of Advertisement is $31943 ranked first in China.

Revenue Growth

• Growth rate in last five years was very high. In 2011, the growth rate was 91.6%.

• But the growth rate begins to decelerate from 2012.

Production

• Baidu has different online production, such as Baidu Media, Baidu Answer, Baidu Post Bar and etc.

• But they are free and not the main revenue for Baidu.

Valuation Multiple

• EV/EBITA and EV/EBITDA are growing annually.

• But they are all below the average data of the internet industry.

Hold Period Return

Business Description


Financial Analysis Valuation Risk Conclusion

Business Description

Start• BIDU

founded in 2000

Compete • Baidu

became major competitor of Google China

Search and beyond• Google

exited China at 2010

• Baidu started to dominated the market

Search – easier, richer, safer• BIDU

continuous to develop its internet kingdom

More• Baidu

become cross functional.

• Innovated Baidu phone at 2013

Baidu offers search platform on its Baidu.com Baidu search Enables users to find relevant information online Baidu developed alternative products such as web pages, news,

images, documents and multimedia files Alternative Mobile products, including, Baidu Browser, maps, cloud,

etc.

80%

11%

9%

Revenue Segmentation

Ranking Auction Enterprise Data Mining Search Enginee



Baidu is the largest Chinese search engine, accounting for over 80 percent of the Chinese search market share, more than 500 million Chinese Internet users have become accustomed to when there is a demand, " Baidu it "!

forestry, an-imal hus-

bandry and fishery

building and renovation

mechanical device class

ticket class travel

business services

audio books 0.00

5.00

10.00

15.00

20.00

25.00

30.00

2.283.55

6.95

1.27

13.43

28.07

Catergory Search

Major Income source & Business Model

Ads only capture 20%

consumer

AD is everyone, but who is truly need one?

Accurately Invest every

penny on consumer

Purchase “Baidu it”

and Consumer

will find you

Traditional Marketing Baidu it! Demand Marketing

Search Products Social Products

UGC-based Knowledge

Products

Location-based Products and

serviceMusic Products PC Client

Software Mobile RelatedProducts and

service for developers

Other Products and services



Porter’s Five Force & Competitors

Supplier’s Power (High)

Rivalry (High)

New Entrants (Moderate)

Substitutes (low)Buyer’s Power (Low)

0

5Competitive Advantage: Product diversification, Brand identity, advanced technology economic of scale. Industry Growth Estimate: 11%.



BAIDU vs. Industry

BAIDU INC - SPON ADR

GOOGLE INC-CL A

FACEBOOK INC-A

YAHOO! INC YAHOO JAPAN CORP

NAVER CORP NETEASE INC-ADR

76.81

398.18

197.78

42.36 23.03 24.59 11.52

Market Cap M

Averag

e

BAIDU INC - S

PON ADR

GOOGLE INC-CL A

FACEB

OOK INC-A

YAHOO! IN

C

YAHOO JA

PAN CORP

NAVER CORP

NETEA

SE IN

C-ADR

5.53 4.89

19.41

0.62 1.3 0.22

45.91

5.65

EPS:1 Yr

• Baidu is the third rank market capitalization.• Consider NAVER has abnormal EPS & ROE, Baidu

has high ROE above average.

Average BAIDU INC - SPON

ADR

YAHOO! INC

YAHOO JAPAN CORP

NETEASE INC-ADR

NAVER CORP

GOOGLE INC-CL A

Facebook

20.85%32.63%

9.89%21.52% 25.05%

108.94%

16.25% 10.95%

ROE

Financial Analysis



Financial Analysis• On China internet, Baidu earns 28.9% as market share. • Estimate growth rate will consist at 4.93% from 2016.

China Internet market share %

NetEase Inc

Sina Corp Sohu Inc Tencent Holdings

Ltd

Google China

Taobao Other Baidu0

5

10

15

20

25

30

35

13 3.5 4.6 4.6

25.828.6 28.9

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

2000

4000

6000

8000

10000

12000

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

39%

84%92%

56%47%

35%30%

5% 5% 5% 5%

Net sales Net sales growth

Baidu Revenue and Growth

Baidu Margin vs. Industry in 2013

Average Profit Margin EBIT Margin EBITDA Margin0

10

20

30

40

50

32.93 35.0443.34

Baidu Average

Profit Margin

• Gross Profit Margin is slightly higher than the industry average

• EBITDA Margin and EBIT Margin much higher than the industry average.



Financial Analysis

2008 2009 2010 2011 2012 20130.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Baidu Historical Margins

EBITDA Gross Profit EBIT

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190.00%

50.00%100.00%150.00%200.00%250.00%300.00%350.00%400.00%450.00%500.00%

ROIC

ROIC

Stable Margins

• Margin decrease in 2011, as Baidu’s margin was high before, and it began to stable in 2011.

• Debt to equity is around 50%.• A very low debt level causes little concern regarding solvency.

Solvency

• ROIC tend to be stable from 2013

Valuation



Target Price $205.34

DCF$207.79

Average$202.88

EV/EBITA $144.9596

EV/EBITDA $229.89

PEG $ 144.9596

Valuation



Market Return4%

Beta2.705

Risk Free Rate: 10-yr Treasury

2.41%

Cost of Equity13.23%

Weight 69.7%

Cost of Debt6.33% 1-Tax Rate: 15% Weight

30.3

WACC 10.61%

+¿ ×

×

× ×



Base Perpetual Growth RateWACC 4.43% 4.93% 5.43%

9.6% 248 292 357

10.1% 212 243 285

10.6% 185 208 238

11.1% 164 181 203

11.6% 148 161 178

Revenue Growth Assumptions Price ($)

2014E-2015E

2016E 2017E 2018E Price

Bull Case 45% 35% 10% 5% 239

Base Case 35% 30% 5% 5% 208

Bear Case 25% 10% 4% 4% 137

• Revenue growth rate and projections using WACCmethodology.• The estimated perpetual growth rate is 5%, based on industry average growth rate.

DCF: Case & Sensitivity Analysis

2014E-2015E 2016E 2017E 2018E0

2000

4000

6000

8000

10000

12000

14000

Bull Case Base Case Bear Case

Main Assumptions



2014 2015 2016 2017 2018 2019NOPLAT 2437.77 3149.19 3301.18 3460.65 3627.99 3803.58 Growth (NOPLAT) 50.2% 29.2% 4.8% 4.8% 4.8% 4.8% NOPLAT/net sales 34.2% 34.0% 34.0% 33.9% 33.9% 33.9%ROIC 32.7% 34.0% 34.2% 34.4% 34.6% 34.8%Free cash flow -946.08 1332.76 2913.13 3053.47 3200.74 3355.26

Value of OperationsWACC 4% 5% 5%9.56% 248.31 291.85 356.82

10.06% 212.38 242.88 285.4210.56% 185.39 207.79 237.5911.06% 164.37 181.43 203.3311.56% 147.55 160.91 177.58

2014 2015 2016 2017 2018 2019Invested capital (Uses) 7,455 9,271 9,659 10,066 10,494 10,942

Net investment 3,384 1,816 388 407 427 448

Discounted Cash Flow

Compare with industry average, NOPLAT of Baidu is slightly lower than average. Using historical data, ROIC is higher than industry average, and it will steady increase at 1.24%.

Divide & Minus



Relative Valuation: Peer Companies P/E PEG EV/EBITDA EV/EBITA

BAIDU 35.86 1.17 25.85 28.92

GOOGLE 31.29 1.25 17.92 21.22

YAHOO 32.10 2.07 30.83 55.19IAC/

INTERACTIVECORP

24.32 2.85 10.46 11.73

AOL 25.63 1.59 9.90 15.32

FACEBOOK 91.08 1.33 33.61 45.73

SINA 103.88 9.05 86.42 214.81

PEOPLE.CN 78.76 3.59 68.53 73.85

NAVER 62.55 6.28 31.95 38.78

AVERAGE 41.71 2.54 32.17 60.15P/E PEG EV/EBITDA EV/EBITA

35.86

1.17

25.8528.92

41.71

2.54

32.17

60.15

Multiples BAIDU AVERAGE

• US Listed Companies.• Internet Software & Service Industry.• Similar Service.• Average revenue comes from the whole

industry.



Relative Valuation Forward PEG 0.84

×EPS Growth rate for BIDU in next

year27.70%

100

= P/E for BIDU 23.268

× Forward EPS 6.23

= Price($) 144.9596

Forward EV/EBITDA 32.15

× Forward EBITDA FOR BIDU($M) 2675.9

- Net Debt ($M) 5428.6

÷ Number of common shares outstanding(M) 350.61

= Price($) 229.8896

Forward EV/EBITA 36.63

× Forward EBITA FOR BIDU($M) 2385.9

- Net Debt ($M) 5428.6

÷ Number of common shares outstanding(M) 350.61

= Price($) 233.7837

Target Price = $202.88

Risk



Market Risk

Operational Risk

Economic Risk

Investment Risk

Political Risk

Prob

abili

ty

High

Low

Impact HighLow

Competitio

n

New Product

development

BrandLosing

Customer

Currency Risk

Expand new business

Labor Cost Intellectual Property Tort

Government

Regulation

Macroeconomic

Risk Matrix



If Baidu fail to retain existing customers or attract new customers for our online marketing services, itsbusiness, results of operations and growth prospects could be seriously harmed.

If online marketing does not further grow in China, Baidu ability to increase revenue and profitability could bematerially and adversely affected

Our business depends on a strong brand, and if we are not able to maintain and enhance our brand, ourbusiness and results of operations may be harmed.

Major RisksConsumer Risk

Macro Effect

Brand Value



If Baidu expansions into new internet businesses are not successful, the future results of operations and growthprospects may be materially and adversely affected.

If Baidu fail to continue to innovate and provide products and services to attract and retain users, it may not beable to generate sufficient user traffic levels to remain competitive.

Baidu face significant competitions and may suffer from loss of users and customers as a result

Major RisksExpansion Risks

Competition Risks

Product development Risks



GDP Of China

2007 2008 2009 2010 2011 2012 2013 20140

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

0

1000

2000

3000

4000

5000

6000

468.7651.4

1200.5

2300.2

3578.5

5276.5

43025.8

49963.8

59847.1

74970.4

82502.4

90386.6

GDP of China Revnue of China

• China GDP is growing at average of 16%. It impact performance of Baidu.

• Goodwill take 29% of Baidu total assets.

40%

14%

29%

17%

Assets Composition

Short term investments Cash & cash equivalentsGoodwill & intangibles Other Assets

Conclusion



Strong market share

Lower than average

multiples

Diversified Product Line

Revenue Growth

Decelerated

Advanced technology

Narrowed income source

Hold$205.34

END

Documents

BAIDU final (1)