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
Introduction Business Description
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
Introduction 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
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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%.
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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
20.85%32.63%
9.89%21.52% 25.05%
108.94%
16.25% 10.95%
ROE
Financial Analysis
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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.
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
Target Price $205.34
DCF$207.79
Average$202.88
EV/EBITA $144.9596
EV/EBITDA $229.89
PEG $ 144.9596
Valuation
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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%
+¿ ×
×
× ×
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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.
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
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
Introduction Business Description
Financial Analysis Valuation Risk Conclusion
Strong market share
Lower than average
multiples
Diversified Product Line
Revenue Growth
Decelerated
Advanced technology
Narrowed income source
Hold$205.34
END