Online Marketing

Baidu is worth backing as key player in China's internet

Written by admin

Greg Smith

Baidu, the Chinese online search giant and a leader in the development of AI (artificial intelligence), beat on the top and bottom lines when it reported recently. The company also confirmed its plans to list its video streaming business iQIYI, sometimes called the Netflix of China, in the United States.

The details are yet to be firmed up, but Baidu plans to remain a majority shareholder. Given the valuations we have seen ascribed to other Chinese video streaming platforms, a listing is likely to unlock some value for Baidu shareholders.

Baidu’s total revenues were 23.6 billion yuan  ($4.76 billion) in the fourth quarter of 2017 (4Q17), a 29 per cent year-on-year increase. That beat both the consensus estimate of23.05 billion yuan and the company’s own guidance. Baidu strung together solid top-line growth in 2017 after a couple of relatively weak quarters in late 2016 when the company faced headwinds.

Online marketing revenues hit 20.4 billion yuan, marking a 26 per cent increase year-on-year. Baidu had around 460,000 active advertiser customers in 4Q17, up 2 per cent from the corresponding period of 2016. While that seems only modest growth, it was a solid recovery and good news given that  many of the “bad actors” should have been weeded out during 2017.

With lower quality advertisers shaken out, the overall quality of the advertising business is likely to improve. Revenue per online marketing customer showed significant strength, surging 25 per cent year-on-year to 44,300 yuan.


The tilt in the overall revenue mix towards mobile devices continued, with 76 per cent of total revenues from mobile in the quarter versus 65 per cent a year ago. Other services revenues  of 3.1 billion yuan was 53 per cent higher than a year earlier.

Rising content costs

Baidu’s operating profit of 4.8 billion yuan more than doubled (up 118 per cent) year-on-year, as costs were relatively well contained compared with a year ago. Content costs are, though, rising significantly as Baidu invests in its iQIYI video streaming platform. As a percentage of revenues, content costs came in at 15.8 per cent in 4Q17, up from 11.1 per cent a year earlier. R&D expense increased roughly 25 per cent as Baidu continues to invest heavily in initiatives such as artificial intelligence.

Net income came in at 4.2 billion yuan, in effect flat (up 1 per cent) compared with a year earlier when Baidu benefited on its exchange of Uber shares.

If cash is king, then Baidu certainly delivered a royal performance. Free cash flow in 4Q17 was an impressive 8.8 billion yuan, up from 6.8 billion yuan in 4Q16. At the end of 2017, Baidu had cash, cash equivalents and short-term investments of 100.5 billion yuan.

Baidu has the leading online ad platform in China and is therefore well placed to benefit as consumer and advertising spending ticks up in the years ahead. The group has built a robust business franchise due to its dominance in Chinese internet search. The company’s strong brand, network advantage, expertise in AI and substantial R&D budget should reinforce its strong competitive position.

In our view the group is set to remain one of the biggest players in the evolution of China’s broader internet opportunity.

Greg Smith is the head of research at investment research and funds management house Fat Prophets. Interests associated with Fat Prophets declare an interest in Baidu. For a free trial of Fat Prophets’ daily market commentary please click here.

Let’s block ads! (Why?)

Source link

About the author


Leave a Comment