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Investing.com -- Fitch Ratings has given an ’A’ rating to the proposed offshore Chinese yuan senior unsecured notes of China-based tech giant Baidu (NASDAQ:BIDU), Inc. This rating aligns with Baidu’s senior unsecured rating of ’A’, as the proposed notes will be on par with its existing and potential future senior unsecured debt. The company plans to utilize the funds from these notes to repay some of its existing debt, cover interest payments, and for other corporate purposes.
The ratings are supported by Baidu’s commanding position in China’s search engine market and its leadership in artificial intelligence (AI) technologies. Baidu’s search engine is a top choice for advertisers to promote their products and services in China. It is also making significant strides in the AI market, particularly with its widely adopted foundation model ERNIE.
Baidu is currently facing some challenges in its advertising sector due to China’s demanding macroeconomic environment. This has put pressure on Baidu Core’s online marketing revenue. The company is working on enhancing its search product by integrating more generative AI content into search results, but has yet to monetize this content.
Despite these challenges, Baidu’s AI cloud services are expected to offset the pressure on Baidu Core’s online marketing revenue. The company predicts that AI cloud services will make up 71% of Baidu Core’s non-marketing revenue in 2025, an increase from 69% in 2024. This growth has been driven by wider enterprise adoption and increased market recognition of Baidu’s technical capabilities and AI expertise.
Baidu’s profitability at its partly-owned online video service, iQIYI, Inc., has been affected by intense competition for premium content. However, a hit drama series in January 2025 has given the company a strong start, and iQIYI plans to further improve content quality and operational efficiency.
Baidu’s strategic focus on cost efficiency is expected to support profitability amid economic pressure and rising AI investment. Despite a 4% drop in reported adjusted EBITDA from Baidu Core in 2024, the company expects operational efficiency to improve in the medium term.
Baidu’s capital structure is conservative, with a large net cash position. Although EBITDA gross leverage is likely to temporarily exceed 2.5x in 2025 due to short-term EBITDA pressure and new debt, Baidu’s net cash and robust free cash flow generation should be more than sufficient to fund shareholder returns. The company spent over $1.0 billion on share repurchases since 2024, with $3.3 billion remaining under its share repurchase program, which is effective until the end of 2025.
Baidu’s credit profile is stronger than that of internet peers like Meituan, Vipshop Holdings (NYSE:VIPS) Limited, and Expedia (NASDAQ:EXPE) Group, Inc., but weaker than that of Alibaba (NYSE:BABA) Group Holding Limited and Tencent (HK:0700) Holdings (OTC:TCEHY) Limited, which are larger and have greater revenue diversification.
Fitch expects Baidu to maintain a large net cash balance. It had fully consolidated cash and short-term investments of about CNY127 billion at the end of 2024, with a significant portion invested in time deposits and wealth-management products from state-owned banks. Baidu also had CNY99 billion in long-term time deposits and held-to-maturity investments. This is against fully consolidated debt, including redeemable non-controlling interests, of about CNY81 billion.
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