Author: Landon H. Brodersen, St. John’s University Date: 3/23/2015

Questions regarding the analysis may be directed to lhbrodersen@csbsju.edu or (763) 744-8442

Baidu, Inc.(BIDU) (Sponsored ADR)

Technology Sector

Internet Content and Information Industry

Highlights

As the shining star among Chinese internet companies, Baidu, Inc.

presents an opportunity to capitalize on the Chinese growing middle

class. The firm not only displays robust management and phenomenal

profitability ratios, but it also is the dominant search engine used in

mainland China.

Baidu, Inc. shows promising revenue growth; consistently generating double

digit revenue growth since the company’s inception in 2000. Year-to-year revenue

growth from 2013 to 2014 was 52.83% according to the Q4 earnings call. Growth has

been driven by Baidu’s mobile product expansion and brand recognition in China.

The expansion of Baidu’s segments to services such as Baidu Connect, Baidu

Wallet, and Baidu Food Delivery will allow the company to capitalize on the

growing Chinese middle-class and demand for mobile services.

Baidu, Inc. shows strong financial health relative to its competitors, as shown by

its valuation ratios and profitability ratios. Historically, Baidu’s ROE, ROA, and

Operating Margin have all been higher than its competitors. For the next 1 to 3 years,

I expect these profitability ratios to decrease as Baidu’s investments in mobile services

will take time to generate a significant return. In the long run, I expect Baidu to come

out as the industry leader in its mobile internet search services, producing an efficient

ROI.

Baidu, Inc. announced its 2014 earnings on February 11, 2015 after-market

hours. The results were received to the disappointment of Wall Street as EPS was

$1.61 as opposed to the average estimated $1.68. Baidu’s actual revenue was lower

than analyst estimates. Baidu also announced that its expansion into mobile services

will have a longer turnover than is ideal for a short term investor.

Baidu is the dominant firm in a dominant-fringe firm market structure in the

Chinese internet search engine market, as indicated by its majority market share.

This gives Baidu more pricing power on advertising products, whereas its competitors

have negligible power.

Baidu has shown that its formidable management is not afraid to make

investments in growing markets, whether it is with a segment expansion or with

an investment in a new tech business. Baidu recently took an ambitious stake in

Uber, the online taxi service app, though the terms of the investment decision were not

disclosed. This shows Baidu’s short term profitability will decrease until investments

such as this will turn over.

Risk factors include changing strength of the Yuan against the US Dollar, loss of

market share due to potential changes in Chinese government policy, and

Baidu’s investments in new business segments. While the chances of Google’s

search engine services returning to mainland China are slim, the possibility presents a

threat to Baidu.

Ticker BIDU (NASDAQ)

Price (Close on 2/13/2015) 212.13

Recommendation BUY

Target Price 271.00

Fig

ure

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Company Profile

Price $212.13

52 Week Range $140.66 - $251.99

Average Daily Volume 3.1M

Beta 2.05

Dividend Yield 0.0%

Shares Outstanding 351M

Market Capitalization $74,402M

Insider Holdings 67.4%

M. Fund Holdings 34.0%

Book Value Per Share $23.68

Debt to Capital 33.4%

Key Ratios

EBITDA $2,392M

Fwd. Price-Earnings Ratio 38.0x

Earnings Per Share $3.38

Days Sales Outstanding 25.1

Total Debt/EBITDA 1.7x

Quick Ratio 3.2x

Current Ratio 3.2x

Profit Margin 26.9%

Operating Margin 26.1%

Return on Equity 29.2%

Return on Assets 15.4%

Sales EBITDA

2009 41.0% 41.4%

2010 79.8% 131.4%

2011 92.0% 101.6%

2012 57.4% 52.0%

2013 46.9% 13.0%

2014 52.8% 6.1%

E-2015 50.0% 55.3%

E-2016 45.0% 45.0%

Year to Year Growth Trends

Figure 1

Figure 3

Figure 2

Figure 4