Citigroup has recommended exiting Baidu.com, Inc.
(ADR)(NASDAQ:BIDU) ahead of the search engine's bond issuance to raise funds
worth $1.5 billion.
The Chinese search engine company has filed its
proposal with the Securities and Exchange Commission to raise funds via sale of
bonds in two tranches to raise funds that will be used to pay down debt of $350
million and also to make acquisitions.
According to Citi's Muzhi Li, the company’s plan to
use the funds to make acquisitions would not address its underlying weakness.
When announcing its third quarter results Baidu's
management had said that the company was looking to buy Internet-related
start-up firms. It has already announced its intention to buy Providence Equity
Partner’s 40 percent stake in iQiyi, an online video service.
Li wrote in a note - “search is no longer the gateway
of mobile Internet, but apps is. Our survey showed that 1) deeper penetration
of mobile devices reduces the usage of PC; 2) mobile search is replaceable by
apps; and 3) paid search is the least accepted ad format in mobile, according
to our survey. These findings explain why advertisers are unwilling to buy
mobile search ads.”
“In 2013, we
estimate at least 1/3 of Baidu’s search traffic would come from mobile. On the
mobile side, revenue pressures would come from 1) reducing CPC to improve
advertisers’ ROI, 2) low mobile CTR and 3) low keyword coverage on mobile.
Baidu has to balance mobile’s negative incremental revenue impacts with growth
from PC. However, on the desktop side, 1) upward CPC trend (21 percent YTD) is
hard to maintain in 2013 as competition from Qihoo and Sogou emerge, 2) limited
upside of improving click-through-rate (CTR) to compensate the loss of traffic
to competitors and increasing mobile search traffic, 3) expand customer base
among SMEs. We forecast 2013E revenues to grow at 30 percent, vs. the consensus
of 36 percent.”
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