271
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y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 189: YHOO Annual Cash Flow Statement
$ in millions
FY-07 FY-08E FY-09E FY-10E
Net Income 660.0 909.6 460.6 444.7
D&A 659.2 813.5 880.0 900.0
Tax Benefit (21.2) 52.2 - -
Excess Tax Benefit from SBC - -
Equity (150.7) (592.5) (250.0) (265.0)
Minority Interests 18.0 3.0 - -
Stock Based Compensation 572.4 480.8 720.0 820.0
Other Non-Cash Items (149.8) 658.2 - -
Changes in Working Capital 366.5 658.2 (4.9) (14.7)
Accounts Receivable - 56 36.8 110.6
Prepaid Expenses - 216 14.2 42.8
Accounts Payable - 17 5.9 17.7
Accrued Charges - (28) 36.8 110.6
Deferred Revenue - (69) 13.3 39.8
Other Operating - - - -
Cash From Operations 1,960.9 2,353.1 1,805.7 1,885.0
FCF 1,352.1 1,699.1 1,055.7 1,095.0
INVESTING CASH FLOWS
Capital Expenditures (602.3) (732.9) (750.0) (790.0)
Net Investment 216.4 (380.4) - -
ST Investment Purch. (112.0) - - -
ST Investments Mat. 899.0 - - -
Acquisitions (973.6) (209.2) - -
Cash From Investing (572.5) (1,322.5) (750.0) (790.0)
FINANCING CASH FLOWS
Common Stock Issued 375.1 331.4 - -
Shares Repurchased (1,583.9) (79.2) - -
Structured stock repurchase (250.0) - - -
Excess Tax Benefit from SBC (6.5) 78.9 - -
Other financing activities, net (18.6) (8.5) - -
Long Term Debt - - - -
Cash From Financing (1,484.0) 322.5 - -
Foreign Exch Effects 39.7 (79.4) - -
Net Change In Cash (55.9) 1,273.7 1,055.7 1,095.0
Cash at Beginning 1,569.9 1,513.9 2,787.7 3,843.4
Cash at End 1,514.0 2,787.7 3,843.4 4,938.4
Source: Company reports and J.P. Morgan estimates.
272
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2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
273
Global Equity Research
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y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
International Company Outlooks
International Company Outlooks
274
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275
Global Equity Research
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y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Baidu, Overweight, ($126.93)
We maintain our Overweight rating on Baidu, the dominant market leader in China's
online search market, which is still in an early high-growth stage. Our Dec-09 price
target is US$300, which implies 67.6x FY08E, 50.7x FY09E and 35.3x FY10E
diluted GAAP EPS, or 62.7x FY08E, 48.0x FY09E and 34.0x FY10E adjusted
diluted EPS.
• We believe online search advertising is still in an early high-growth stage in
China, driven by: (1) rising Internet penetration, (2) significant growth in
websites and pages, (3) higher search usage (due to greater mass of web content),
and (4) large number of SMEs (with small ad budgets) turning to search
advertising (due to the higher ROI). We expect the paid search market in China to
grow over 40% Y/Y in 2009 and 2010 each (following ~64% growth for 2008, as
per our estimates).
• Baidu remains the dominant player in China’s search market with ~65% market
share as of 3Q08 (as per iResearch estimates) and also the highest Internet traffic
in China (as per Alexa estimates). We expect Baidu to maintain its leadership in
China due to: (1) our view that its products are tailored better to local needs (e.g.,
music search and Baidu Knows - community Q&A site), (2) its strong local brand
name, (3) good relationship with the Chinese government, (4) its good Chinese
search technology, and (5) it has among the widest distribution networks in China
(a key to market development and driving sales), and is well ahead of competitors
in search.
• We expect Baidu to see a negative impact in 4Q’08 and 2009 from the medical
and pharmaceutical customer removal issue (following a CCTV report in mid-
Nov. on unlicensed entities advertising via Baidu), as these customers account for
10-15% of Baidu’s total revenue. We believe the stock is likely to trade weakly in
the near term until there is more clarity on the impact on 2009. However, we
believe this recent “hiccup” is positive for Baidu in the long term, as Baidu is
now taking the right steps to address the longer-term user experience and
monetization issues, which should put the company on the right path to continue
to grow in the early-stage search market. Thus, we remain positive on Baidu.
• With the impact from the medical and pharmaceutical customer issue, we had
revised down our ’08E/’09E earnings by 4% and 18%, respectively (on 10 Dec
2008). For 4Q’08, we expect total revenue of US$138.1M, up 2% Q/Q and 64%
Y/Y, with gross margin of 62.2% (down from 66.4% in 3Q’08) and adj. operating
margin of 36.1% (down from 41.9% in 3Q08). We forecast GAAP diluted EPS of
US$1.27, down 14% Q/Q but up 37% Y/Y.
• 2009 Drivers: In our view, the following factors will drive shares in 2009: (1)
more clarity on 2009 impact from medical & pharmaceutical customer removal
issue, (2) continued strong execution to drive sales and margins, (3) official
launch of C2C ecommerce site, and (4) continued solid growth in China’s
Internet usage and SME search adoption.
Our financial estimates for Baidu are in the table below:
276
Global Equity Research
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y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 190: Baidu Financial Snapshot
$ in millions, except per share data
4Q'08E F'08E F'09E F'10E F'08E Y/Y F'09E Y/Y F'10E Y/Y
J.P. Morgan
Revenue 138.1 471.2 667.2 947.2 103% 42% 42%
EBITDA 62.5 218.4 307.1 449.7 114% 41% 46%
GAAP EPS 1.27 4.44 5.92 8.49 85% 33% 43%
Adj. EPS 1.36 4.79 6.25 8.82 87% 31% 41%
Consensus
Revenue 141.7 463.6 674.7 945.7 100% 46% 40%
EBITDA 66.2 217.2 310.7 414.1 113% 43% 33%
GAAP EPS 1.40 4.57 6.40 9.16 90% 40% 43%
Adj. EPS 1.53 4.76 6.70 9.36 86% 41% 40%
Source: J.P. Morgan estimates and Bloomberg. *Note: Adj. EPS excludes share-based compensation expense.
Our Estimates and Outlook for 2009
We forecast net revenue of US$667.2M in 2009, up 42% Y/Y, and GAAP diluted
EPS of US$5.92, up 33% Y/Y, or adjusted EPS (ex-share-based expense) of
US$6.25, up 31% Y/Y. We expect continued growth in both active online marketing
customers and revenue per customer, though with relatively higher growth in number
of customers (as SME penetration remains very low – Baidu’s active customer base
was 194k in 3Q’08, vs. China SME base of ~40M).
On margins, we forecast gross margin at 60.4% for 2009 (conservative forecast as
Baidu could potentially increase investment in bandwidth / servers for the long-term
opportunities in China), down from 63.8% for 2008. We forecast TAC at slightly
over 14% of revenue in 2009, up from ~13% in 2008 (as Baidu continues to sign
deals that are positive to net revenue growth). We expect adjusted operating margin
(ex-share-based expense) of 35.0% for 2009, down from 36.9% for 2008, and
adjusted net margin of 33.0% for 2009, down from 35.4% for 2008.
Our Estimates and Outlook for 2010
For 2010, we forecast net revenue of US$947.2M, up 42% Y/Y, and GAAP diluted
EPS of US$8.49, up 43% Y/Y, or adjusted EPS of US$8.82, up 41% Y/Y. We
forecast gross margin at 59.5% (slightly lower Y/Y); adjusted operating margin of
35.0% (stable Y/Y) and adjusted net margin of 33.3% (also stable Y/Y).
Price Target, Valuation and Rating Analysis
We maintain our Overweight on Baidu, as it remains the market leader in China’s
online search market, which we believe is still in an early high-growth stage. Our
Dec-2009 price target is US$300, which implies PEG of 1.3x, which we believe is
reasonable given the strong China Internet usage growth and early stage of search
advertising. Our price target implies 67.6x FY’08E, 50.7x FY’09E and 35.3x
FY’10E diluted GAAP EPS, or 62.7x FY08E, 48.0x FY’09E and 34.0x FY’10E
adjusted diluted EPS.
In addition, we believe earnings upside in 2009 could come from banner advertising,
C2C ecommerce services and potential margin leverage.
277
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Imran Khan
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imran.t.khan@jpmorgan.com
Risks to Our Rating
Risks to our rating and price target include: (1) lower-than-expected online search
spending in China, (2) large infrastructure-related (servers and bandwidth) spending,
(3) near-term distributor transition in a couple of cities (FuShan and Dongguan in
2Q08), (4) unsuccessful ecommerce and Japan search initiatives, and (5) potential
margin decline (from TAC increase, bandwidth cost increase, tax rate increase or
significant labor cost increase).
278
Global Equity Research
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Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 191: BIDU Annual Income Statement
$ in millions
INCOME STATEMENT
2007 2008E 2009E 2010E
Total Revenue 231.6 471.2 667.2 947.2
Online marketing services 231.2 470.6 666.6 946.7
Other services 0.5 0.6 0.5 0.5
COGS -85.5 -170.5 -264.3 -383.4
Gross Profit 146.2 300.7 402.9 563.8
Operating Expense -73.5 -138.9 -181.0 -243.8
SG&A expenses -52.3 -91.4 -117.6 -161.0
R&D expenses -15.9 -35.4 -51.7 -71.0
Share-based comps expenses -5.3 -12.0 -11.8 -11.8
EBIT 72.7 161.8 221.8 320.0
Adj. EBIT (ex-share-based exp.) 77.9 173.8 233.6 331.8
EBITDA 101.8 218.4 307.1 449.7
Net Interest Income 6.4 6.6 11.3 18.7
Net Other Income 2.7 1.4 0.0 0.0
Pre Tax Profit 81.8 169.8 233.1 338.7
Tax Expense/(Credit) 1.7 -15.2 -24.5 -35.0
Net Profit 83.5 154.6 208.6 303.6
Adj. Net Profit (ex-share-based exp) 88.8 166.6 220.4 315.4
Diluted EPS (US$) 2.40 4.44 5.92 8.49
Adj. Diluted EPS (US$, ex-share-based exp.) 2.56 4.79 6.25 8.82
Margins (%)
Gross Margin 63.1 63.8 60.4 59.5
Adj. OPM 33.7 36.9 35.0 35.0
EBITDA Margin 44.0 46.3 46.0 47.5
Net Margin 36.1 32.8 31.3 32.1
Adj. Net Margin 38.3 35.4 33.0 33.3
Sequential Growth (%)
Revenue 119.2 103.4 41.6 42.0
Gross Profit 95.2 105.7 34.0 40.0
EBIT 119.2 122.7 37.1 44.3
Net Profit 119.5 85.1 34.9 45.5
Adj. Net Profit 103.9 87.6 32.3 43.1
Diluted EPS 122.0 84.7 33.3 43.4
Adj. Diluted EPS 103.1 87.2 30.7 41.0
Source: Company reports and J.P. Morgan estimates.
279
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Imran Khan
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imran.t.khan@jpmorgan.com
Table 192: BIDU Quarterly Income Statement
$ in millions
1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08E 1Q'09E 2Q'09E 3Q'09E 4Q'09E
Total Revenue 35.7 52.7 66.3 78.3 81.9 117.0 135.4 138.1 135.3 162.0 178.6 191.2
Online marketing services 35.6 52.6 66.2 78.1 81.7 117.0 135.2 137.9 135.2 161.9 178.4 191.1
Other services 0.1 0.1 0.1 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1
COGS -13.2 -19.2 -24.1 -29.5 -32.5 -40.8 -45.4 -52.2 -53.5 -62.9 -70.7 -77.3
Gross Profit 22.5 33.5 42.2 48.8 49.4 76.2 89.9 85.9 81.8 99.1 107.9 114.0
Operating Expense -13.0 -16.5 -19.8 -24.6 -28.4 -35.9 -35.7 -39.0 -39.1 -43.8 -47.6 -50.5
SG&A expenses -8.6 -11.9 -14.7 -17.4 -19.8 -23.0 -23.0 -25.7 -25.7 -28.3 -30.8 -32.7
R&D expenses -2.8 -3.5 -4.3 -5.4 -6.3 -8.7 -10.2 -10.4 -10.5 -12.6 -13.8 -14.8
Share-based comps expenses -1.6 -1.2 -0.7 -1.8 -2.3 -4.3 -2.5 -2.9 -2.9 -2.9 -2.9 -2.9
EBIT 9.6 16.9 22.4 24.2 21.0 40.3 54.2 46.9 42.7 55.3 60.3 63.5
Adj. EBIT (ex-share-based exp.) 11.1 18.1 23.2 26.0 23.3 44.6 56.8 49.9 45.7 58.2 63.3 66.4
EBITDA 15.3 23.6 29.8 33.7 32.9 54.9 68.7 62.5 59.7 75.2 83.1 89.1
Net Interest Income 1.5 1.5 1.6 1.8 1.5 1.5 1.7 1.9 2.3 2.7 3.0 3.3
Net Other Income 0.2 0.4 0.5 1.7 -0.1 1.0 0.4 0.0 0.0 0.0 0.0 0.0
Pre Tax Profit 11.3 18.9 24.6 27.6 22.5 42.8 56.4 48.8 45.0 58.0 63.3 66.8
Tax Expense/(Credit) -0.2 -0.2 -0.3 2.5 -1.5 -4.2 -5.1 -4.4 -4.8 -6.1 -6.6 -7.0
Net Profit 11.1 18.6 24.3 30.1 20.9 38.6 51.2 44.4 40.2 51.9 56.7 59.8
Adj. Net Profit (ex-share-based exp) 12.7 19.8 25.0 32.0 23.2 42.9 53.7 47.4 43.2 54.8 59.6 62.8
Diluted EPS (US$) 0.32 0.54 0.70 0.87 0.60 1.11 1.47 1.27 1.15 1.47 1.61 1.69
Adj. Diluted EPS (US$, ex-share-based exp.) 0.36 0.57 0.72 0.92 0.67 1.23 1.54 1.36 1.23 1.56 1.69 1.77
Margins (%)
Gross Margin 63.1 63.5 63.7 62.3 60.4 65.1 66.4 62.2 60.5 61.2 60.4 59.6
Adj. OPM 31.2 34.4 35.0 33.2 28.5 38.1 41.9 36.1 33.8 35.9 35.4 34.7
EBITDA Margin 42.9 44.7 44.9 43.1 40.1 47.0 50.8 45.3 44.1 46.4 46.5 46.6
Net Margin 31.0 35.4 36.6 38.5 25.5 33.0 37.8 32.2 29.7 32.0 31.7 31.3
Adj. Net Margin 35.5 37.6 37.7 40.8 28.3 36.7 39.7 34.3 31.9 33.8 33.4 32.8
Sequential Growth (%)
Revenue 2.6 47.7 25.7 18.1 4.6 42.8 15.7 2.0 -2.0 19.8 10.2 7.1
Gross Profit -9.3 48.7 26.1 15.6 1.4 54.1 18.0 -4.5 -4.7 21.1 8.9 5.6
EBIT -26.7 77.2 32.4 7.7 -13.0 91.7 34.6 -13.5 -8.9 29.4 9.1 5.2
Net Profit -29.6 68.4 30.1 24.3 -30.6 84.8 32.6 -13.3 -9.4 28.9 9.3 5.6
Adj. Net Profit -24.1 56.6 26.1 27.9 -27.4 84.8 25.3 -11.9 -8.8 26.9 8.8 5.3
Diluted EPS -29.6 68.2 29.9 24.1 -30.6 84.7 32.6 -13.7 -9.7 28.4 8.9 5.2
Adj. Diluted EPS -24.0 56.4 25.9 27.8 -27.3 84.7 25.3 -12.2 -9.1 26.5 8.4 4.9
Source: Company reports and J.P. Morgan estimates.
280
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Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 193: BIDU Annual Balance Sheet
$ in millions
2007 2008E 2009E 2010E
Cash & Cash Equivalents 211 409 588 899
Account Receivables 9 15 21 30
Other Current Assets 9 25 35 50
Total Current Assets 229 449 644 979
Net Fixed Assets 103 147 262 362
LT Investments 2 3 3 3
Other LT Assets 19 27 26 24
Total Long Term Assets 124 177 291 390
Total Assets 353 626 934 1,369
ST Debt - - - -
Accrued Expenses and Payables 48 86 120 169
Other Current Liabilities 36 78 109 158
Total Current Liabilities 84 164 230 327
LT Debt - - - -
Other LT Liabilities 0 - - -
Total Liabilities 84 164 230 327
Share Capital 0 0 0 0
Additional Paid-in Capital 156 190 222 255
Other Reserves (11) (19) (19) (19)
Retained Earnings 124 290 502 806
Preferred Stock - - - -
Total Equity 268 461 705 1,042
Total Liabilities and Equity 353 626 934 1,369
Source: Company reports and J.P. Morgan estimates.
. Expenditures (602.3) (732.9) (750.0) (790.0)
Net Investment 216.4 (380.4) - -
ST Investment Purch. (112.0) - - -
ST Investments Mat. 899.0 - - -
Acquisitions.
US$1.27, down 14% Q/Q but up 37% Y/Y.
• 2009 Drivers: In our view, the following factors will drive shares in 2009: (1)
more clarity on 2009 impact from medical