Baidu's net income grieved due to cost pressure; however, stable capital structure

Baidu Inc. was incorporated on January 18, 2000 and is a Chinese web services company which operates an Internet search engine. The Company offers algorithmic search, enterprise search, pay for performance and news, MP3, and image searches. Baidu provides an index of over 740 million web pages, 80 million images, and 10 million multimedia files.

Strong revenue growth, however operating margin suffered due to higher cost all fronts

Baidu Inc. for the fiscal year ending 2013 registered a spectacular revenue growth of 47% with revenues at $5.19 billion. However, operating income grew by a miniscule 4%, largely led by higher cost at all fronts. The company’s selling, general and administrative expenses grew more than two-fold, R&D expenditures as well as cost of services went up by 83%. Net income came in at $1.71 billion, showing growth akin to operating income. Revenue growth posted during the quarter stood at 57% with operating income growing only by 21%. Operating margin declined during the quarter to 30% from 38% registered during the same quarter last year.

Marginal EPS growth in line with the operating income; no dividend payments

EPS (FY2013: $4.9, FY2012: $4.7) of the company has grown marginally by 3%, which is in line with the operating income, hinting that the company was able to maintain the cost below the operating level. The company has not been making any dividend payments recently.

Market consensus

In terms of market outlook for the company, the company is expected to continue its growth momentum on the revenue front. Likewise, net income and EPS are also outlined to grow at similar levels, signalling no deterioration in margin or atleast margins would be sustained at current levels. Moreover, consensus factors in a no change in dividend policy and assess the management to continue with no dividend announcements in the years to come. The table below summarizes the consensus forecast for Baidu Inc:

Stable and healthy capital structure with good cash flow from operations

The Company’s long term debt has increased to $349 million in fiscal year 2013 from $57 million in fiscal year 2012, which led to Long-Term Debt to Equity ratio mounting from 0.4x in fiscal year 2012 to 0.5x in fiscal year 2013. Company’s capital structure is more or less stable and healthy considering accrual of decent cash flow from operations. Primary reason for jump in debt in fiscal year 2013 was acquisition of business.

Upcoming events

The Company is expected to announce its 3rd quarterly results between 27 October 2014 and 31 October 2014.

Major shareholders

Following are 3 major shareholders of company:

Baillie Gifford & Co. 9.61% holding with 26.47m shares

T. Rowe Price Associates, Inc. 6.90% holding with 19.00m shares

Oppenheimer Funds, Inc. 4.70% holding with 12.94m shares

Significant change in shareholding

Following are the major shareholding transactions that took place recently:

T. Rowe Price Associates, Inc. buying 2.57 million shares

Tiger Global Management, L.L.C. selling 2.57 million shares

Carmignac Gestion selling 1.95 million shares

Stock reigning at historical highs reflecting robust business growth at the top line front and also the high market expectations