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.”