China’s Baidu to report third straight fall in quarterly profit as search advertising stays soft

Chinese online search market leader expected to resume year-on-year growth by the second quarter of next year

PUBLISHED : Monday, 24 October, 2016, 5:41pm
UPDATED : Monday, 24 October, 2016, 10:37pm

Chinese internet search giant Baidu is widely expected to report its third consecutive quarter of net profit decline, as the company continues to face a slow recovery in its core advertising business.

Baidu has been significantly affected by Chinese regulators’ efforts to put more stringent controls on medical-related search advertising since May, following public outrage over the death of university student Wei Zexi linked to a cancer treatment he found in an online search result.

Jefferies equity analyst Karen Chan said in a report that Baidu is predicted to post a 15 per cent year-on-year decrease in third-quarter net profit to 2.41 billion yuan (HK$2.76 billion), up 9.2 per cent from the market consensus estimate of 2.21 billion yuan.

“We expect [Baidu’s] core search [advertising business] to remain soft in the near term before year-on-year growth resumes in the second quarter next year as more of the pent-up demand comes in,” Chan said.

Baidu in July forecast its third-quarter revenue would range from 18.04 billion yuan to 18.58 billion yuan, representing a year on year decrease of 1.9 per cent to an increase of 1.1 per cent.

Jefferies estimated Baidu’s third-quarter revenue would reach 18.3 billion yuan, the mid-point of the company’s guidance.

BNP Paribas Research analyst Ling Vey-sern said in a report that Baidu’s weak third-quarter revenue guidance “reflects a full quarter impact from the more stringent controls put in place on medical-related search ads from mid-May”.

Data from Analysys International and Jefferies showed that Baidu still cornered an 81.2 per cent revenue share in China’s search market during the second quarter, when the company reported its worst ever quarterly drop in net profit.

Baidu reported in July a 34 per cent fall in net profit in the second quarter to 2.41 billion yuan, down from 3.66 billion yuan in the same period last year.

Total revenue in the three months to June advanced 10 per cent to 18.26 billion yuan, up from 16.57 billion yuan a year earlier, which marked the company’s slowest quarterly growth since it was listed on the Nasdaq stock market in the US in 2005.

Robin Li Yanhong, the founder and chief executive of Baidu, said in July that management expected it would take another two to three quarters before the company’s search business recovers.

The company was investigated in May by a task force set up by regulators the Cyberspace Administration of China, the State Administration for Industry and Commerce, and the National Health and Family Planning Commission.

The probe was conducted in response to the death of 21-year-old Wei, a computer science student from Shaanxi province, who had suffered from a rare form of cancer and sought an experimental medical treatment at a hospital in Beijing that topped a Baidu search result.

Wei chronicled online the ineffective treatment he received, and his death in April prompted a public outcry.

Baidu was ordered by regulators to strictly limit advertising per page and clean up its medical-related paid-search business.

In July, the State Administration for Industry and Commerce promulgated regulations to protect consumers against false claims and to prevent misleading practises in online advertising. These regulations will take effect on September 1. There are currently no national laws which regulate China’s online advertising business.

“We believe Baidu is already in line with the new search advertising rules ... because internal controls have already been put in place since mid-May when the medical incident happened,” BNP’s Ling said.