A Closer Look At Baidu’s Fintech Initiatives

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In December 2015, Baidu (NASDAQ:BIDU) established a financial services group to enter the consumer finance, mobile payment and internet brokerage businesses. This move was made to compete effectively with other players in the region such as Alibaba and Tencent, who already had payment services or credit card users. Since then, the company’s financial services business has grown and benefited from its artificial intelligence (AI) expertise. Baidu’s AI and big data capabilities can intelligently target and match customers with the right products and identify and prevent fraud. Further, this capability can also assess credit risk through its proprietary data and modelling capabilities. While the company is positioning its financial services business as a fintech business using technology effectively to differentiate itself, credit rating agencies are considering this to be a high-risk business. Recently, Fitch placed Baidu on negative watch as it started moving into unsecured consumer loans and uninsured investments, which are considered to be riskier and “part of the shadow banking system” in China.  While Search Services still remains the most valuable segment for Baidu (accounting for more than 60% of its valuation, according to our estimates) the company is diversifying into several other areas to leverage its AI capabilities. Further, after stricter regulations, advertising on search engines is now controlled, leading to lower revenues for Baidu.

Financial Services is a growth area for Baidu, and the company needs to expand in this segment to stay competitive with players such as Alibaba and Tencent.  China’s financial industry is growing at an exponential pace, and there is demand for a more inclusive finance system. A large population of the country falls in the lower income category and does not meet the criteria laid out by many banks for credit products. This gap is being filled by technology giants such as Baidu, who are using big data and artificial intelligence to determine the creditworthiness of individuals. While there is certainly demand for this, it is a high risk business. While Baidu believes that its AI capabilities can help manage the credit risk of consumers, the company needs to tread carefully on this path. Baidu already faced a significant reputation loss when misleading medical advertisements on its platform contributed to the death of a college student. This impacted its search business negatively, and the company needs to ensure that its financing arm does not run into any trouble as it extends unsecured loans.

Baidu’s financial services group now accounts for nearly 12% of its total assets, and the company is looking to expand this segment to capture the opportunities in this space. While the current Fitch downgrade does not put Baidu in the non-investment grade category, the company is likely to tread carefully in this space to avoid any issues.

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