Morgan Stanley Cuts Baidu's Target To $200 On Risks To Revenue From Investigation Results

Baidu Inc (ADR) BIDU has been asked to clean up its search results following an investigation by China's cyberspace regulator. Morgan Stanley’s Robert Lin maintained an Overweight rating for the company, while reducing its price target from $223 to $200. The analyst commented that the investigation results pose potential risks to revenue.

“The Cyberspace Administration of China (CAC) announced investigation results on the recent Baidu health care incident. Baidu responded that it will comply fully by May 31 and has established a Rmb1bn fund protection to compensate users harmed by misleading marketing information,” analyst Robert Lin wrote.

Potential Risk: Cleanup Of Low Quality Healthcare Advertisers

Baidu has ended ad relationships with military hospitals following the investigation, leading to ~126mn ads being terminated. The Chinese search giant would need to have more stringent ad practices in order to comply with the new requirement.

Lin expects Baidu’s top line to be adversely impacted by ~2-3 percent in 2Q and by ~4 percent each in 3Q and 4Q.

Potential Risk: Ad Load Limitation

Baidu has to comply with a 30 percent ad load limitation that has been imposed. “We believe the ad load limit will likely have a bigger impact on PC search (40% of search revenue/ 26% of total), as mobile has already satisfied the 30% ad load,” Lin wrote.

Given the revenue contribution by PC search and the reduction in ad load, Lin estimates a revenue reduction of 5-6 percent on an annual basis. For 2Q, the analyst forecasts another 2-3 percent in lowered revenue.