Baidu, Alibaba Face Profit Hit From New Rules on Search Ads

China's New Advertising Rules May Hurt Alibaba, Baidu
  • Search to be taxed an additional 3%, like Internet advertising
  • Daiwa estimates Baidu earnings will fall below consensus

Alibaba Group Holding Ltd. and Baidu Inc. could face a hit to earnings from new regulations in China that will tax search advertising.

China’s State Administration for Industry & Commerce last week issued new rules on the classification of Internet ads. From September, paid searches will be treated as Internet advertising for the first time and that revenue could be subject to an additional 3 percent tax.

Such a move could force Baidu, operator of China’s most popular search engine, to cut its earnings for fiscal 2017 net income to 16.3 billion yuan ($2.4 billion), according to analysts at Daiwa Capital Markets led by John Choi. That’s about 4 percent below the average of estimates compiled by Bloomberg. About 50 percent of Alibaba’s revenue in the first quarter would be affected, suggesting a 2.4 percent hit to earnings, he wrote.

“We would expect the market to cut its 2017-19 earnings forecasts for Baidu and Alibaba given the additional surcharge burden,” Choi said in a report.

Alibaba said that if its pay-for-performance ads were charged a 3 percent fee, the impact of on its margins would be in the “low single digit” range as its revenue channels are becoming more diversified, according to an e-mailed statement. Whitney Yan, a spokeswoman for Beijing-based Baidu, said in an e-mail that the company would fully implement the new regulations.

The issue was flagged in Baidu’s April 20-F filing to the Securities and Exchange Commission. At the time the company wrote that it made substantially all its revenue from online marketing services, including “pay-for-performance, or P4P, services.”

“We would be obligated to examine the content of our P4P customers’ listings on our websites, which could be excessively burdensome such that we may have to stop posting certain categories of listings on our websites or otherwise cease our P4P services for certain categories of customers," it said at the time.

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