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

Search to Be Taxed an Additional 3%, Like Internet Advertising

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Employees at Alibaba's headquarters in Hangzhou, China.
Employees at Alibaba's headquarters in Hangzhou, China. Credit: Nelson Ching/Bloomberg
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Internet giants Alibaba Group and Baidu 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% 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 $2.4 billion, according to analysts at Daiwa Capital Markets led by John Choi. That's about 4% below the average of estimates compiled by Bloomberg. About 50% of Alibaba's revenue in the first quarter would be affected, suggesting a 2.4% 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," Mr. Choi said in a report.

Alibaba said that if its pay-for-performance ads were charged a 3% 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 emailed statement. Whitney Yan, a spokeswoman for Beijing-based Baidu, said in an email 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.

--Bloomberg News