Companies count cost of new ad rules

Analysts estimate additional 3% tax on paid internet searches could hit bottom-line profits of Baidu and Alibaba

Some of China's biggest internet companies may see their earnings take a hit from a new regulation as China takes a firmer grip on search advertising.

The State Administration for Industry and Commerce on July 8 released a regulation that for the first time classifies paid searches as internet advertising. Analysts say that the revenue could be subject to an additional 3 percent culture-cultivation tax.

Such a move could force Baidu Inc, which runs China's biggest online search engine, to cut its forecast for fiscal 2017 net income to 16.3 billion yuan ($2.4 billion; 2.2 billion euros), according to analysts at Daiwa Capital Markets HK Ltd led by John Choi.

That estimate is about 4 percent below the average of estimates compiled by Bloomberg.

About 50 percent of the first-quarter revenue of e-commerce giant Alibaba Group Holding Ltd would be affected, suggesting a 2.4 percent hit to earnings, writes Hong Kong-based Choi.

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

The regulation, which will take effect on Sept 1, is seen as the government's attempt to increase oversight of the country's $23.2 billion internet advertising market, which came under media scrutiny this year after the death of a college student who sought out treatment for a rare disease on Baidu's search results.

Baidu said in a statement that the company would fully implement the new regulations. Alibaba said in a statement that if its pay-for-performance ads were charged a 3 percent fee, the impact on its margins would be in the "low single digit" range as its revenue channels are becoming more diversified.

Analysts say the regulation would have a positive impact on the Chinese online advertising industry. That is because it makes it clear that advertising publishers have the obligation to review ad content - and advertisers from certain industries such as healthcare would have to obtain licenses from watchdogs before they can advertise online, says Jialong Shi, head of Nomura China Internet and Media Research.

"But being officially classified as an ad service, internet search operators will have the new obligation to review the paid search results, which Baidu indicated in its 2015 annual report as 'being burdensome'," Shi says.

mengjing@chinadaily.com.cn

(China Daily European Weekly 07/15/2016 page30)