Baidu

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F

(Mark One)
‘ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
or

È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012.

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from

to

or

‘ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report

or

Commission file number: 000-51469

Baidu, Inc.

(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
Baidu Campus
No. 10 Shangdi 10th Street
Haidian District, Beijing 100085
The People’s Republic of China
(Address of principal executive offices)
Jennifer Xinzhe Li, Chief Financial Officer
Telephone: +(86 10) 5992-8888
Email: ir@baidu.com
Facsimile: +(86 10) 5992-0000
Baidu Campus
No. 10 Shangdi 10th Street,
Haidian District, Beijing 100085
The People’s Republic of China
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

American depositary shares (ten American depositary shares representing one Class A
ordinary share, par value US$0.00005 per share)

Class A ordinary shares, par value US$0.00005 per share*

The NASDAQ Stock Market LLC
(The NASDAQ Global Select Market)

The NASDAQ Stock Market LLC
(The NASDAQ Global Select Market)

*

Not for trading, but only in connection with the listing on The NASDAQ Global Select Market of American depositary shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)

Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
27,202,710 Class A ordinary shares and 7,763,000 Class B ordinary shares, par value US$0.00005 per share, as of December 31, 2012.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. Yes ‘ No È
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes È No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes È No ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
È
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
Other ‘
U.S. GAAP È

Non-accelerated filer

Accelerated filer

‘

‘

International Financial Reporting Standards as issued by the International
Accounting Standards Board ‘

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ‘
Item 18 ‘
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ‘ No ‘

TABLE OF CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FORWARD-LOOKING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identity of Directors, Senior Management and Advisers . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Offer Statistics and Expected Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Key Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Item 4.
Information on the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4A. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating and Financial Review and Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5.
Directors, Senior Management and Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Major Shareholders and Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7.
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
The Offer and Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10.
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Description of Securities Other than Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13.
Defaults, Dividend Arrearages and Delinquencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds . . . . . . . . .
Item 15.
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16A. Audit Committee Financial Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16B. Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16C. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16D. Exemptions from the Listing Standards for Audit Committees . . . . . . . . . . . . . . . . . . . . . .
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers . . . . . . . . . . . . . . . .
Item 16F. Change in Registrant’s Certifying Accountant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16G. Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16H. Mine Safety Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 17.
Item 18.
Item 19.

PART III

PART II

Page

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i

In this annual report, except where the context otherwise requires and for purposes of this annual report only:

INTRODUCTION

•

•

•

•

•

•

•

•

•

“we,” “us,” “our company,” “our,” or “Baidu” refers to Baidu, Inc., its subsidiaries, and, in the context
of describing our operations and consolidated financial information, our consolidated affiliated entities
in China, including but not limited to Beijing Baidu Netcom Science Technology Co., Ltd., or Baidu
Netcom;

“user traffic” or “traffic” refers generally to page views and the reach of a website, with “page views”
measuring the number of web pages viewed by internet users over a specified period of time except
that multiple page views of the same page viewed by the same user on the same day are counted only
once, and “reach” measuring the number of internet users and typically expressed as the percentage of
all internet users who visit a given website;

“China” or “PRC” refers to the People’s Republic of China, and solely for the purpose of this annual
report, excluding Taiwan, Hong Kong and Macau;

“shares” or “ordinary shares” refers to our ordinary shares, which include both Class A ordinary shares
and Class B ordinary shares;

“ADSs” refers to our American depositary shares, and we effected a change of the ADS to Class A
ordinary share ratio from 1 ADS representing 1 Class A ordinary share to 10 ADSs representing 1
Class A ordinary share on May 12, 2010, which has the same effect as a 10-for-1 ADS split;

“U.S. GAAP” refers to generally accepted accounting principles in the United States;

“RMB” or “Renminbi” refers to the legal currency of China;

“$,” “dollars,” “US$” or “U.S. dollars” refers to the legal currency of the United States; and

all discrepancies in any table between the amounts identified as total amounts and the sum of the
amounts listed therein are due to rounding.

FORWARD-LOOKING INFORMATION

This annual report on Form 20-F contains statements of a forward-looking nature. These statements are
made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can
identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,”
“aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “future” or other similar expressions. We have
based these forward-looking statements largely on our current expectations and projections about future events
and financial trends that we believe may affect our financial condition, results of operations, business strategy
and financial needs. These forward-looking statements include, but are not limited to:

•

•

•

•

•

•

•

our growth strategies;

our future business development, results of operations and financial condition;

our ability to attract and retain users and customers and generate revenue and profit from our
customers;

our ability to retain key personnel and attract new talents;

competition in the internet search, online marketing and other businesses in which we engage;

the outcome of ongoing or any future litigation, including those relating to intellectual property rights;

PRC governmental regulations and policies relating to the internet and internet search providers and to
the implementation of a corporate structure involving variable interest entities in China.

1

We would like to caution you not to place undue reliance on forward-looking statements and you should
read these statements in conjunction with the risk factors disclosed in “Item 3D. Key Information—Risk
Factors.” Those risks are not exhaustive. We operate in a rapidly evolving environment. New risk factors emerge
from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact
of all factors on our business or the extent to which any factor, or combination of factors, may cause actual
results to differ from those contained in any forward-looking statement. We do not undertake any obligation to
update or revise the forward-looking statements except as required under applicable law.

2

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected Financial Data

The following table presents the selected consolidated financial information for our company. The selected
consolidated statements of comprehensive income data for the three years ended December 31, 2010, 2011 and
2012 and the consolidated balance sheets data as of December 31, 2011 and 2012 have been derived from our
audited consolidated financial statements, which are included in this annual report beginning on page F-1. The
selected consolidated statements of comprehensive income data for the years ended December 31, 2008 and 2009
and the selected consolidated balance sheets data as of December 31, 2008, 2009 and 2010 have been derived
from our audited consolidated financial statements for the years ended December 31, 2008, 2009 and 2010,
which are not included in this annual report. Our historical results do not necessarily indicate results expected for
any future periods. The selected consolidated financial data should be read in conjunction with, and are qualified
in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5.
Operating and Financial Review and Prospects” below. Our audited consolidated financial statements are
prepared and presented in accordance with U.S. GAAP.

For the Years Ended December 31,

2008
RMB

Consolidated Statements of

Comprehensive Income Data

Revenues:

2009
RMB

2010
RMB

2011
RMB

RMB
(In thousands except per share and per ADS data)

2012

US$

Online marketing services . . . . . . . . . 3,194,461
3,791
Other services . . . . . . . . . . . . . . . . . . .

4,445,310
2,466

7,912,869
2,205

14,489,767
11,019

22,245,643
60,383

3,570,672
9,692

Total revenues . . . . . . . . . . . . . . . . . . . . . . . 3,198,252

4,447,776

7,915,074

14,500,786

22,306,026

3,580,364

Operating costs and expenses:

Cost of revenues . . . . . . . . . . . . . . . . . (1,155,457)
(659,804)
Selling, general and administrative . . .
(286,256)
Research and development . . . . . . . . .

(1,616,236)
(803,988)
(422,615)

(2,149,288)
(1,088,980)
(718,038)

(3,896,883)
(1,692,810)
(1,334,434)

(6,448,545)
(2,501,336)
(2,304,825)

(1,035,063)
(401,492)
(369,950)

Total operating costs and expenses . . . . . . . (2,101,517)

(2,842,839)

(3,956,306)

(6,924,127) (11,254,706)

(1,806,505)

Operating profit

. . . . . . . . . . . . . . . . . . . . . 1,096,735

1,604,937

3,958,768

7,576,659

11,051,320

1,773,859

Interest income . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . .
Loss from equity method investments . . . .
Other income, net, including exchange

48,573
(896)
—

44,818
(12,157)
(229)

103,096
(35,975)
(8,965)

418,201
(82,551)
(179,408)

866,465
(107,857)
(294,229)

139,077
(17,312)
(47,227)

gains or losses . . . . . . . . . . . . . . . . . . . . .

19,767

45,752

44,239

76,278

449,738

72,188

Income before income taxes . . . . . . . . . . . . 1,164,179

1,683,121

4,061,163

7,809,179

11,965,437

1,920,585

Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . .
(116,071)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . 1,048,108

(198,017)
1,485,104

(535,995)
3,525,168

(1,188,861)
6,620,318

(1,574,159)
10,391,278

(252,670)
1,667,915

Less: Net loss attributable to

noncontrolling interests . . . . . . . . . . . . .

—

—

—

(18,319)

(64,750)

(10,393)

Net income attributable to Baidu, Inc.

. . . . 1,048,108

1,485,104

3,525,168

6,638,637

10,456,028

1,678,308

3

For the Years Ended December 31,

2008

RMB

2009

RMB

2010

RMB

2011

RMB

2012

RMB

US$

(In thousands except per share and per ADS data)

Net income attributable to Baidu, Inc. per Class A ordinary

share, per Class B ordinary share(1)

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30.63

42.96

101.28

190.27

298.62

47.93

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30.19

42.70

100.96

189.88

298.29

47.88

Net income attributable to Baidu, Inc. per ADS
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.06

3.02

4.30

4.27

10.13

10.10

19.03

18.99

29.86

29.83

4.79

4.79

(1) As holders of Class A and Class B ordinary shares have the same dividend right and the same participation right in our undistributed
earnings, the basic and diluted net income per Class A ordinary share and Class B ordinary share are the same for all the periods
presented during which there were two classes of ordinary shares. The weighted average number of ordinary shares represents the sum of
the weighted average number of Class A and Class B ordinary shares. Please see “Earnings per Share” under Note 17 to our audited
consolidated financial statements included in this annual report for additional information regarding the computation of the per share
amounts and the weighted average numbers of Class A and Class B ordinary shares.

2008

RMB

2009

RMB

2010

RMB

2011

RMB

2012

RMB

US$

As of December 31,

(In thousands)

2,357,609
4,562
301,244
3,937,991
849,328

4,180,376
19,513
381,149
6,156,975
1,403,874

7,781,976
38,278
376,492
11,048,439
2,642,847

4,127,482
483,387
10,051,578
23,340,541
7,015,028

11,880,632
395,029
20,604,223
45,668,890
18,453,765

1,906,973
63,407
3,307,206
7,330,360
2,962,031

Consolidated Balance Sheets

Data:

Cash and cash equivalents . . . . . . .
Restricted cash . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . .
Total Baidu, Inc. shareholders’

equity . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . .

3,088,663
3,088,663

4,753,101
4,753,101

8,405,592
8,405,592

15,291,716
15,389,535

26,055,229
26,181,842

4,182,153
4,202,476

Exchange Rate Information

Our business is primarily conducted in China and almost all of our revenues are denominated in RMB.
However, periodic reports made to shareholders will include current period amounts translated into U.S. dollars
using the then current exchange rates, for the convenience of the readers. The conversion of RMB into
U.S. dollars in this annual report is based on the noon buying rate in New York City for cable transfers in RMB
as certified for customs purposes by the Federal Reserve Board. Unless otherwise noted, all translations from
RMB to U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of RMB6.2301 to
US$1.00, the noon buying rate in effect as of December 31, 2012. We make no representation that any RMB or
U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any
particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through
direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On
March 22, 2013, the noon buying rate was RMB6.2120 to US$1.00.

4

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar

for the periods indicated.

Noon Buying Rate

Period

Period-End

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2013

January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
February . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March (through March 22, 2013) . . . . . . . . . . . . . . . . . . . . . .

6.8225
6.8259
6.6000
6.2939
6.2301
6.2848
6.2372
6.2265
6.2301

6.2186
6.2213
6.2120

Source: Federal Reserve Statistical Release

Average(1)

Low
(RMB per U.S. Dollar)
7.2946
6.8470
6.8330
6.6364
6.3879
6.3489
6.2877
6.2454
6.2502

6.9193
6.8295
6.7603
6.4475
6.2990
6.3200
6.2627
6.2338
6.2328

6.2215
6.2323
6.2165

6.2303
6.2438
6.2246

High

6.7800
6.8176
6.6000
6.2939
6.2221
6.2848
6.2372
6.2221
6.2251

6.2134
6.2213
6.2117

(1) Annual averages are calculated using the average of month-end rates of the relevant year. Monthly averages

are calculated using the average of the daily rates during the relevant period.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Risks Related to Our Business

If we fail to retain existing customers or attract new customers for our online marketing services, our
business, results of operations and growth prospects could be seriously harmed.

We generate almost all of our revenues from online marketing services, a substantial majority of which are
derived from our pay-for-performance, or P4P, services. Our online marketing customers will not continue to do
business with us if their investment does not generate sales leads and ultimately consumers, or if we do not
deliver their web pages in an appropriate and effective manner. Our P4P customers may discontinue their
business with us at any time and for any reason as they are not subject to fixed-term contracts. We have in the
past removed, and may in the future again remove, questionable paid search listings of some customers to ensure
the quality and reliability of our search results. Such removal, whether temporary or permanent, may cause the
affected customers to discontinue their business with us. In addition, third parties may develop and use certain
technologies to block the display of our customers’ advertisements and other marketing products on our
Baidu.com website, which may in turn cause us to lose customers and adversely affect our results of operations.
Furthermore, we adjust prices for our online marketing services from time to time. We may lose customers who
decide not to pay our increased prices. Failure to retain our existing customers or attract new customers for our
online marketing services could seriously harm our business, results of operations and growth prospects.

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In recent years, we have generated an increasing portion of our online marketing revenues from online
advertising. We believe our large user base and traffic provide advertisers with a broad reach and optimal
monetization results. However, we cannot assure you that we will be able to continue to attract new advertisers or
retain our existing advertisers. If our advertisers determine that their expenditures on our websites do not
generate expected returns, they may allocate a portion or all of their advertising budgets to other advertising
channels such as television and outdoor media and reduce or discontinue business with us. Since most of our
advertisers are not bound by long-term contracts, they may amend or terminate advertising arrangements with us
easily without incurring liabilities. Failure to retain existing advertisers or attract new ones to advertise on our
websites may materially and adversely affect our business, financial condition, results of operations and
prospects.

If online marketing does not further grow in China, our ability to increase revenue and profitability could be
materially and adversely affected.

The use of the internet as a marketing channel is at a developing stage in China. Internet penetration rate in
China is relatively low as compared to that in most developed countries. Many of our current and potential
customers have limited experience with the internet as a marketing channel, and historically have not devoted a
significant portion of their marketing budgets to online marketing and promotion. As a result, they may not
consider the internet to be an effective channel to promote their products and services as compared to traditional
print and broadcast media. Our ability to increase revenue and profitability from online marketing may be
adversely impacted by a number of factors, many of which are beyond our control, including:

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difficulties associated with developing a larger user base with demographic characteristics attractive to
online marketing customers;

increased competition and potential downward pressure on online marketing prices;

higher customer acquisition costs due in part to the limited experience of small to medium-sized
enterprises, or SMEs, with the internet as a marketing channel;

failure to develop an independent and reliable means of verifying online traffic;

ineffectiveness of our online marketing delivery, tracking and reporting systems; and

decreased use of internet or online marketing in China.

Our business depends on a strong brand, and if we are not able to maintain and enhance our brand, our
business and results of operations may be harmed.

We believe that our brand “Baidu” has contributed significantly to the success of our business. We also
believe that maintaining and enhancing the “Baidu” brand is critical to increasing the number of our users,
customers and Baidu Union members. We have conducted various marketing and brand promotion activities, but
we cannot assure you that these activities will achieve the brand promotion effect expected by us. If we fail to
maintain and further promote the “Baidu” brand, or if we incur excessive expenses in this effort, our business and
results of operations may be materially and adversely affected. In addition, any negative publicity about our
company, our products and services, our employees, our business practices, or our search results or the websites
to which our search results link, regardless of its veracity, could harm our brand image and in turn adversely
affect our business and results of operations.

We face significant competition and may suffer from loss of users and customers as a result.

We face significant competition in almost every aspect of our business, particularly from other companies
that seek to provide internet search services to users and provide online marketing services to customers. In the
Chinese internet search market, our main competitors include U.S.-based internet search providers providing
Chinese language internet search services, such as Google, and China-based internet companies, such as Sohu,

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Tencent, Alibaba and Qihoo 360. We compete with these entities for both users and customers on the basis of
user traffic, quality (relevance) and quantity (index size) of the search results, availability and ease of use of
products and services, the number of customers, distribution channels and the number of associated third-party
websites. Some of our competitors have significant financial resources,
long operating histories and are
experienced in attracting and retaining users and managing customers. They may use their experience and
resources to compete with us in a variety of ways, including by competing more heavily for users, customers,
distributors, strategic partners and networks of third-party websites, investing more heavily in research and
development and making acquisitions. If any of our competitors provides comparable or better Chinese language
search experience, our user traffic could decline significantly. Any such decline in traffic could weaken our brand
and result in loss of users and customers, which would have a material and adverse effect on our results of
operations.

We also face competition from other types of advertising media, such as newspapers, magazines, yellow
pages, billboards, other forms of outdoor media, television, radio and mobile applications. Large companies in
China generally allocate, and may continue to allocate, most of their marketing budgets to traditional advertising
media and only a small portion of their budgets to online marketing and other forms of advertising media. If
these companies do not devote a larger portion of their marketing budgets to online marketing services provided
by us, or if our existing customers reduce the amount they spend on online marketing, our results of operations
and growth prospects could be adversely affected.

If our expansions into new internet businesses are not successful, our future results of operations and growth
prospects may be materially and adversely affected.

As part of our growth strategy, we enter into new internet businesses from time to time by leveraging our
large internet search user base to generate additional revenue streams and through our development of new
business lines or strategic investments in or acquisitions of other businesses. Expansions into new businesses
may present operating and marketing challenges that are different from those that we currently encounter. For
each new business we enter into, we face competition from existing leading players in that business. If we cannot
successfully address the new challenges and compete effectively against the existing leading players in the new
businesses, we may not be able to develop a sufficiently large customer and user base, recover costs incurred for
investing in, developing and marketing new businesses, and eventually achieve profitability from these
businesses, and our future results of operations and growth prospects may be materially and adversely affected.

If we fail to continue to innovate and provide products and services to attract and retain users, we may not be
able to generate sufficient user traffic levels to remain competitive.

Our success depends on providing products and services to attract users and enable users to have a high-
quality internet experience. In order to attract and retain users and compete against our competitors, we must
continue to invest significant resources in research and development to enhance our internet search technology,
improve our existing products and services and introduce additional high-quality products and services. If we are
unable to anticipate user preferences or industry changes, or if we are unable to modify our products and services
on a timely basis, we may lose users. Our results of operations may also suffer if our innovations do not respond
to the needs of our users, are not appropriately timed with market opportunities or are not effectively brought to
market. As search technology continues to develop and mobile devices and applications are increasingly used to
access the internet, our competitors may be able to offer products and services that are, or that are perceived to
be, substantially similar to or better than those provided by us. This may force us to expend significant resources
in research and development and strategic investments and acquisitions in order to remain competitive.

If we fail to keep up with rapid changes in technologies and user behavior, our future success may be
adversely affected.

Our future success will depend on our ability to respond to rapidly changing technologies, adapt our
products and services to evolving industry standards and improve the performance and reliability of our products
and services. Our failure to adapt to such changes could harm our business. In addition, changes in user behavior

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resulting from technological developments may also adversely affect us. For example, the number of people
accessing the internet through mobile devices, including mobile phones, tablets and other hand-held devices, has
this trend to continue while 3G and more advanced mobile
increased in recent years, and we expect
communications technologies are broadly implemented. If we fail to develop products and technologies that are
compatible with all mobile devices and operating systems, or if the products and services we develop are not
widely accepted and used by users of various mobile devices and operating systems, we may not be able to
penetrate the mobile internet market. In addition, the widespread adoption of new internet, networking or
telecommunications technologies or other technological changes could require substantial expenditures to modify
or integrate our products, services or infrastructure. If we fail to keep up with rapid technological changes to
remain competitive, our future success may be adversely affected.

Interruption or failure of our own information technology and communications systems or those of third-
party service providers we rely upon could impair our ability to provide products and services, which could
damage our reputation and harm our results of operations.

Our ability to provide products and services depends on the continuing operation of our information
technology and communications systems. Any damage to or failure of our systems could interrupt our services.
Service interruptions could reduce our revenues and profits and damage our brand if our systems are perceived to
be unreliable. Our systems are vulnerable to damage or interruption as a result of terrorist attacks, wars,
earthquakes, floods, fires, power loss, telecommunications failures, undetected errors or “bugs” in our software,
computer viruses, interruptions in access to our websites through the use of “denial of service” or similar attacks,
hacking or other attempts to harm our systems, and similar events. Some of our systems are not fully redundant,
and our disaster recovery planning does not account for all possible scenarios. In July 2011, our services were
inaccessible to many users for approximately half an hour due to network failure.

Our servers, which are hosted at third-party or our own internet data centers, are vulnerable to break-ins,
sabotage and vandalism. The occurrence of natural disaster or closure of an internet data center by a third-party
provider without adequate notice could result in lengthy service interruptions. In addition, our domain names are
resolved into internet protocol (IP) addresses by systems of third-party domain name registrars and registries.
Any interruptions or failures of those service providers’ systems, which are beyond our control, could
significantly disrupt our own services. In January 2010, some hackers gained access to a domain name registrar
in the U.S., where the servers of our main domain name, Baidu.com, were recorded, and modified such records
of ours. As a result, our internet search services were interrupted for approximately five hours. If we experience
frequent or persistent system failures on our websites, whether due to interruptions and failures of our own
information technology and communications systems or those of third-party service providers we rely upon, our
reputation and brand could be severely harmed. The steps we take to increase the reliability and redundancy of
our systems are expensive, may reduce our operating margin and may not be successful in reducing the
frequency or duration of service interruptions.

We may not be able to manage our expanding operations effectively.

We have significantly expanded our operations in recent years. We expect this expansion trend to continue
as we grow our user and customer base and explore new opportunities. To manage the further expansion of our
business and growth of our operations and personnel, we need to continually improve our operational and
financial systems, procedures and controls, and expand, train, manage and maintain good relations with, our
growing employee base. We have experienced labor disputes in the past. Although these disputes were resolved
promptly, we cannot assure you that there will not be any new labor dispute in the future. In addition, we must
maintain and expand our relationships with other websites, internet companies and other third parties. Our
current and future personnel, systems, procedures and controls may not be adequate to support our expanding
operations.

8

We may face intellectual property infringement claims and other related claims that could be time-consuming
and costly to defend and may result in an adverse impact over our operations.

Internet, technology and media companies are frequently involved in litigation based on allegations of
infringement of intellectual property rights, unfair competition, invasion of privacy, defamation and other
violations of other parties’ rights. The validity, enforceability and scope of protection of intellectual property in
internet-related industries, particularly in China, are uncertain and still evolving. As we face increasing
competition and as litigation becomes more common in China in resolving commercial disputes, we face a higher
risk of being the subject of intellectual property infringement claims. We may be subject to administrative
actions brought by the PRC State Copyright Bureau, and in the most severe scenario criminal prosecution, for
alleged copyright infringement, and as a result may be subject to fines and other penalties and be required to
discontinue infringing activities. Furthermore, as we expand our operations outside of China, we may be subject
to claims brought against us in jurisdictions outside of China.

Our search products and services link to materials in which third parties may claim ownership of
trademarks, copyrights or other rights. In addition, as we adopt new technologies and roll out new products and
services, we face the risk of being subject to intellectual property infringement claims that may arise from our
use of new technologies and provision of new products and services. Our products and services including those
based on cloud computing technology, such as Baidu WenKu and Baidu Post Bar, allow our users to upload
written materials and pictures to our servers, or share, link to or otherwise provide access to audio, video and
other contents from other websites. Although we have made commercially reasonable efforts to request all of our
users to comply with applicable intellectual property laws, we cannot ensure that all of our users have the rights
to upload or share these contents. In addition, Baidu Media Player, our audio and video player using point-to-
point streaming media technology, enables users to play multimedia files, which may be protected by copyright
or other intellectual property rights. We have been and may continue to be subject to copyright or trademark
infringement and other related claims from time to time, in China and internationally.

We have been making continuous efforts to keep ourselves informed of and to comply with all applicable
laws and regulations affecting our business. However, PRC laws and regulations are evolving, and uncertainties
still exist with respect to the legal standards as well as the judicial interpretation of the standards for determining
liabilities of internet search and other internet service providers for providing links to contents on third-party
websites that infringe upon others’ copyrights or hosting such contents, or providing information storage space,
file sharing technology or other internet services that are used by internet users to disseminate such contents. The
Supreme People’s Court of China promulgated a judicial
interpretation on infringement of the right of
dissemination through internet in December 2012. This judicial interpretation, like certain court rulings and
certain other judicial interpretations, provide that the courts will place the burden on internet service providers to
remove not only links or contents that have been specifically mentioned in the notices of infringement from right
holders, but also links or contents they “should have known” to contain infringing content. The interpretation
further provides that where an internet service provider has directly obtained economic benefits from any
contents made available by an internet user, it has a higher duty of care with respect to internet users’
infringement of third-party copyrights. This interpretation could subject us and other internet service providers to
significant administrative burdens and litigation risks.

We conduct our business operations primarily in China. There might be claims that we are subject to
U.S. copyright laws, including the legal standards for determining indirect liability for copyright infringement,
although we believe such claims are without merits. We cannot assure you that we will not be subject to
copyright infringement lawsuits or other proceedings in the U.S. or elsewhere in the future.

Intellectual property litigation is expensive and time-consuming and could divert resources and management
attention from the operations of our business. We are currently named as a defendant in a number of copyright
infringement suits in connection with our Baidu WenKu, Baidu Post Bar, Baidu Media Player and certain other
search services. See “Item 8.A. Financial
Information—Consolidated Statements and Other Financial
Information—Legal Proceedings.” There is no guarantee that the competent courts will accept our defenses and

9

rule in our favor. If there is a successful claim of infringement, we may be required to discontinue the infringing
activities, pay substantial fines and damages and/or enter into royalty or license agreements that may not be
available on commercially acceptable terms, if at all. Our failure to obtain a license of the rights on a timely basis
could harm our business. Any intellectual property litigation by third parties and/or negative publicity alleging
our intellectual property infringement could have an adverse effect on our business, reputation, financial
condition or results of operations. To address the risks relating to intellectual property infringement, we may
have to substantially modify, limit or terminate some of our search services. Any such change could materially
affect user experience and in turn have an adverse impact on our business.

We have been and may again be subject to claims based on the content found on our websites or the results in
our paid search listings.

In addition to the content developed by ourselves and posted on our websites, our users are free to post
information on Baidu Post Bar, Baidu Knows, Baidu Encyclopedia, Baidu WenKu and other sections of our
websites, and our P4P customers may create text-based descriptions, image descriptions and other phrases to be
used as text, image or keywords in our search listings. We have been and may continue to be subject to claims for
defamation, negligence or other legal theories based on the content found on our websites, which, with or without
merit, may result in diversion of management attention and financial resources and negative publicity on our
brand and reputation. See “Item 8.A. Financial Information—Consolidated Statements and Other Financial
Information—Legal Proceedings.” Furthermore, if the content posted on our websites contains information that
government authorities find objectionable, our websites may be shut down and we may be subject to other
penalties. See “—Risks Related to Doing Business in China—Regulation and censorship of information
disseminated over the internet in China may adversely affect our business, and subject us to liability for
information displayed on or linked to our websites, and negative publicity in international media.”

Under PRC advertising laws and regulations, we are obligated to monitor the advertising content posted on
our websites to ensure that such content is fair and accurate and in compliance with applicable law. In addition,
where a special government review is required for specific categories of advertisements before posting, we are
obligated to confirm that such review has been performed and approval has been obtained. See “Item 4.B.
Information on the Company—Business Overview—Regulation—Regulations on Advertisements.” Our
P4P services are not subject to PRC advertising laws and regulations, because PRC laws and regulations and
administrative authorities currently do not classify P4P services as a form of online advertising. However, if
P4P services are classified as a form of online advertising in the future, we would be obligated to examine the
content of our P4P customers’ listings on our websites as required by PRC advertising laws and regulations,
which could be very burdensome, and we may have to stop posting certain categories of listings on our websites
or otherwise cease our P4P services for certain categories of customers. If advertisements shown on our websites
are in violation of relevant PRC advertising laws and regulations, or if the supporting documentation and
government approvals provided to us by our advertising clients in connection with the advertising content are not
complete or accurate, we may be subject to legal liabilities and our reputation could be harmed.

We have been and in the future may again be subject to claims or negative publicity based on the results in
our paid search listings. Claims have been filed against us after we allowed certain customers to register
keywords containing trademarks, trade names or brand names owned by others and displayed links to such
customers’ websites in our paid search listings. While we maintain a database of certain well-known trademarks
and update continually our system algorithms and functions aiming at preventing customers from submitting a
keyword containing the well-known trademarks that we know are owned by others, it is not possible for us to
completely prevent our customers from bidding on keywords that contain trademarks, trade names or brand
names owned by others. There has been negative publicity about fraudulent information in our paid search
listings. Although we have been continually enhancing our technology, control and oversight
to prevent
fraudulent websites, web pages and information from our paid search listings, there is no guarantee that the
measures we have taken are effective at all times. Claims and negative publicity based on the results in our paid
search listings, regardless of their merit, may divert management attention, severely disrupt our operations,
adversely affect our results of operations and harm our reputation.

10

We may be subject to patent infringement claims with respect to our P4P platform.

Our technologies and business methods, including those relating to our P4P platform, may be subject to
third-party claims or rights that limit or prevent their use. In June 2005, we applied for a patent in China for our
P4P platform, but our application was rejected on the ground that it is not patentable. Certain U.S.-based
companies,
including Overture Services Inc., have been granted patents in the United States relating to
P4P platforms and similar business methods and related technologies. While we believe that we are not subject to
U.S. patent laws since we conduct our business operations outside of the United States, we cannot assure you that
U.S. patent laws would not be applicable to our business operations, or that holders of patents relating to a P4P
platform would not seek to enforce such patents against us in the United States or China.

Many parties are actively developing and seeking protection for internet-related technologies, including
patent protection. They may hold patents issued or pending that relate to certain aspects of our technologies,
products, business methods or services. Any patent infringement claims, regardless of their merits, could be
time-consuming and costly to us. If we were sued for patent
to our
P4P platform and were found to infringe upon the patents and were not able to adopt non-infringing technologies,
we may be severely limited in our ability to operate our P4P platform, which would have a material and adverse
effect on our results of operations and prospects.

infringement claims with respect

Our business may be adversely affected by third-party software applications or practices that interfere with our
receipt of information from, or provision of information to, our users, which may impair our users’
experience.

Our business may be adversely affected by third-party malicious or unintentional software applications that
make changes to our users’ computers and interfere with our products and services. These software applications
may change our users’ internet experience by hijacking queries to our websites, altering or replacing our search
results, or otherwise interfering with our ability to connect with our users. The interference often occurs without
disclosure to or consent from users, resulting in a negative experience, which users may associate with our
websites. These software applications may be difficult or impossible to remove or disable, may reinstall
themselves and may circumvent other applications’ efforts to block or remove them. In addition, our business
may be adversely affected by the practices of third-party website owners, content providers and developers which
interfere with our ability to crawl and index their web pages and contents including applications. The ability to
provide a superior user experience is critical to our success. If we are unable to successfully combat malicious
third-party software applications that interfere with our products and services, our reputation may be harmed. If a
significant number of website owners, content providers and developers prevent us from indexing and including
their high-quality web pages and contents including applications in our search results, the quality of our search
results may be impaired.

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm
our business and competitive position.

trademark and trade secret

We rely on a combination of copyright,

laws, as well as nondisclosure
agreements and other methods to protect our intellectual property rights. The protection of intellectual property
rights in China may not be as effective as those in the United States or other countries. The steps we have taken
may be inadequate to prevent the misappropriation of our technology. Reverse engineering, unauthorized
copying or other misappropriation of our technologies could enable third parties to benefit from our technologies
without paying us. Moreover, unauthorized use of our technology could enable our competitors to offer products
and services that are comparable to or better than ours, which could harm our business and competitive position.
We have in the past resorted to litigation to enforce our intellectual property rights, and may have to do so from
time to time in the future. There is no guarantee that the competent courts will accept our claims and rule in our
favor. Such litigation may result in substantial costs and diversion of resources and management attention.

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Our success depends on the continuing and collaborative efforts of our management team and other key
personnel, and our business may be harmed if we lose their services.

Our future success depends heavily upon the continuing services of our management team, in particular our
chairman and chief executive officer, Robin Yanhong Li. If one or more of our executives or other key personnel
are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all,
and our business may be disrupted and our financial condition and results of operations may be materially and
adversely affected. Competition for management and key personnel is intense, the pool of qualified candidates is
limited, and we may not be able to retain the services of our executives or key personnel, or attract and retain
experienced executives or key personnel in the future.

If any of our executives or other key personnel joins a competitor or forms a competing company, we may
lose customers, distributors, know-how and key personnel. Each of our executive officers and key employees has
entered into an employment agreement with us, containing confidentiality and non-competition provisions. If any
disputes arise between any of our executives or key personnel and us, we cannot assure you the extent to which
any of these agreements may be enforced.

We rely on highly skilled personnel. If we are unable to retain or motivate them or hire additional qualified
personnel, we may not be able to grow effectively.

Our performance and future success depend on the talents and efforts of highly skilled individuals. We will
need to continue to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our
organization and business operations. Competition in the internet industry for qualified employees is intense. Our
continued ability to compete effectively depends on our ability to attract new employees and to retain and
motivate our existing employees. As competition in the internet industry intensifies, it may be more difficult for
us to hire, motivate and retain highly skilled personnel. If we do not succeed in attracting additional highly
skilled personnel or retaining or motivating our existing personnel, we may be unable to grow effectively.

Our strategy of investments and acquiring complementary businesses and assets may fail.

As part of our business strategy, we have pursued, and intend to continue to pursue, selective strategic
investments and acquisitions of businesses and assets that complement our existing business. In the past three
years, we acquired certain businesses and intangible assets,
trademarks, customer
relationships, user list and other assets, through several strategic investments and acquisitions, such as our
investment in Qunar Cayman Islands Limited, or Qunar, and Qiyi.com, Inc. We intend to make other strategic
investments and acquisitions in the future if suitable opportunities arise. Investments and acquisitions involve
uncertainties and risks, including:

including software,

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potential ongoing financial obligations and unforeseen or hidden liabilities;

failure to achieve the intended objectives, benefits or revenue-enhancing opportunities;

costs and difficulties of integrating acquired businesses and managing a larger business; and

diversion of resources and management attention.

Any failure to address these risks successfully may have a material and adverse effect on our financial
condition and results of operations. Investments and acquisitions may require a significant amount of capital
investment, which would decrease the amount of cash available for working capital or capital expenditures. In
addition, if we use our equity securities to pay for investments and acquisitions, we may dilute the value of our
ADSs and the underlying ordinary shares. If we borrow funds to finance investments and acquisitions, such debt
instruments may contain restrictive covenants that could, among other things, restrict us from distributing
dividends. Moreover, acquisitions may also generate significant amortization expenses related to intangible
assets. We may also incur impairment charges to earnings for investments and acquired businesses and assets
which are determined to be impaired, and recognize the proportional share of the net losses of the investees to the
extent of the amount of the investments for the equity method investments.

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We are subject to risks and uncertainties faced by companies in a rapidly evolving industry.

We operate in the rapidly evolving internet industry, which makes it difficult to predict our future results of
operations. Accordingly, you should consider our future prospects in light of the risks and uncertainties
experienced by companies in evolving industries. Some of these risks and uncertainties relate to our ability to:

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maintain our leading position in the Chinese language internet search market;

offer new, innovative products and services and enhance our existing products and services with
innovative and advanced technology to attract and retain a larger user base;

attract users’ continuing use of internet search services;

retain existing customers and attract additional customers and increase spending per customer;

upgrade our technology to support increased traffic and expanded product and service offerings;

further enhance our brand;

respond to competitive market conditions;

respond to evolving user preferences or industry changes;

respond to changes in the regulatory environment and manage legal risks, including those associated
with intellectual property rights;

maintain effective control of our costs and expenses;

execute our strategic investments and acquisitions effectively;

attract, retain and motivate qualified personnel and maintain good relations with a young and growing
work force; and

build profitable operations in new markets such as the Japanese and other overseas internet search
markets we have entered into.

If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and

adversely affected.

Our historical growth rate may not be indicative of our future growth rate.

We have experienced substantial growth in recent years. Our total revenues and net income attributable to
Baidu, Inc. grew at a compound annual growth rate of 62.5% and 77.7%, respectively, from 2008 to 2012. Our
growth was driven in part by the growth in China’s internet and online marketing industries, which may not be
indicative of future growth or be sustainable. Our past growth rate may not be indicative of our future growth
rate.

Our indebtedness could adversely affect our financial condition and our ability to obtain additional capital on
reasonable terms when necessary.

As of December 31, 2012, we had an aggregate of US$1.9 billion of outstanding indebtedness that will
mature between 2013 and 2022 and we may incur additional indebtedness in the future. Our current and future
debt requires us to dedicate a portion of our cash flow to service interest and principal payments and may limit
our ability to engage in other transactions. Our ability to pay interest and repay the principal for our indebtedness
is dependent upon our ability to manage our business operations, generate sufficient cash flows to service such
debt and the other factors discussed in this section. There can be no assurance that we will be able to manage any
of these risks successfully.

13

We may require additional capital to support our business growth or to respond to business opportunities,
challenges or unforeseen circumstances. Our ability to obtain additional capital, if and when required, will
depend on our business plans, investor demand, our operating performance, the condition of the capital markets,
and other factors, and our indebtedness may limit our ability to borrow additional funds. We may have difficulty
incurring new debt on terms that we would consider to be commercially reasonable, if at all. In addition, we may
also need to refinance a portion of our outstanding debt as it matures. There is a risk that we may not be able to
refinance existing debt or that the terms of any refinancing may not be as favorable as the terms of our existing
debt.

Our results of operations may fluctuate, which makes our results difficult to predict and could cause our
results to fall short of expectations.

Our results of operations may fluctuate as a result of a number of factors, many of which are beyond our
control. For these reasons, comparing our results of operations on a period-to-period basis may not be
meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly
and annual revenues and costs and expenses as a percentage of our revenues may be significantly different from
our historical or projected figures. Our results of operations in future quarters may fall below expectations. Any
of these events could cause the price of our ADSs to fall. Any of the risk factors listed in this “Risk Factors”
section, and in particular the following factors, could cause our results of operations to fluctuate from quarter to
quarter:

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general economic conditions in China and economic conditions specific to the internet, internet search
and online marketing industries;

our ability to continue to attract users to our websites despite the emergence of mobile applications;

our ability to attract additional customers and increase spending per customer;

the announcement or introduction of new or enhanced products and services by us or our competitors;

the amount and timing of operating costs and capital expenditures related to the maintenance and
expansion of our businesses, operations and infrastructure;

the results of our acquisitions of, or investments in, other businesses or assets;

PRC regulations or government actions pertaining to activities on the internet, including various forms
of entertainment, online payment and activities otherwise affecting our online marketing customers,
and those relating to the new products and services we may introduce from time to time;

unforeseen events, such as negative publicity arising from widespread media coverage and other
sources and labor disputes; and

geopolitical events, natural disasters or epidemics.

Because of the rapid growth of our business, our historical results of operations may not be useful to you in
predicting our future results of operations. Our user traffic tends to be seasonal. For example, we generally
experience less user traffic during public holidays and other special event periods in China. In addition,
advertising and other marketing spending in China has historically been cyclical, reflecting overall economic
conditions as well as budgeting and buying patterns. Our rapid growth has lessened the impact of the cyclicality
and seasonality of our business. As we continue to grow, we expect that the cyclicality and seasonality in our
business may cause our results of operations to fluctuate.

A severe and prolonged global economic recession and the slowdown in the Chinese economy may adversely
affect our business, results of operations and financial condition.

The global financial markets experienced significant disruptions in 2008 and the United States, Europe and
other economies went into recession. The recovery from the lows of 2008 and 2009 was uneven and is facing

14

new challenges, including the escalation of the European sovereign debt crisis since 2011 and the slowdown of
the Chinese economy in 2012. It is unclear whether the European sovereign debt crisis will be contained and
whether the Chinese economy will resume its high growth rate. There is considerable uncertainty over the long-
term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and
financial authorities of some of the world’s leading economies, including China’s. There have also been concerns
over unrest in the Middle East and Africa, which have resulted in volatility in oil and other markets, and over the
possibility of a war involving Iran. There have also been concerns about the territorial disputes involving China
in Asia and the economic effects. Economic conditions in China are sensitive to global economic conditions, as
well as changes in domestic economic and political policies and the expected or perceived overall economic
growth rate in China. Any prolonged slowdown in the global or Chinese economy may have a negative impact on
our business, results of operations and financial condition, and continued turbulence in the international markets
may adversely affect our ability to access the capital markets to meet liquidity needs. Our customers may reduce
or delay spending with us, while we may have difficulty expanding our customer base fast enough, or at all, to
offset the impact of decreased spending by our existing customers. In addition, to the extent we offer credit to
any customer and the customer experiences financial difficulties due to the economic slowdown, we could have
difficulty collecting payment from the customer.

Because we rely to a large extent on distributors in providing our P4P services, failure to retain key
distributors or attract additional distributors could materially and adversely affect our business. Moreover,
there is no assurance that our direct sales model in some key geographic markets will continue to be
successful.

Online marketing is at a development stage in China and is not as widely accepted by or available to
businesses in China as in the United States. As a result, we rely, to a large extent, on a nationwide distribution
network of third-party distributors for our sales to, and collection of payment from, our P4P customers. If our
distributors do not provide quality services to our P4P customers or otherwise breach their contracts with our P4P
customers, we may lose customers and our results of operations may be materially and adversely affected. We do
not have long-term agreements with any of our distributors and cannot assure you that we will continue to
maintain favorable relationships with them. If we fail to retain our key distributors or attract additional
distributors on terms that are commercially reasonable, our business and results of operations could be materially
and adversely affected.

We have transitioned to using our direct sales force to serve P4P customers in some key geographic
markets, such as Beijing, Shanghai and major cities in Guangdong Province. There is no assurance that our direct
sales model in those markets will continue to be successful. If we fail to maintain an adequate direct sales force,
retain existing customers and continue to attract new customers in those markets, our business, results of
operations and prospects could be materially and adversely affected.

We rely on our Baidu Union members for a significant portion of our revenues. If we fail to retain existing
Baidu Union members or attract additional members, our revenue growth and profitability may be adversely
affected.

We pay Baidu Union members a portion of our revenues based on click-throughs by users of Baidu Union
members’ properties. We consider our Baidu Union critical to the future growth of our revenues. Some of our
Baidu Union members, however, may compete with us in one or more areas of our business. Therefore, they may
decide in the future to terminate their relationships with us. If our Baidu Union members decide to use a
competitor’s or their own internet search services, our user traffic may decline, which may adversely affect our
revenues. If we fail to attract additional Baidu Union members, our revenue growth may be adversely affected. In
addition, if we have to share a larger portion of our revenues to retain existing Baidu Union members or attract
additional members, our profitability may be adversely affected.

15

Our Japan and other overseas operations may not be successful.

We formally launched our Japanese search service in January 2008, after completing a 10-month Beta test
for the service. We have limited experience operating in the Japanese market. Our Japan operations have not
achieved profitability, and it is uncertain when the business will become profitable, if at all.

We have started to launch products and services in local languages to internet users in several other
countries. These overseas operations may be exposed to risks similar to those we face in Japan. In particular, we
rely on local telecommunication operators and service providers to provide us with network services and data
center hosting services, and our systems for these international products and services are not redundant across
different regions and data centers. Any interruption to the internet infrastructure or any data center may render
our products and services in the region unavailable.

We face certain risks inherent in doing business internationally, including:

•

•

•

•

•

•

•

difficulties in developing, staffing and simultaneously managing a foreign operation as a result of
distance, language and cultural differences;

longer customer payment cycles;

currency exchange rate fluctuations;

political or social unrest or economic instability;

unexpected changes in laws or regulations;

severe natural disasters; and

potentially adverse tax consequences.

One or more of these factors could harm our Japan and other overseas operations and consequently, could

harm our overall results of operations.

If we are unable to adapt or expand our existing technology infrastructure to accommodate greater traffic or
additional customer requirements, our business may be harmed.

Our Baidu.com website regularly serves a large number of users and customers and delivers a large number
of daily page views. Our technology infrastructure is highly complex and may not provide satisfactory service in
the future, especially as the number of users and customers increases. We may be required to upgrade our
technology infrastructure to keep up with the increasing traffic on our Baidu.com website, such as increasing the
capacity of our servers and the sophistication of our software. If we fail to adapt our technology infrastructure to
accommodate greater traffic or customer requirements, our users and customers may become dissatisfied with
our services and switch to our competitors’ websites, which could harm our business.

If we fail to detect fraudulent click-throughs, we could lose the confidence of our customers and our revenues
could decline.

We are exposed to the risk of click-through fraud on our paid search results. Click-through fraud occurs
when a person clicks paid search results for a reason other than to view the underlying content of search results.
If we fail to detect fraudulent clicks or otherwise are unable to prevent this fraudulent activity, the affected
customers may experience a reduced return on investments, or ROI in our online marketing services and lose
confidence in the integrity of our systems, and we may have to issue refunds to our customers. If this happens,
we may be unable to retain existing customers or attract new customers for our online marketing services, and
our online marketing revenues could decline. In addition, affected customers may also file legal actions against
us claiming that we have over-charged or failed to refund them. Any such claims or similar claims, regardless of
their merits, could be time-consuming and costly for us to defend against and could also adversely affect our
brand and our customers’ confidence in the integrity of our systems.

16

More people are using devices other than personal computers to access the internet. If users do not widely
adopt versions of our web search technology, products and services developed for these devices, our business
could be adversely affected.

The number of people who access the internet through devices other than personal computers, including
mobile phones, smart phones, handheld computers such as iPad and other tablets, and television set-top devices,
has increased dramatically in the past few years. The lower resolution, functionality, and memory associated with
some alternative devices make the use of our products and services on such devices more difficult and the
versions of our products and services developed for these devices may not be compelling to users, manufacturers,
or distributors of devices. Each manufacturer or distributor may establish unique technical standards for its
devices, and our products and services may not work or be accessible on these devices. We have limited
experience to date in operating versions of our products and services developed or optimized for users of
alternative devices, or in designing alternative devices. As new devices and new platforms are continually being
released, it is difficult to predict the problems we may encounter in developing versions of our products and
services for use on these alternative devices and we may need to devote significant resources to the creation,
support, and maintenance of our products and services tailored for such devices. If we are unable to attract and
retain a substantial number of alternative device manufacturers, distributors, and users to our products and
services, or if we are slow to develop products and technologies that are more compatible with alternative
devices, we may fail to capture a significant share of an increasingly important portion of the market for online
services, which could adversely affect our business.

The successful operation of our business depends upon the performance and reliability of the internet
infrastructure and fixed telecommunications networks in China.

Our business depends on the performance and reliability of the internet infrastructure in China. Almost all
access to the internet is maintained through state-owned telecommunication operators under the administrative
control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT. In
addition, the national networks in China are connected to the internet through international gateways controlled
by the PRC government. These international gateways are the only channels through which a domestic user can
connect to the internet. It is unpredictable whether a more sophisticated internet infrastructure will be developed
in China. We may not have access to alternative networks in the event of disruptions, failures or other problems
with China’s internet infrastructure. In addition, the internet infrastructure in China may not support the demands
associated with continued growth in internet usage.

We rely heavily on China Telecommunications Corporation, or China Telecom, China United Network
Communications Group Company Limited, or China Unicom, and China Mobile Communications Corporation,
or China Mobile, to provide us with network services and data center hosting services. We have entered into
contracts with various local branches or subsidiaries of China Telecom, China Unicom and China Mobile to
obtain data communications capacity. We have limited access to alternative services in the event of disruptions,
failures or other problems with the fixed telecommunications networks of these companies, or if these companies
otherwise fail to provide the services. Any unscheduled service interruption could damage our reputation and
result in a decrease in our revenues. Furthermore, we have no control over the costs of the services provided by
these telecommunication companies. If the prices that we pay for telecommunications and internet services rise
significantly, our gross margins could be adversely affected. In addition, if internet access fees or other charges
to internet users increase, our user traffic may decrease, which in turn may harm our revenues.

Failure of information security could subject us to penalties, damage our reputation and brand, and harm our
business and results of operations.

The internet industry is facing significant challenges regarding information security and privacy, including
the storage, transmission and sharing of confidential information. We transmit and store over our systems
confidential and private information of our users, customers, distributors and Baidu Union members, such as

17

personal information, including names, user IDs and passwords, and payment or transaction related information.
We are required by PRC law to ensure the confidentiality,
integrity, availability and authenticity of the
information of our users, customers, distributors and Baidu Union members, which is also essential to maintain
their confidence in our online products and services.

the Standing Committee of

We have adopted strict information security policies and deployed advanced measures to implement the
including, among others, advanced encryption technologies. However, advances in technology,
policies,
increased level of sophistication and diversity of our products and services, increased level of expertise of
hackers, new discoveries in the field of cryptography or others could still result in a compromise or breach of the
measures that we use. Because of our leading market position in the internet industry in China, we believe we are
a particularly attractive target for security breaches and hacking attacks. We have experienced in the past, and
may experience in the future, such attacks. In August 2011, China’s Supreme People’s Court and Supreme
People’s Procuratorate issued judicial interpretations regarding hacking and other internet crimes. In December
2012,
the PRC National People’s Congress promulgated the Decision on
Strengthening Network Information Protection, or the Network Information Protection Decision, to enhance the
legal protection of information security and privacy on the internet. The Network Information Protection
Decision also requires internet operators to take measures to ensure confidentiality of information of users.
However, the effect of these new laws on curbing hacking and other illegal online activities still remains to be
seen. Significant capital, managerial and human resources are required to comply with legal requirements,
enhance information security and to address any issues caused by security failures. If we are unable to protect our
systems, hence the information stored in our systems, from unauthorized access, use, disclosure, disruption,
modification or destruction, such problems or security breaches could cause loss or give rise to our liabilities to
the owners of confidential information, such as our users, customers, distributors and Baidu Union members,
subject us to penalties imposed by administrative authorities, and disrupt our operations. Any negative publicity
on our website’s safety or privacy protection mechanism and policy could also have a material and adverse effect
on reputation and brand and harm our business and results of operations.

If we fail to maintain an effective system of internal control over financial reporting, we may lose investor
confidence in the reliability of our financial statements.

We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404
of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management
report on the company’s internal control over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of our internal control over financial reporting. In addition, an
independent registered public accounting firm must attest to and report on the effectiveness of our internal
control over financial reporting. We have been subject to these requirements since the fiscal year ended
December 31, 2006.

Our management has concluded that our internal control over financial reporting was effective as of
December 31, 2012. See “Item 15. Controls and Procedures.” Our independent registered public accounting firm
has issued an attestation report, which has concluded that our internal control over financial reporting was
effective in all material aspects as of December 31, 2012. However, if we fail to maintain effective internal
control over financial reporting in the future, our management and our independent registered public accounting
firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable
assurance level. This could in turn result in loss of investor confidence in the reliability of our financial
statements and negatively impact the trading price of our ADSs. Furthermore, we have incurred and anticipate
that we will continue to incur considerable costs, management time and other resources in an effort to comply
with Section 404 and other requirements of the Sarbanes-Oxley Act.

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We have limited business insurance coverage.

The insurance industry in China is still at a relatively early stage of development. Insurance companies in
China offer limited business insurance products. We do not have any business liability or disruption insurance
coverage for our operations in China. Any business disruption may result in our incurring substantial costs and
the diversion of our resources.

We face risks related to health epidemics, severe weather conditions and other outbreaks.

Our business could be adversely affected by the effects of avian influenza, severe acute respiratory
syndrome (SARS), the influenza A (H1N1), severe weather conditions or other epidemic or outbreak. Health or
other government regulations adopted in response to an epidemic, severe weather conditions such as snow storm,
flood or hazardous air pollution, or other outbreaks may require temporary closure of our offices or internet cafes
where many users access our websites. Such closures may disrupt our business operations and adversely affect
our results of operations.

Risks Related to Our Corporate Structure

PRC laws and regulations governing our businesses and the validity of certain of our contractual
arrangements are uncertain. If we are found to be in violation, we could be subject to sanctions. In addition,
changes in PRC laws and regulations or changes in interpretations thereof may materially and adversely
affect our business.

The PRC government restricts or imposes conditions on foreign investment in internet, online advertising,
online audio and video services and employment agency businesses. We and our PRC subsidiaries are considered
foreign persons or foreign-invested enterprises under PRC foreign investment related laws. As a result, we and
our PRC subsidiaries are subject to PRC legal restrictions on or conditions for foreign ownership of internet,
online advertising, online audio and video services and employment agency businesses. To comply with these
PRC regulations, we operate our websites and conduct online advertising, online audio and video services and
the nominee
employment agency businesses in China through our consolidated affiliated entities. As all
shareholders of our consolidated affiliated entities are either PRC citizens or PRC domestic enterprises, these
entities are therefore considered as PRC domestic enterprises under PRC law. The “nominee shareholders” refer
to those shareholders who have pledged their equity interest in our consolidated affiliated entities to us and
entered into exclusive equity purchase and transfer option agreements with us as part of the contractual
arrangements. Our contractual arrangements with our consolidated affiliated entities and the nominee
shareholders allow us to have the power to direct the activities of these entities that most significantly impact
their economic performance. These contractual arrangements demonstrate our ability and intention to continue to
exercise the ability to absorb substantially all of the profits and the expected losses of the affiliated entities.

limited to,

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations,
including, but not
the laws and regulations governing our business, or the enforcement and
performance of our contractual arrangements with our consolidated affiliated entities, including but not limited to
Baidu Netcom and the nominee shareholders. These laws and regulations may be subject to change, and their
official interpretation and enforcement may involve substantial uncertainty. New laws and regulations that affect
existing and proposed future businesses may also be applied retroactively.

Although we believe we comply with current PRC laws and regulations, we cannot assure you that the PRC
government would agree that our contractual arrangements comply with PRC licensing, registration or other
regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future.
The PRC government has broad discretion in determining penalties for violations of laws and regulations. If the
PRC government determines that we do not comply with applicable law, it could revoke our business and
operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block
our websites, require us to restructure our operations, impose additional conditions or requirements with which
we may not be able to comply, impose restrictions on our business operations or on our customers, or take other
regulatory or enforcement actions against us that could be harmful to our business. Any of these or similar

19

occurrences could significantly disrupt our business operations or restrict us from conducting a substantial
portion of our business operations, which could materially and adversely affect our business, financial condition
and results of operations. If any of these occurrences results in our inability to direct the activities of any of our
consolidated affiliated entities that most significantly impact its economic performance, and/or our failure to
receive the economic benefits from any of our consolidated affiliated entities, we may not be able to consolidate
the entity in our consolidated financial statements in accordance with U.S. GAAP.

If the PRC government were to classify P4P services as a form of online advertising or as part of internet
content services, our effective tax rate may increase and we might be subject to sanctions and required to pay
delinquent taxes.

PRC laws and regulations and administrative authorities currently do not classify P4P services as a form of
online advertising or as part of internet content services that require an ICP license, or ICP services. However, we
cannot assure you that the PRC government will not classify P4P services as a form of online advertising or as
part of ICP services in the future. If new regulations characterize P4P services as a form of online advertising or
as part of ICP services, our tax liability may increase, given the advertising revenues are subject to a 3%
construction fee for culture undertakings in addition to the 6% value-added tax, or VAT, which replaced the
original 5% business tax for advertising revenues in Beijing in September 2012 as a result of the pilot VAT
reform program. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Taxation”
for more information on PRC business tax and VAT. Moreover, if the change in classification of P4P services
were to be retroactively applied, we might be subject to sanctions, including payment of delinquent taxes and
fines. In addition, the classification of P4P services as a form of online advertising could subject us to an
obligation to examine the content of our P4P customers’ listings on our websites and the associated risks. See
“—Risks Related to Our Business—We have been and may again be subject to claims based on the content
found on our websites or the results in our paid search listings.” Such examinations could be burdensome and
increase our operating costs and expenses. Any change in the classification of P4P by the PRC government may
materially and adversely affect our business, results of operations and financial condition.

Our contractual arrangements with our consolidated affiliated entities in China and the individual nominee
shareholders may not be as effective in providing control over these entities as direct ownership.

Since PRC law restricts or imposes conditions on foreign equity ownership in internet, online advertising,
online audio and video services and employment agency companies in China, we operate our websites and
conduct our online advertising, online audio and video services and employment agency businesses through our
consolidated affiliated entities in China. We have no equity interest in any of these entities and must rely on
contractual arrangements to control and operate the businesses. These contractual arrangements may not be as
effective in providing control over these entities as direct ownership. For example, our consolidated affiliated
entities and the individual nominee shareholders could breach their contractual arrangements with us by, among
other things, failing to operate our business, such as maintaining our websites, in an acceptable manner or taking
other actions that are detrimental to our interests. If our consolidated affiliated entities or the individual nominee
shareholders fail to perform their obligations under these contractual arrangements, we may have to incur
substantial costs to enforce such arrangements, and rely on legal remedies under PRC law, including contract
remedies, which may not be sufficient or effective. If we are unable to enforce these contractual arrangements, or
if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we
may not be able to have the power to direct the activities that most significantly affect the economic performance
of our consolidated affiliated entities, and our ability to conduct our business may be negatively affected, and we
may not be able to consolidate the financial results of the relevant affiliated entities into our consolidated
financial statements in accordance with U.S. GAAP, which could materially and adversely affect our results of
operations and damage our reputation.

Our contractual arrangements with our consolidated affiliated entities in China may result in adverse tax
consequences to us.

As a result of our corporate structure and the contractual arrangements between our subsidiaries and each of
our consolidated affiliated entities in China, we are effectively subject to the 5% PRC business tax, or 6% VAT

20

in certain pilot locations as a result of the pilot VAT reform program, on both revenues generated by our
consolidated affiliated entities’ operations in China and revenues derived from our subsidiaries’ contractual
arrangements with these consolidated affiliated entities, except that where our consolidated affiliated entity is
qualified as a VAT general taxpayer, the VAT charged by our subsidiaries on the revenues obtained from such
consolidated affiliated entity based on the contractual arrangement between our subsidiaries and such
consolidated affiliated entity will constitute input VAT for the consolidated affiliated entity, and will be
creditable against output VAT arising in connection with VAT taxable activities carried out by the consolidated
affiliated entity. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Taxation”
for more information on the pilot VAT reform program. Moreover, we would be subject to adverse tax
consequences if the PRC tax authorities were to determine that the contracts between our subsidiaries and these
consolidated affiliated entities were not on an arm’s-length basis and therefore constituted a favorable transfer
pricing. Under the PRC Enterprise Income Tax Law, or the EIT Law, an enterprise must submit its annual tax
return together with information on related-party transactions to the PRC tax authorities. The PRC tax authorities
may impose reasonable adjustments on taxation if they have identified any related party transactions that are
inconsistent with arm’s-length principles. For example,
that our
consolidated affiliated entities adjust their taxable income upward for PRC tax purposes. Such adjustment could
adversely affect us by increasing our consolidated affiliated entities’ tax expenses without reducing our
subsidiaries’ tax expenses, which could subject our consolidated affiliated entities to interest due on late
payments and other penalties for under-payment of taxes.

the PRC tax authorities could request

We may have exposure to greater than anticipated tax liabilities.

We are subject to enterprise income tax, or EIT, business tax or VAT, and other taxes in many provinces
and cities in China and our tax structure is subject to review by various local tax authorities. The determination of
our provision for income tax and other tax liabilities requires significant judgment. In the ordinary course of our
business, there are many transactions and calculations where the ultimate tax determination is uncertain.
Although we believe our estimates are reasonable, the ultimate decisions by the relevant tax authorities may
differ from the amounts recorded in our financial statements and may materially affect our financial results in the
period or periods for which such determination is made.

The individual nominee shareholders of our consolidated affiliated entities may have potential conflicts of
interest with us, which may adversely affect our business. We do not have any arrangements in place to
address such potential conflicts.

We have designated individuals who are PRC nationals to be the nominee shareholders of our consolidated
affiliated entities in China. For example, Robin Yanhong Li, our chairman, chief executive officer and
co-founder, is also the principal nominee shareholder of Baidu Netcom, one of our consolidated affiliated
entities. Baidu Netcom is the principal shareholder of Beijing BaiduPay Science and Technology Co., Ltd., or
BaiduPay and Baidu HR Consulting (Shanghai) Co., Ltd., or Baidu HR, two other consolidated affiliated entities.

Although the individual nominee shareholders are contractually obligated to act in good faith and in our best
interest, they may still have potential conflicts of interest with us. For example, some individual nominee
shareholders of our consolidated affiliated entities do not have a significant equity stake in our company other
than the share options granted to them. We cannot assure you that when conflicts of interest arise, any or all of
these individuals will act in the best interests of our company or such conflicts will be resolved in our favor. In
addition, these individuals may breach, cause our consolidated affiliated entities to breach or refuse to renew, the
existing contractual arrangements with us. Currently, we do not have any arrangements to address potential
conflicts of interest between these individuals and our company, except that we could exercise our transfer option
under the exclusive equity purchase and transfer agreement with the relevant individual nomine shareholder to
request him/her to transfer all of his/her equity ownership in the relevant consolidated variable interest entity to a
PRC entity or individual designated by us. We rely on Mr. Robin Yanhong Li, who is also a director of our
company, to abide by the Cayman Islands law, which provides that directors owe a fiduciary duty to the
company, and those who are also directors or officers of our PRC subsidiaries to abide by PRC law, which

21

provides that directors and officers owe a fiduciary duty to the company. Such fiduciary duty requires directors
and/or officers to act in good faith and in the best interests of the company and not to use their positions for
personal gains. There are, however, no specific provisions under the Cayman Islands or PRC law on how to
address potential conflicts of interest. If we cannot resolve any conflict of interest or dispute between us and the
individual nominee shareholders of our consolidated affiliated entities, we would have to rely on legal
proceedings, which could disrupt our business, distract management and subject us to substantial uncertainty as
to the outcome of any such legal proceedings.

We may be unable to collect long-term loans to the nominee shareholders of our consolidated affiliated
entities in China.

As of the date of this annual report, we have made long-term loans in an aggregate principal amount of
RMB278.1 million (US$44.6 million) to the nominee shareholders of our consolidated affiliated entities. We
extended these loans to enable the nominee shareholders to fund the initial capitalization of these entities and
subsequent increases in its registered capital. As of the date of this annual report, all of the registered capital of
our consolidated affiliated entities in China has been fully funded. We may in the future provide additional loans
to the nominee shareholders of our consolidated affiliated entities in China in connection with any increase in
their capitalization to the extent necessary and permissible under applicable law. Our ability to ultimately collect
these loans will depend on the profitability of these consolidated affiliated entities and their operational needs,
which are uncertain.

We are in the process of registering the pledges of equity interests by nominee shareholders of some of our
consolidated affiliated entities, and we may not be able to enforce the equity pledges against any third parties
who acquire the equity interests in good faith in the relevant consolidated affiliated entities before the pledges
are registered.

The nominee shareholders of each of our consolidated affiliated entities have pledged all of their equity
interests in the relevant consolidated affiliated entities to our subsidiaries. An equity pledge agreement becomes
effective among the parties upon execution, but according to the PRC Property Rights Law, an equity pledge is
not perfected as a security property right unless it is registered with the relevant local administration for industry
and commerce. The pledge relating to each of Baidu Netcom, Beijing Perusal Technology Co., Ltd., or Beijing
Perusal, BaiduPay and Baidu HR has been registered with the relevant local administration for industry and
commerce, while we are in the process of registering the pledge of the registered capital of certain of our newly
acquired consolidated affiliated entities. Prior to the completion of the registration, we may not be able to
successfully enforce the equity pledge against any third parties who have acquired property right interests in
good faith in the equity interests in the relevant consolidated affiliated entity.

Risks Related to Doing Business in China

Changes in China’s economic, political or social conditions or government policies could have a material and
adverse effect on our business and operations.

Most of our business operations are conducted in China. Accordingly, our business, results of operations,
financial condition and prospects are affected by economic, political and social conditions in China generally and
by continued economic growth in China as a whole.

China’s economy differs from the economies of most developed countries in many respects, including the
level of government involvement, level of development, growth rate, control of foreign exchange and allocation
of resources. Although the Chinese government has implemented measures emphasizing the utilization of market
forces for economic reform, the reduction of state ownership of productive assets, and the establishment of
improved corporate governance in business enterprises, a substantial portion of productive assets in China is still
owned by the government. In addition, the Chinese government continues to play a significant role in regulating

22

industry development. The Chinese government also exercises significant control over China’s economic growth
through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary
policy, and providing preferential treatment to particular industries or companies.

While China’s economy has experienced significant growth in the past three decades, growth has been
uneven, both geographically and among various sectors of the economy, and may slow down in the future. Some
of the government measures may benefit the overall Chinese economy, but may have a negative effect on us. For
example, our financial condition and results of operations may be adversely affected by government control over
capital investments or changes in tax regulations. Any stimulus measures designed to boost the Chinese
economy, may contribute to higher inflation, which could adversely affect our results of operations and financial
condition. For example, certain operating costs and expenses, such as employee compensation and office
operating expenses, may increase as a result of higher inflation. Additionally, because a substantial portion of our
assets consists of cash and cash equivalents and short-term investments, high inflation could significantly reduce
the value and purchasing power of these assets.

Uncertainties with respect to the PRC legal system could adversely affect us.

We conduct our business primarily through our subsidiaries and consolidated affiliated entities in China.
Our operations in China are governed by PRC laws and regulations. Our subsidiaries are generally subject to
laws and regulations applicable to foreign investments in China. The PRC legal system is based on written
statutes. Prior court decisions may be cited for reference but have limited precedential value.

PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign
investments in China for the past three decades. However, China has not developed a fully integrated legal
system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in
China. In particular, because these laws and regulations are relatively new, and because of the limited volume of
published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations
involve uncertainties. The following are a few examples:

•

•

China enacted the Anti-Monopoly Law, which became effective on August 1, 2008. Because the
Anti-Monopoly Law and the related regulations are still new, and there have been very few court
rulings and judicial or administrative interpretations on certain key concepts used in the law, it is
uncertain how the implementation and enforcement of the Anti-Monopoly Law and the related
regulations would affect our business.

The PRC Tort Liability Law became effective on July 1, 2010. In accordance with the Tort Liability
Law, where an internet service provider is informed or knows that an internet user is infringing upon
other persons’ rights and interests through its internet service but fails to take necessary actions, it will
be jointly and severally liable with the internet user as to the damages suffered by the right holders as a
result of the infringing activity known to the internet service provider. The interpretation of the
applicability and enforceability of the Tort Liability Law on internet search providers remain uncertain,
thus we are not sure how it would affect our business.

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of
which are not published on a timely basis or at all. As a result, we may not be aware of our potential violation of
these policies and rules. In addition, any litigation in China may be protracted and result in substantial costs and
diversion of resources and management attention.

23

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet
business and companies.

The PRC government regulates the internet industry extensively, including foreign ownership of, and the
licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws
and regulations are relatively new and evolving, and their interpretation and enforcement involve significant
uncertainty. As a result, under certain circumstances it may be difficult to determine what actions or omissions
may be deemed to be violations of applicable laws and regulations. Issues, risks and uncertainties relating to PRC
government regulation of the internet industry include, but are not limited to, the following:

• We only have contractual control over our websites. We do not own the websites due to the restriction
of foreign investment in businesses providing value-added telecommunication services in China,
including online information services.

•

•

The licensing requirements relating to the internet business in China are uncertain and evolving. This
means that permits, licenses or operations at some of our companies may be subject to challenge, or we
may not be able to obtain or renew certain permits or licenses, including without limitation an internet
news license, which is issued by the State Council News Office, an internet culture business permit
with the permitted scope of business covering online game virtual currency issuance or trading, which
is issued by the Ministry of Culture, an audio/video program transmission license, which is issued by
the State Administration of Radio Film and Television, an internet publication business license, which
is issued by the General Administration of Press and Publication, or GAPP, a surveying and mapping
qualification certificate for internet map services, which is issued by the State Bureau of Surveying and
Mapping, a payment service permit, which is issued by the People’s Bank of China, and a qualification
certificate for internet drug information services, which is issued by provincial branch of the State Food
and Drug Administration. Failure to obtain or renew these permits and licenses may significantly
disrupt our business, or subject us to sanctions, requirements to increase capital or other conditions or
enforcement, or compromise enforceability of related contractual arrangements, or have other harmful
effects on us.

New laws and regulations may be promulgated to regulate internet activities, including online advertising
and online payment. Other aspects of our online operations may be regulated in the future. If these new
laws and regulations are promulgated, additional licenses may be required for our online operations. If our
operations do not comply with these new regulations at the time they become effective, or if we fail to
obtain any licenses required under these new laws and regulations, we could be subject to penalties.

In July 2006, the MIIT issued the Notice of the Ministry of Information Industry on Intensifying the
Administration of Foreign Investment in Value-added Telecommunications Services. This notice prohibits
domestic telecommunication services providers from leasing, transferring or selling telecommunications business
operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any
foreign investor for their illegal operation of a telecommunications business in China. According to this notice,
either the holder of a value-added telecommunication business operating license or its shareholders must directly
own the domain names and trademarks used by the license holder
in its provision of value-added
telecommunication services. The notice also requires each license holder to have the necessary facilities,
including servers, for its approved business operations and to maintain these facilities in the regions covered by
its license. Baidu Netcom, our consolidated affiliated entity that holds the ICP license necessary to conduct our
business in China, received a letter from the MIIT requiring self-assessment and responded timely to the letter. In
order to comply with the notice described above, we have transferred certain domain names primarily used in our
business and certain trademarks, including pending trademark applications to Baidu Netcom, Beijing Perusal,
BaiduPay and Baidu HR.

In September 2009, the GAPP together with several other government agencies issued a notice prohibiting
foreign investors from participating in online game operating businesses through wholly-owned enterprises,
equity joint ventures or cooperative joint ventures in China, and from controlling and participating in such

24

businesses directly or indirectly through contractual or technical support arrangements. We offer online games
provided by our game operator partners on our websites. If we are found to be in violation of any existing or
future PRC laws or regulations, including the MIIT notice and the GAPP notice, the relevant regulatory
authorities would have broad discretion in dealing with such violations.

As we enter into new businesses, we may encounter additional regulatory uncertainties. For example, it
remains unclear whether the provision of online payment services by BaiduPay will require BaiduPay to apply
for a value-added telecommunications business operating license for “online data processing and transaction
processing businesses” as provided in the Catalog of Telecommunications Businesses promulgated by the MIIT.

Pursuant

to the People’s Bank of China’s Measures Concerning Payment Services by Non-financial
Institutions, which took effect in September 2010, and its implementation rules, non-financial institutions that
have been providing monetary transfer services as an intermediary between payees and payers, including online
payment, issuance and acceptance of prepaid card or bank card, and other payment services as specified by the
People’s Bank of China, are required to obtain a license from the People’s Bank of China prior to September 1,
2011, in order to continue providing monetary transfer services. We applied for the license to provide monetary
transfer services and received the acceptance notice from the local branch of the People’s Bank of China, which
practically extends the September 1, 2011 deadline to the point in time that the People’s Bank of China makes a
final decision whether to grant the license. We have not received such license as of the date of this annual report.
We cannot assure you that we will be able to obtain such license. We will have to cease conducting our online
payment business if we fail to obtain such license.

The interpretation and application of existing PRC laws, regulations and policies and possible new laws,
regulations or policies relating to the internet industry have created substantial uncertainties regarding the
legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in
China, including our business.

Regulation and censorship of information disseminated over the internet in China may adversely affect our
business, and subject us to liability for information displayed on or linked to our websites and negative
publicity in international media.

The PRC government has adopted regulations governing internet access and distribution of news and other
information over the internet. Under these regulations, internet content providers and internet publishers are
prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and
regulations,
impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or
defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide
internet content and other licenses and the closure of the concerned websites. In the past, failure to comply with
these requirements has resulted in the closure of certain websites. The website operator may also be held liable
for the censored information displayed on or linked to the website.

In particular, the MIIT has published regulations that subject website operators to potential liability for
content displayed on their websites and the actions of users and others using their systems, including liability for
violations of PRC laws and regulations prohibiting the dissemination of content deemed to be socially
destabilizing. The Ministry of Public Security has the authority to order any local internet service provider to
block any internet website at its sole discretion. From time to time, the Ministry of Public Security has stopped
the dissemination over the internet of information which it believes to be socially destabilizing. The State
Secrecy Bureau is also authorized to block any website it deems to be leaking state secrets or failing to meet the
relevant regulations relating to the protection of state secrets in the dissemination of online information.
Furthermore, we are required to report any suspicious content to relevant governmental authorities, and to
undergo computer security inspections. If we fail to implement the relevant safeguards against security breaches,
our websites may be shut down and our business and ICP licenses may be revoked. In addition, internet
companies that provide bulletin board systems (BBS), chat rooms or similar services must apply for approval
from relevant authorities in practice.

25

Although we attempt to monitor the content in our search results and on our online communities such as
Baidu Post Bar, we are not able to control or restrict the content of other internet content providers linked to or
accessible through our websites, or content generated or placed on our Baidu Post Bar message boards or our
other online communities by our users. To the extent that PRC regulatory authorities find any content displayed
on our websites objectionable, they may require us to limit or eliminate the dissemination of such information on
our websites. If third-party websites linked to or accessible through our websites conduct unlawful activities such
as online gambling on their websites, PRC regulatory authorities may require us to report such unlawful activities
to relevant authorities and to remove the links to such websites, or they may suspend or shut down the operation
of these third-party websites. PRC regulatory authorities may also temporarily block access to certain websites
for a period of time for reasons beyond our control. Any of these actions may reduce our user traffic and
adversely affect our business. In addition, we may be subject to penalties for violations of those regulations
arising from information displayed on or linked to our websites, including a suspension or shutdown of our
online operations.

Moreover, our compliance with PRC regulations governing internet access and distribution of news and
other information over the internet may subject us to negative publicity or even legal actions outside of China. In
May 2011, eight New York residents filed a lawsuit against us before the U.S. District Court for the Southern
District of New York accusing us of aiding Chinese censorship in violation of the U.S. Constitution. Although
we believe the U.S. court does not have jurisdiction over us, we cannot assure you that the U.S. court would not
rule against us. Even if we win the case, our reputation may be adversely affected among users and investors
outside of China.

A notice issued by the PRC Ministry of Culture in August 2009 may affect our online music services.

In August 2009, the PRC Ministry of Culture promulgated the Notice on Strengthening and Improving the
Content Review of Online Music, which provides, among others that only “internet culture operating entities”
approved by the Ministry of Culture may engage in the production, release, dissemination (including providing
direct links to music products) and importation of online music products. In addition, it is required that imported
music products must pass prior content review by the Ministry of Culture before they are put on internet and
domestic music products must be filed with the Ministry of Culture within 30 days after the commencement date
of the online operation of the domestic music products. We hold an internet culture business permit granted by
the Ministry of Culture, which allows us to engage in “internet culture activities” as defined in the relevant
regulations promulgated by the Ministry of Culture. See “Item 4.B. Information on the Company—Business
Overview—Regulation—Regulations on Internet Culture Activities.” We provide music for users to stream and
download on our platform and we have obtained licenses from many content providers. We have been
communicating with the government authority in order to comply with the review or filing requirement. If we are
found by the Ministry of Culture to have failed to fully comply with the requirements of this notice, we could be
subject to administrative penalties, including an order to stop providing the music products that have not been
reviewed by or filed with the Ministry of Culture, fines, or confiscation of income derived from activities deemed
in violation of the notice. Any of these occurrences could adversely affect our business and results of operations.

Intensified government regulation of internet cafes could restrict our ability to maintain or increase user
traffic to our websites.

The PRC government has tightened its regulation over internet cafes over the past decade. In particular, a
large number of unlicensed internet cafes have been closed. In addition, the PRC government has imposed higher
capital and facility requirements for the establishment of internet cafes. Furthermore, the PRC government’s
policy, which encourages the development of a limited number of national and regional internet cafe chains and
discourages the establishment of independent internet cafes, may slow down the growth of internet cafes. In May
2007, the State Administration for Industry and Commerce reiterated its position not to register any new internet
cafes in 2007. Since 2008, the Ministry of Culture, the State Administration for Industry and Commerce and
other relevant government authorities, individually or jointly, have issued several notices that provide various

26

ways to strengthen the regulation of internet cafes, including investigating and punishing internet cafes that
accept minors, cracking down on internet cafes without sufficient and valid licenses, limiting the total number of
internet cafes and approving internet cafes within the planning made by relevant authorities, screening unlawful
and adverse games and websites, and improving the coordination of regulation over internet cafes and online
games. So long as internet cafes are one of the primary venues for our users to access our websites, any reduction
in the number, or any slowdown in the growth, of internet cafes in China could limit our ability to maintain or
increase user traffic to our websites.

The discontinuation of any of the preferential income tax treatments currently available to us in the PRC
could have a material and adverse effect on our result of operations and financial condition.

Pursuant to the EIT Law, as further clarified by subsequent tax regulations implementing the EIT Law,
foreign-invested enterprises and domestic enterprises are subject to EIT at a uniform rate of 25%. The EIT rate
for enterprises established before March 16, 2007 that were eligible for preferential tax rates according to then
effective tax laws and regulations will gradually transition to the uniform 25% EIT rate by January 1, 2013.
Certain enterprises may still benefit from a preferential tax rate of 15% under the EIT Law if they qualify as
“High and New Technology Enterprises strongly supported by the state,” subject to certain general factors
described in the EIT Law and the related regulations.

Our PRC subsidiaries and consolidated affiliated entities, Baidu Online Network Technology (Beijing) Co.,
Ltd., or Baidu Online, Baidu.com Times Technology (Beijing) Co. Ltd., or Baidu Times, Baidu Netcom and
Baidu (China) Co., Ltd., or Baidu China, are entitled to enjoy a preferential tax rate of 15% due to their
qualification as “High and New Technology Enterprise.” If any or all of Baidu Online, Baidu Times, Baidu
Netcom and Baidu China fail to maintain the “High and New Technology Enterprise” qualification, their
applicable EIT rate will be up to 25%. Furthermore, in February 2011, Baidu Online was announced as a “Key
Software Enterprise” jointly by the National Development and Reform Commission, MIIT, Ministry of
Commerce and State Administration of Taxation, which entitled it to enjoy a preferential income tax rate of 10%
for 2010. Baidu Online has applied for “Key Software Enterprise” status for 2011 and 2012, which is in the
process of being assessed by the relevant government authorities. There is no assurance that Baidu Online will
continue to maintain the “Key Software Enterprise” status. See “Item 5.A. Operating and Financial Review and
Prospects—Operating Results—Taxation—PRC Enterprise Income Tax.”

The discontinuation of any of the above-mentioned preferential income tax treatments currently available to
us in the PRC could have a material and adverse effect on our result of operations and financial condition. We
cannot assure you that we will be able to maintain our current effective tax rate in the future.

If our PRC subsidiaries declare and distribute dividends to their respective offshore parent companies, we will
be required to pay more taxes, which could have a material and adverse effect on our result of operations.

Under the EIT Law and related regulations, dividends, interests, rent or royalties payable by a foreign-
invested enterprise, such as our PRC subsidiaries, to any of its foreign non-resident enterprise investors, and
proceeds from any such foreign enterprise investor’s disposition of assets (after deducting the net value of such
assets) are subject to a 10% withholding tax, unless the foreign enterprise investor’s jurisdiction of incorporation
has a tax treaty with China that provides for a reduced rate of withholding tax. Undistributed profits earned by
foreign-invested enterprises prior to January 1, 2008 are exempted from any withholding tax. The British Virgin
Islands, where Baidu Holdings Limited, the direct parent company of our PRC subsidiary Baidu Online, is
incorporated, does not have such a tax treaty with China. Hong Kong has a tax arrangement with China that
provides for a 5% withholding tax on dividends subject to certain conditions and requirements, such as the
requirement that the Hong Kong resident enterprise own at least 25% of the PRC enterprise distributing the
dividend at all times within the 12-month period immediately preceding the distribution of dividends and be a
“beneficial owner” of the dividends. For example, Baidu (Hong Kong) Limited, which directly owns our PRC
subsidiaries Baidu China and Baidu Times, is incorporated in Hong Kong. However, if Baidu (Hong Kong)
Limited is not considered to be the beneficial owner of dividends paid to it by Baidu China and Baidu Times

27

under the tax circulars promulgated in February and October 2009, such dividends would be subject to
withholding tax at a rate of 10%. See “Item 5.A. Operating and Financial Review and Prospects—Operating
Results—Taxation—PRC Enterprise Income Tax.” If our PRC subsidiaries declare and distribute profits earned
after January 1, 2008 to us in the future, such payments will be subject to withholding tax, which will increase
our tax liability and reduce the amount of cash available to our company.

We may be deemed a PRC resident enterprise under the EIT Law, which could subject us to PRC taxation on
our global income, and which may have a material and adverse effect on our results of operations.

Under the EIT Law and related regulations, an enterprise established outside of the PRC with “de facto
management body” within the PRC is considered a PRC resident enterprise and is subject to the EIT at the rate of
25% on its worldwide income as well as PRC EIT reporting obligations. The related regulations define the term
“de facto management body” as “the establishment that exercises substantial and overall management and control
over the production, business, personnel, accounts and properties of an enterprise.” The State Administration of
Taxation issued a SAT Circular 82 in April 2009, which provides certain specific criteria for determining
whether the “de facto management body” of a Chinese-controlled overseas-incorporated enterprise is located in
China. In July 2011, the State Administration of Taxation issued additional rules to provide more guidance on the
implementation of SAT Circular 82. See “Item 5.A. Operating and Financial Review and Prospects—Operating
Results—Taxation—PRC Enterprise Income Tax.” Although the SAT Circular 82 and the additional guidance
apply only to overseas registered enterprises controlled by PRC enterprises, not to those controlled by PRC
individuals or foreigners, the criteria set forth in SAT Circular 82 may reflect the State Administration of
Taxation’s general position on how the “de facto management body” test should be applied in determining the
tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or
individuals. If we are deemed a PRC resident enterprise, we may be subject to the EIT at 25% on our global
income, except that the dividends we receive from our PRC subsidiaries may be exempt from the EIT to the
extent such dividends are deemed as “dividends among qualified PRC resident enterprises.” If we are deemed a
PRC resident enterprise and earn income other than dividends from our PRC subsidiaries, a 25% EIT on our
global income could significantly increase our tax burden and materially and adversely affect our cash flow and
profitability.

Under PRC tax laws, dividends payable by us and gains on the disposition of our shares or ADSs may be
subject to PRC taxation.

If we are considered a PRC resident enterprise under the EIT Law, our shareholders and ADS holders who
are deemed non-resident enterprises may be subject to the EIT at the rate of 10% upon the dividends payable by
us or upon any gains realized from the transfer of our shares or ADSs, if such income is deemed derived from
China, provided that (i) such foreign enterprise investor has no establishment or premises in China, or (ii) it has
establishment or premises in China but its income derived from China has no real connection with such
establishment or premises. If we are required under the EIT Law to withhold PRC income tax on our dividends
payable to our non-PRC resident enterprise shareholders and ADS holders, or if any gains realized from the
transfer of our shares or ADSs by our non-PRC resident enterprise shareholders and ADS holders are subject to
the EIT, your investment in our shares or ADSs could be materially and adversely affected.

Furthermore, if we are considered a PRC resident enterprise and relevant PRC tax authorities consider
dividends we pay with respect to our shares or ADSs and the gains realized from the transfer of our shares or
ADSs to be income derived from sources within the PRC, it is possible that such dividends and gains earned by
non-resident individuals may be subject to PRC individual income tax at a rate of 20%. If we are required under
PRC tax laws to withhold PRC income tax on dividends payable to our non-PRC investors that are non-resident
individuals or if you are required to pay PRC income tax on the transfer of our shares or ADSs, the value of your
investment in our shares or ADSs may be materially and adversely affected.

28

Our subsidiaries and consolidated affiliated entities in China are subject to restrictions on paying dividends
and making other payments to our holding company.

Baidu, Inc. is our holding company incorporated in the Cayman Islands and does not conduct any business
operations other than holding equity interests in our subsidiaries. As a result of the holding company structure, it
currently relies on dividend payments from our subsidiaries in China. However, PRC regulations currently permit
payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting
standards and regulations. Our subsidiaries and consolidated affiliated entities in China are also required to set
aside a portion of their after-tax profits according to PRC accounting standards and regulations to fund certain
reserve funds. The PRC government also imposes controls on the conversion of RMB into foreign currencies and
the remittance of foreign currencies out of China. We may experience difficulties in completing the
administrative procedures necessary to obtain and remit foreign currency. See “—Governmental control of
currency conversion may affect the value of your investment.” Furthermore, if our subsidiaries or consolidated
affiliated entities in China incur debt on their own in the future, the instruments governing the debt may restrict
their ability to pay dividends or make other payments. If our subsidiaries and consolidated affiliated entities in
China are unable to pay dividends or make other payments to us, we may be unable to pay dividends on our
ordinary shares and ADSs.

Governmental control of currency conversion may affect the value of your investment.

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain
cases, the remittance of foreign currency out of China. We receive most of our revenues in RMB. Under our
current structure, our income at the Cayman Islands holding company level will primarily be derived from
dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the
ability of our PRC subsidiaries and consolidated affiliated entities to remit sufficient foreign currency to pay
dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under
existing PRC foreign exchange regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, can be made in foreign currencies without
prior approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. However, approval from appropriate government authorities is required where RMB is
to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of
loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the
future to foreign currencies for current account transactions. If the foreign exchange control system prevents us
from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends
in foreign currencies to our shareholders or ADS holders.

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and
governmental control of currency conversion may delay or prevent us from making loans or additional capital
contributions to our PRC subsidiaries, which could adversely affect our ability to fund and expand our
business.

Baidu, Inc. is our offshore holding company conducting operations in China through our PRC subsidiaries
and consolidated affiliated entities. We may make loans to our PRC subsidiaries and consolidated affiliated
entities, or we may make additional capital contributions to our PRC subsidiaries. Loans by Baidu, Inc. or any of
our offshore subsidiaries to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC
law, are subject to PRC regulations and foreign exchange loan registrations. Such loans to any of our PRC
subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local
counterpart of SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested enterprise is
the difference between the amount of total investment as approved by the PRC Ministry of Commerce or its local
counterpart and the amount of registered capital of such foreign-invested enterprise. Any medium or long term
loans by Baidu, Inc. or any of our offshore subsidiaries to our consolidated affiliated entities, which are domestic
PRC entities, must be approved by the National Development and Reform Commission and SAFE, or their

29

relevant
local counterparts. We may also decide to finance our PRC subsidiaries by means of capital
contributions. These capital contributions must be approved by the PRC Ministry of Commerce or its local
counterpart. Meanwhile, we are not likely to finance the activities of our consolidated affiliated entities by means
of capital contributions given the PRC legal restrictions on foreign ownership of internet, online advertising,
online audio and video services and employment agency businesses.

In August 2008, SAFE promulgated a SAFE Circular No. 142 regulating the conversion by a foreign-
invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may
be used. SAFE Circular No. 142 provides that the RMB capital converted from foreign currency registered
capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the
applicable government authority and may not be used for equity investments within the PRC. In addition, SAFE
strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered
capital of a foreign-invested enterprise. The use of such RMB capital may not be altered without SAFE’s
approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans
have not been used. Furthermore, SAFE promulgated a SAFE Circular No. 59 in November 2010, which requires
that the government authorities closely examine the authenticity of settlement of net proceeds from offshore
offerings and the net proceeds be settled in the manner described in the offering documents. SAFE also
promulgated a SAFE Circular No. 45 in November 2011, which, among other things, restrict a foreign-invested
enterprise from using RMB converted from its registered capital to provide entrusted loans or repay loans
between non-financial enterprises. Violations of these circulars could result in severe monetary or other penalties.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC
entities by offshore holding companies, including SAFE Circulars referred to above, we cannot assure you that
we will be able to complete the necessary government registrations or obtain the necessary government approvals
on a timely basis, if at all, with respect to future loans or capital contributions by us to our PRC subsidiaries and
conversion of such loans or capital contributions into RMB. If we fail to complete such registrations or obtain
such approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which
could adversely affect our ability to fund and expand our business.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may
limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their
registered capital or distribute profits to us, or may otherwise adversely affect us.

SAFE Circular No. 75 effective from November 2005 and a series of implementation rules and guidance
issued by SAFE, including the most recent circular relating to operating procedures that came into effect in July
2011, require PRC residents and PRC corporate entities to register with local branches of SAFE in connection
with their direct or indirect offshore investment in an overseas special purpose vehicle, or SPV, for the purposes
of overseas equity financing activities. These regulations apply to our shareholders who are PRC residents and
may apply to any offshore acquisitions that we make in the future.

Under these SAFE regulations, PRC residents who make, or have previously made, direct or indirect
investments in an SPV are required to register those investments. In addition, any PRC resident who is a direct or
indirect shareholder of an SPV is required to update the previously filed registration with the local branch of
SAFE, with respect to that SPV, to reflect any material change involving its round-trip investment, capital
variation, such as an increase or decrease in capital, transfer or swap of shares, merger, division, long-term equity
or debt investment or creation of any security interest. Moreover, the PRC subsidiaries of that SPV are required
to urge the PRC resident shareholders to update their SAFE registration with the local branch of SAFE when
such updates are required under applicable SAFE regulations. If any PRC shareholder fails to make the required
SAFE registration or update the previously filed registration, the PRC subsidiaries of that SPV may be prohibited
from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation, to
their SPV parent, and the SPV may also be prohibited from injecting additional capital
into their PRC
subsidiaries. Moreover, failure to comply with the various SAFE registration requirements described above could
result in liability under PRC law for evasion of applicable foreign exchange restrictions.

30

We have notified holders of ordinary shares of our company whom we know are PRC residents to register
with the local SAFE branch and update their registrations as required under the SAFE regulations described
above. We are aware that Mr. Robin Yanhong Li, our chairman, chief executive officer and principal
shareholder, who is a PRC resident, has registered with the relevant local SAFE branch. We, however, cannot
provide any assurances that all of our shareholders who are PRC residents will file all applicable registrations or
update previously filed registrations as required by these SAFE regulations. The failure or inability of our PRC
resident shareholders to comply with the registration procedures may subject the PRC resident shareholders to
fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to
distribute dividends to or obtain foreign exchange-dominated loans from our company.

As it is uncertain how the SAFE regulations described above will be interpreted or implemented, we cannot
predict how these regulations will affect our business operations or future strategy. For example, we may be
subject to more stringent review and approval process with respect to our foreign exchange activities, such as
remittance of dividends and foreign currency-denominated borrowings, which may adversely affect our results of
operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot
assure you that we or the owners of such company will be able to obtain the necessary approvals or complete the
necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement
our acquisition strategy and could adversely affect our business and prospects.

Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership
plans or share option plans may subject the PRC plan participants or us to fines and other legal or
administrative sanctions.

In February 2012, SAFE promulgated the Notices on Issues concerning the Foreign Exchange
Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed
Company, or the Stock Option Rule, replacing the earlier rules promulgated in March 2007. Under the Stock
Option Rule, PRC residents who are granted stock options by an overseas publicly listed company are required,
through a PRC agent or PRC subsidiary of such overseas publicly listed company, to register with SAFE and
complete certain other procedures. We and our PRC resident employees who have been granted stock options are
subject to these regulations. We have designated our PRC subsidiary Baidu Online to handle the registration and
other procedures required by the Stock Option Rule. If we or our PRC optionees fail to comply with these
regulations in the future, we or our PRC optionees and their local employers may be subject to fines and legal
sanctions.

A regulation adopted in August 2006 and other recent regulations establish more complex procedures for
acquisitions conducted by foreign investors, which could make it more difficult for us to pursue growth
through acquisitions.

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, adopted by six
PRC regulatory agencies in August 2006, among other
things, established additional procedures and
requirements that could make merger and acquisition activities by foreign investors more time-consuming and
complex. In addition, the Implementing Rules Concerning Security Review on the Mergers and Acquisitions by
Foreign Investors of Domestic Enterprises, issued by the PRC Ministry of Commerce in August 2011, specify
that mergers and acquisitions by foreign investors involved in “an industry related to national security” are
subject to strict review by the PRC Ministry of Commerce, and prohibit any activities attempting to bypass such
security review, including by structuring the transaction through a proxy or contractual control arrangement. We
may grow our business in part by directly acquiring complementary businesses in China. Complying with the
requirements of this regulation to complete such transactions could be time-consuming, and any required
approval processes, including obtaining approval from the Ministry of Commerce and going through security
review procedures, may delay or inhibit our ability to complete such transactions, which could affect our ability
to expand our business or maintain our market share. We believe that our business is not in an industry related to
the PRC Ministry of Commerce or other
national security, but we cannot preclude the possibility that

31

government agencies may publish explanations contrary to our understanding or broaden the scope of such
security reviews in the future, in which case our future acquisitions in the PRC, including those by way of
entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited. Our
ability to expand our business or maintain or expand our market share through future acquisitions would as such
be materially and adversely affected.

Our auditor, like other independent registered public accounting firms operating in China, is not permitted to
be subject to inspection by Public Company Accounting Oversight Board, and as such, investors may be
deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit reports included in our annual
reports filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm
registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the
laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the
United States and professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is
currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other
independent registered public accounting firms operating in China, is currently not inspected by PCAOB.

Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those
firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to
improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public
accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit
procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

We may be adversely affected by the outcome of the administrative proceedings brought by the SEC against
five accounting firms in China.

The SEC has brought administrative proceedings against five accounting firms in China recently, alleging
that they refused to produce audit work papers and other documents related to certain China-based companies
under investigation by the SEC for potential accounting fraud. We were not and are not subject to any SEC
investigations, nor are we involved in the proceedings brought by the SEC against the accounting firms.
However, the independent registered public accounting firm that issues the audit reports included in our annual
reports filed with the SEC is one of the five accounting firms named in the SEC’s proceedings and we may be
adversely affected by the outcome of the proceedings, along with other U.S.-listed companies in China audited
by these accounting firms. If the SEC prevails in the proceedings, our independent registered public accounting
firm and other four accounting firms in China that were named in the proceedings may be barred from practicing
before the SEC and hence unable to continue to be the auditors for China-based companies listed in the U.S. like
ourselves. If none of the China-based auditors are able to continue to be auditors for China-based companies
listed in the U.S., we will not be able to meet the reporting requirements under the Securities Exchange Act of
1934, as amended, or the Exchange Act, which may ultimately result in our deregistration by the SEC and
delisting from NASDAQ.

Fluctuation in the value of the RMB may have a material and adverse effect on your investment.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among
other things, changes in China’s political and economic conditions and foreign exchange policies. The
conversion of RMB into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of
China. The PRC government allowed the RMB to appreciate by more than 20% against the U.S. dollar between
July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate
between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has
allowed the RMB to appreciate slowly against the U.S. dollar again, though there have been periods when the
U.S. dollar has appreciated against the Renminbi as well. It is difficult to predict how market forces or PRC or
U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

32

Our revenues and costs are mostly denominated in RMB. Any significant revaluation of RMB may
materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and
any dividends payable on, our ADSs in U.S. dollars. For example, an appreciation of RMB against the
U.S. dollar would make any new RMB denominated investments or expenditures more costly to us, to the extent
that we need to convert U.S. dollars into RMB for such purposes. An appreciation of RMB against the
U.S. dollar would also result in foreign currency translation losses for financial reporting purposes when we
translate our U.S. dollar denominated financial assets into RMB, as RMB is our reporting currency. Conversely,
a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent
of our earnings, which in turn could adversely affect the price of our ADSs.

We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their
non-PRC holding companies.

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by
Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, which became
effective retroactively as of January 1, 2008, where a non-resident enterprise investor transfers equity interests in
a PRC resident enterprise indirectly by way of disposing of equity interests in an overseas holding company, or
an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective
tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise investor
should report such indirect transfer to the relevant tax authority of the PRC resident enterprise. The PRC tax
authority will examine the true nature of the indirect transfer, and if the tax authority considers that the
non-resident enterprise investor has adopted an abusive arrangement without a reasonable commercial purpose in
order to reduce, avoid or defer PRC tax, they will disregard the existence of the overseas holding company that is
used for tax planning purposes and re-characterize the indirect transfer. As a result, gains derived from such
indirect transfer may be subject to PRC withholding tax at the rate of up to 10%. In addition, the PRC resident
enterprise may be required to provide necessary assistance to support the enforcement of Circular 698.

There is some uncertainty as to the application of Circular 698. For example, the term “indirect transfer” is
not clearly defined, and the relevant governmental authority has not yet promulgated any formal interpretations
or declarations as to the process and format for reporting an indirect transfer to the competent tax authority, or on
how to calculate the effective tax rates in a foreign tax jurisdiction or whether a non-resident enterprise investor
has adopted an abusive arrangement in order to reduce, avoid or defer PRC tax. Although it appears that Circular
698 was not intended to apply to share transfers of publicly traded companies, there is uncertainty as to the
application of Circular 698 to other indirect transfer of our PRC resident entities. As a result, we may have the
risk of being subject to the reporting obligations or PRC tax under Circular 698 and may be required to expend
resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which may
have an adverse effect on our financial condition and results of operations.

Risks Related to Our ADSs

The trading price of our ADSs has been volatile and may continue to be volatile regardless of our operating
performance.

The trading price of our ADSs has been and may continue to be subject to wide fluctuations. The market
price for our ADSs may continue to be volatile and subject to wide fluctuations in response to factors including
the following:

•

•

•

•

actual or anticipated fluctuations in our quarterly results of operations;

changes in financial estimates by securities research analysts;

conditions in internet search and online marketing markets;

changes in the operating performance or market valuations of other internet search or internet
companies;

33

•

•

•

•

•

announcements by us or our competitors or other internet companies of new products, acquisitions,
strategic partnerships, joint ventures or capital commitments;

addition or departure of key personnel;

fluctuations of exchange rates between RMB and the U.S. dollar;

intellectual property litigation; and

general economic or political conditions in China or elsewhere in the world.

In addition, the stock market in general, and the market prices for internet-related companies and companies
with operations in China in particular, have experienced volatility that often has been unrelated to the operating
performance of such companies. The securities of some China-based companies that have listed their securities in
the United States have experienced significant volatility since their initial public offerings in recent years,
including, in some cases, substantial declines in the trading prices of their securities. The trading performances of
these companies’ securities after their offerings may affect the attitudes of investors towards Chinese companies
listed in the United States in general, which consequently may impact the trading performance of our ADSs,
regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate
corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese
companies may also negatively affect the attitudes of investors towards Chinese companies in general, including
us, regardless of whether we have engaged in any inappropriate activities. In particular, the global financial crisis
and the ensuing economic recessions in many countries have contributed and may continue to contribute to
extreme volatility in the global stock markets. These broad market and industry fluctuations may adversely affect
the market price of our ADSs. Volatility or a lack of positive performance in our ADS price may also adversely
affect our ability to retain key employees, most of whom have been granted options or other equity incentives.

Substantial future sales or the perception of sales of our ADSs in the public market could cause the price of
our ADSs to decline.

Sales of our ADSs in the public market, or the perception that these sales could occur, could cause the
market price of our ADSs to decline. Such sales also might make it more difficult for us to sell equity or equity-
related securities in the future at a time and price that we deem appropriate. If any existing shareholder or
shareholders sell a substantial amount of ADSs, the prevailing market price for our ADSs could be adversely
affected. In addition, if we pay for our future acquisitions in whole or in part with additionally issued ordinary
shares, your ownership interests in our company would be diluted and this, in turn, could have a material and
adverse effect on the price of our ADSs.

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting
materials in time to be able to exercise your right to vote.

Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able
to exercise voting rights attached to the shares evidenced by our ADSs on an individual basis. Holders of our
ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attached to
the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to
vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties,
will not have the opportunity to exercise a right to vote. Upon our written request, the depositary will mail to you
a shareholder meeting notice which contains, among other things, a statement as to the manner in which your
voting instructions may be given, including an express indication that such instructions may be given or deemed
given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received
by the depositary from you on or before the response date established by the depositary. However, no voting
instruction will be deemed given and no such discretionary proxy will be given with respect to any matter as to
which we inform the depositary that (i) we do not wish such proxy given, (ii) substantial opposition exists, or
(iii) such matter materially and adversely affects the rights of shareholders.

34

You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities.
Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both
the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities
Act of 1933, or exempt from registration under the Securities Act with respect to all holders of ADSs. We are
under no obligation to file a registration statement with respect to any such rights or underlying securities or to
endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take
advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may
be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer
books at any time or from time to time when it deems expedient in connection with the performance of its duties.
In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books
or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so
because of any requirement of law or of any government or governmental body, or under any provision of the
deposit agreement, or for any other reason.

You may face difficulties in protecting your interests, and your ability to protect your rights through the
U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, conduct most of
our operations in China and all of our officers reside outside of the United States.

We are incorporated in the Cayman Islands, and conduct most of our operations in China through our
subsidiaries and consolidated affiliated entities in China. All of our officers and a majority of our directors reside
outside of the United States and some or all of the assets of these persons are located outside of the United States.
As a result, it may not be possible to effect service of process within the United States or elsewhere outside of
China upon our executive officers, including with respect to matters arising under U.S. federal securities laws or
applicable state securities laws.

It may also be difficult or impossible for you to bring an action against us or against our directors and
officers in the Cayman Islands or in China in the event that you believe that your rights have been infringed
under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of
the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of
our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the
United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal
judgment of a foreign court of competent jurisdiction without retrial on the merits. Moreover, our PRC counsel
has advised us that the PRC does not have treaties with the United States or many other countries providing for
the reciprocal recognition and enforcement of judgment of courts.

Our corporate affairs are governed by our memorandum and articles of association and by the Companies
Law (2012 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action
against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to
us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The
common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the
Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court
in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under
Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the
United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the
United States, and provides significantly less protection to investors. In addition, Cayman Islands companies may
not have standing to initiate a shareholder derivative action before the federal courts of the United States.

35

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests
through actions against our management, directors or major shareholders than would shareholders of a
corporation incorporated in a jurisdiction in the United States.

Our dual-class ordinary share structure with different voting rights could discourage others from pursuing
any change of control transactions that holders of our Class A ordinary shares and ADSs may view as
beneficial.

Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of
Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to
ten votes per share. We issued Class A ordinary shares represented by our ADSs in our initial public offering.
Our co-founder, chairman and chief executive officer, Robin Yanhong Li, who acquired our shares prior to our
initial public offering, holds our Class B ordinary shares. Each Class B ordinary share is convertible into one
Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into
Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder
thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares will be
automatically and immediately converted into the equal number of Class A ordinary shares. In addition, if at any
time Robin Yanhong Li and his affiliates collectively own less than 5% of the total number of the issued and
outstanding Class B ordinary shares, each issued and outstanding Class B ordinary share will be automatically
and immediately converted into one Class A ordinary share, and we shall not issue any Class B ordinary shares
thereafter.

Due to the disparate voting powers attached to these two classes, certain shareholders have significant
including election of directors and significant
voting power over matters requiring shareholder approval,
corporate transactions, such as a merger or sale of our company or our assets. This concentrated control could
discourage or prevent others from pursuing any potential merger, takeover or other change of control transactions
with our company, which could deprive our shareholders and ADS holders of an opportunity to receive a
premium for their shares or ADSs as part of a sale of our company and might reduce the price of our ADSs.

Our articles of association contain anti-takeover provisions that could adversely affect the rights of holders of
our ordinary shares and ADSs.

Our articles of association include certain provisions that could limit the ability of others to acquire control
of our company, and therefore may deprive the holders of our ordinary shares and ADSs of the opportunity to
sell their ordinary shares or ADSs at a premium over the prevailing market price by discouraging third parties
from seeking to obtain control of our company in a tender offer or similar transactions. These provisions include
the following:

•

•

•

A dual-class ordinary share structure.

Our board of directors has the authority, without approval by the shareholders, to issue up to a total of
10,000,000 preferred shares in one or more series. Our board of directors may establish the number of
shares to be included in each such series and may fix the designations, preferences, powers and other
rights of the shares of a series of preferred shares.

Our board of directors has the right to elect directors to fill a vacancy created by the increase of the
board of directors or the resignation, death or removal of a director, which prevents shareholders from
having the sole right to fill vacancies on our board of directors.

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal
income tax consequence to U.S. Holders.

Based on the market price of the ADSs and ordinary shares, the composition of our income and assets and
our operations, we believe that we were not a “passive foreign investment company,” or “PFIC,” for U.S. federal

36

income tax purposes for our taxable year ended December 31, 2012. However, we must make a separate
determination each year as to whether we are a PFIC (after the close of each taxable year) and we cannot assure
you that we will not be a PFIC for our current taxable year ending December 31, 2013 or any future taxable year.
A non-U.S. corporation will be considered a PFIC for any taxable year if either (i) at least 75% of its gross
income is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly
values of the assets during a taxable year) is attributable to assets that produce or are held for the production of
passive income. The future value of our assets is generally determined by reference to the market price of the
ADSs and ordinary shares, which may fluctuate considerably. If we were treated as a PFIC for any taxable year
during which a U.S. Holder (defined below) held an ADS or an ordinary share, certain adverse U.S. federal
income tax consequences could apply to the U.S. Holder. See “Item 10.E. Additional Information—Taxation—
United States Federal Income Taxation—Passive Foreign Investment Company.”

Item 4. Information on the Company

A. History and Development of the Company

We were incorporated in the Cayman Islands in January 2000. Since our inception, we have conducted our
operations in China principally through Baidu Online, our wholly owned subsidiary in Beijing, China. Since June
2001, we also have conducted part of our operations in China through Baidu Netcom, a consolidated affiliated
entity in Beijing, China, which holds the licenses and approvals necessary to operate our websites and provide
online advertising services. In more recent years, we have established additional subsidiaries inside and outside
of China and assisted in establishing additional PRC consolidated affiliated entities to conduct part of our
operations.

On August 5, 2005, we listed our ADSs on The NASDAQ National Market (later renamed The NASDAQ
Global Market) under the symbol “BIDU.” We and certain selling shareholders of our company completed the
initial public offering of 4,604,224 ADSs, each then representing one Class A ordinary share, on August 10,
2005. On May 12, 2010, we effected a change of the ADS to Class A ordinary share ratio from 1 ADS
representing 1 Class A ordinary share to 10 ADSs representing 1 Class A ordinary share. The ratio change has
the same effect as a 10-for-1 ADS split. Our ADSs currently trade on The NASDAQ Global Select Market.

In December 2008, our shareholders approved our name change from Baidu.com, Inc. to Baidu, Inc. In
November 2009, we moved into our new corporate headquarters, which we name as Baidu Campus. Our
principal executive offices are located at Baidu Campus, No. 10 Shangdi 10th Street, Haidian District, Beijing
100085, the People’s Republic of China. Our telephone number at this address is +86 (10) 5992-8888.

In July 2011, we acquired a majority stake in Qunar, an online travel search services provider, and have
since then consolidated the financial results of Qunar in our consolidated financial statements. In November
2012, we obtained the controlling interest in Qiyi.com, Inc., a prior equity method investee, and have since then
consolidated its financial results into our consolidated financial statements.

B. Business Overview

We are the leading Chinese language internet search provider. As a technology-based media company, we
aim to provide the best way for people to find information. In addition to serving users, we provide an effective
platform for businesses to reach potential customers.

Our Baidu.com website was the largest website in China and the fifth largest website globally, as measured
by average daily visitors and page views during the three-month period ended December 31, 2012, according to
Alexa.com, an internet analytics firm. We believe we captured the largest internet search traffic in China in 2012.
Our “Baidu” brand received the highest ranking for an internet brand in China in BrandZ Top 50 Most Valuable
Chinese Brands 2012, a study of the top 50 most valuable Chinese brands published by Millward Brown
Optimor, a brand strategy research firm.

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We conduct our operations primarily in China, and our revenues generated from international operations are
insignificant. Revenues generated from our operations in China accounted for approximately 99.8%, 99.6% and
99.5% of our total revenues in 2010, 2011 and 2012, respectively.

We serve three types of online participants:
Users. We offer a Chinese language search platform on our website Baidu.com that enables users to find
relevant information online, including web pages, news, images, documents and multimedia files, through links
provided on our website. We also offer several international products and services in local languages to users in
several other countries, including our Japanese search services at Baidu.jp, formally launched in January 2008.

We focus on superior user experience and provide a broad range of products and services to enrich user
including search products, social products, UGC-based
experience and facilitate easy and quick search,
knowledge products, location-based products and services, music products, PC client software, mobile related
products and services, products and services for developers and other products and services. Our products and
services can be accessed through PCs and mobile devices. To take our user experience to the next level, we have
launched our semantic search engine named Box Computing to deliver interactive, relevant and intuitive user
experience. Most search results on Baidu.com are produced by Box Computing, which include webpages,
third-party applications and content and sponsored links, as well as our own vertical products and websites, such
as Baidu Post Bar, Baidu Knows, Baidu Encyclopedia, Baidu Maps, Baidu Image Search and Video Search,
travel site Qunar and video site iQiyi.

Customers. We deliver online marketing services to a diverse customer base operating in a variety of
industries. In 2012, we had approximately 596,000 active online marketing customers. Our online marketing
customers consist of SMEs throughout China, large domestic companies and Chinese divisions or subsidiaries of
large, multinational companies. We have a diverse customer base in terms of industries and geographical
locations. Our defined industries in which our customers operate include medical, machinery, education,
software and online games, electronic commerce, tourism and ticketing, transportation, franchising, business
services, electronic products, information technology services, financial services, construction and decoration,
and household appliances. Customers in our top five industries contributed approximately 53% of our total online
marketing revenues in 2012. Although we have customers located throughout China, we have a more active and
larger customer base in coastal regions, reflecting the current general economic demographics in China. We
reach and serve our customers through our direct sales force as well as a network of third-party distributors
across China. As many of our customers are SMEs, we use distributors to help us identify potential SME
customers, collect payments and assist SMEs in setting up accounts with us and using our online marketing
services. We have also engaged third-party agencies to identify and reach potential customers outside of China.

Baidu Union Members. Baidu Union consists of a large number of third-party web content, software and
mobile application providers. Baidu Union members can display on their properties our customers’ promotional
links. Some Baidu Union members, including those mobile and non-mobile oriented, also embed some of our
products and services into their properties. Our relationships with Baidu Union members allow them to provide
high-quality and relevant search results to their users without the cost of building and maintaining advanced
search capabilities in-house and to monetize their traffic through revenue sharing arrangements with us. We
reward Baidu Union members which bring higher quality traffic to us by sharing with these members more
revenues as a percentage of total revenues recognized by us. The number of Baidu Union members that
contributed revenues to us increased by approximately 7.2% in 2012.

Products and Services for Users

We focus on offering products and services that enable our users to find relevant information quickly and
easily. We offer our main products and services to users through Baidu.com free of charge generally. These
products and services can be accessed through PCs, mobile and other non-mobile devices. We organize our
products and services into nine categories, namely, search products, social products, UGC-based knowledge
products, location-based products and services, music products, PC client software, mobile related products and
services, products and services for developers, and other products and services. We also offer some products and
services provided by our associated or cooperative websites.

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Search Products

Baidu Web Search. Baidu’s web search allows users to locate information using Chinese language search
queries. Our web search also incorporates some Bing’s English search results, which are presented to our users
conducting searches using English language search queries. Through our proprietary search technology, we build
and continuously refine a large database of Chinese synonyms and closely associated phrases, which is essential
for accurate and efficient execution of Chinese language searches. The Baidu.com home page features a search
box prominently, which is designed not only to load quickly but also to be user-friendly. After entering a search
query, users are generally presented with a list of search results, which may include our customers’ links marked
as sponsored links. Users can then access the desired websites by clicking on the hypertext links displayed in the
search results.

In addition to providing access to approximately thirty billion indexed Chinese language web pages, we
have integrated additional features into our web search, which help users find information more easily. The
Baidu web search includes features such as:

•

•

•

•

•

•

•

•

•

•

•

•

Related Search—provides alternative search terms based on the original queries to help users find
relevant web pages quickly.

Search in Results—enables users to conduct additional searches within the initial search results.

Search Term Suggestion—displays a list of suggested search terms as the user inputs words into the
search box.

Search by Chinese Phonetics (Pinyin)—enables users to conduct quick searches by entering Chinese
phonetics with letters of the English alphabet instead of Chinese characters.

Spell Checker—suggests alternative search terms when a search appears to contain misspellings or
typing errors.

Advanced Search—enables users to create more focused queries by employing techniques such as
narrowing results to specified words or phrases, document formats, geographic regions, time frames or
websites.

Snapshots—provides snapshots of web pages taken when the pages were indexed, allowing users to
view web pages that cannot be opened quickly or easily.

Third-party rich content microblog—integrates and displays third-party rich content. For example,
users can search for and view directly in our search results microblog contents from SINA Weibo and
Tencent Weibo.

Other Baidu products—integrates and displays search results from other Baidu products including
Baidu News, Baidu Image Search, Baidu Video Search, Hao123, Baidu Post Bar, Baidu Space, Baidu
Knows, Baidu Encyclopedia, Baidu WenKu, Baidu Map Search, Baidu Music, Baidu Translation and
Baidu Dictionary.

Layout design—adopts a layout design that matches users’ interest for the topic to enable quick search,
and offers customized recommendation links and knowledge that derive from both of our web
knowledge base and the aggregated user search history and preference, at right side of search result.

Baidu personalized homepage—offers a customizable landing page providing registered users a
personalized experience based on their historical search behavior. Users are presented with an
intelligently recommended list of recent favorite websites or online services and can add their favorite
websites and online applications on their homepage layout. Users can also view updates of their
interested persons in Baidu Post Bar and Baidu Space.

New devices—provide customized search experience for new devices. For example, we offer
optimized display and interaction on iPad.

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In addition, Baidu Web Search enables users to view some accurate answers and structured data, and also
allows users to launch some applications directly, which feature is powered by Baidu Open Platform and Baidu
Develop Center where content providers and developers can submit their contents and applications.

Baidu Image Search. Baidu Image Search enables users to search for images on the internet by term
queries or various categories and offers advanced features, such as search by image file type and search within a
designated website or web page. Baidu Image Search also allows users to search information on an image or
search other similar images by allowing users to upload an image or enter its uniform resource locator (URL). In
addition, registered users can upload, label and share with others high quality pictures through Baidu Image
Search.

Baidu Video Search. Baidu Video Search enables users to search by term queries for and access through
hyperlinks online video clips that are hosted on third parties’ websites. Baidu Video also allows users to locate
and play various video content on smart phones and tablets, and support blueray playing based on the mobile
cloud technology.

Baidu News. Baidu News provides links to an extensive selection of local, national and international news
and presents news stories in a searchable format, typically within minutes of their publication on the internet.
Baidu News uses an automated process to display links to related headlines, which enables users to see many
different viewpoints on the same story. Baidu News is typically updated every five minutes throughout the day.
Users can also choose to have links of specific types of news articles, e.g., financial news, or news articles
containing specific keywords delivered to their email accounts.

Baidu Web Directory. Baidu Web Directory enables users to browse and search through websites that have

been organized into categories.

Hao123.com. We also operate Hao123.com, a popular Chinese web directory navigation site in China.

Baidu Dictionary. Baidu Dictionary is an online dictionary, providing lookup and translation services

between Chinese and English.

Baidu Top Searches and Search Index. Baidu Top Searches provides listings of top search terms based on
daily search queries entered on Baidu.com. The listings are organized by categories and allow users to easily
locate popular search terms on topics of interest. We also offer Baidu Search Index, which shows how frequently
a given search term is entered into Baidu sites, together with other relevant information such as its historical
trend, geographic distribution and demographic distribution.

Baidu Open Platform. Baidu Open Platform is a platform aiming at providing one-stop online services to
users by intelligently identifying users’ demands before providing optimized treatments and responses. It is also
designed to increase coverage of Baidu products and services. Baidu Open Platform, accessible through
open.baidu.com, has many other specialized accesses such as mobileapp.baidu.com. Content providers can
submit their contents to Baidu Open Platform. These contents are presented on Baidu’s search result pages
directly and at accesses such as open.baidu.com by categories.

Social Products

Baidu Post Bar. Baidu Post Bar provides users with a query-based searchable community to exchange
views and share knowledge and experience. The community can be further expanded by users posting new topics

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that have not been covered in the community before. In Baidu Post Bar, users can search, read and browse
internet message boards and after signing in, reply to other members of the community publicly. Registered users
can also follow and send private messages to each other within the community. Baidu Post Bar covers a broad
range of topics and interest areas, such as society, sports and entertainment. It also allows users to post and share
images and video clips in Baidu Post Bar online communities.

Baidu Space. Baidu Space allows registered users to create personalized homepages in a query-based
searchable community. Registered users can post their blogs, photo album and certain personal information on
their homepages and establish their own communities of friends who are also registered users.

Baidu Album. Baidu Album is a cloud-enabled photo storing and sharing service, which allows users to
upload pictures without surrendering to compression and share with others with privacy control. Baidul Album
uses cloud-based back-up technology to make sure the uploaded pictures will be kept.

UGC-based Knowledge Products

Baidu Knows. Baidu Knows provides users with a query-based searchable community to share knowledge
and experiences. Through Baidu Knows, registered members of Baidu Knows can post specific questions for
other members to respond and also answer questions . Any users of our Baidu.com website can also search, read
and browse questions and answers by registered members of Baidu Knows.

Baidu Encyclopedia. Baidu Encyclopedia is an evolving encyclopedia compiled by registered users.
Registered users can share their knowledge by adding new terms and new content in Baidu Encyclopedia. Any
users of our Baidu.com website can also search, read and browse all terms and content contributed by registered
users of Baidu Encyclopedia.

Baidu WenKu. Baidu WenKu is an online document sharing platform, through which registered users of
our Baidu.com website can search, browse or read, by categories, documents in various formats such as
Microsoft WORD, PDF and Microsoft Excel. Baidu WenKu also allows registered users to upload documents to
and download from this user-created documents database.

Baidu Experience. Baidu Experience is a platform where users can share their experience by inputting their

observations and knowledge following a predetermined format for others to search and browse.

Location-based Products and Services

Baidu Maps. Baidu Maps integrate map data from third-party suppliers and web information, providing
users with location-based services relating to locations, routes, and local merchants on their PCs and mobile
devices. On Baidu Maps for PCs, users have the option to type search terms into a single search box to find a
particular place, points of interest near a specified location and routes for driving and public transportation. On
Baidu Maps for mobile devices, users can also locate their current position and search points of interests and
services near their current location or designated location, such as restaurants, hotels, movie theatres, KTV, gas
stations, scenic spots, banks, bars, as well as deliveries, discounts and group buy deals offered by local
merchants. Users can also enjoy comprehensive intelligent transportation service, including suggested routes for
driving, public transportation and walking, voice navigation, real-time traffic status and real-time public
transportation. Through Baidu Maps, users can access in-depth information about hundreds of thousands of local
merchants and can also comment on the services provided by local business owners. Merchants can also actively
provide their operating information for displaying on Baidu Maps and maintain such display.

Baidu Group Buy Directory. Baidu Group Buy Directory is a navigation site through which users can
view group buy items provided by third-party group buy websites by categories and click through links to these
group buy websites for more information and items.

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Baidu Travel. We run a beta version of Baidu Travel, which aims to provide users with flights, hotels and
other
travel-related information for destinations inside and outside of China, covering top attractions,
transportation, accommodation, shopping and cultural highlights, and allow registered users to share their travel
experience by posting their own travel journals and general comments.

Music Products

Baidu Music. Baidu Music is a digital music service that gives users access to millions of songs. We have
been partnering with many content providers, including well-known international labels such as Universal Music,
Warner Music, Sony Music and EMI Music, to provide licensed music for users in geographic locations within
the license scope to stream and download from our platform. Baidu Music’s front page mainly provides the latest
releases, hot charts and editor’s compilation, and also contains a search box whereby users can search for music
by term queries. Registered members can store their music in a cloud-based “digital music space” and get their
personal playlist synchronized between multiple devices. Baidu Music can also be played on iPhone and
Android-based mobile phones, through which mobile phone users can get access to Baidu Music easily.

Baidu FM. Baidu FM is a webpage offered by Baidu Music where users can listen to online music

channels. It features simple page layout and is easy to use.

Baidu TT Player. Baidu TT Player is a software that enables users to play audio files in multiple formats.

PC Client Software

Baidu Browser. Baidu Browser is an internet browser. Baidu Browser has a landing page with pre-added
links of selected popular websites and applications including games. Users can remove these links from their
landing pages of Baidu Browser. They can also search for their favorite websites and applications from a
collection of websites and applications, most of which are from outside developers, and add them to their Baidu
Browser landing pages. We added three important features, namely, Cloud Storage, Drag Search and Cloud
Reader, on Baidu Browser in 2012. Cloud Storage allows users to backup all files. Drag Search can monitor
users’ drag operations and then return the query results that users want immediately, such as Map, Translation
and Encyclopedia.

Baidu Input Method Editor. Baidu Input Method Editor is an intelligent input method editor which adapts
to the ever evolving Chinese language through analyzing popular search terms based on our search technology. It
also accommodates mixed use of Chinese and English language without having to switch input methods. Using
our cloud computing and web technology, we allow users to use Baidu Input Method online without
downloading and installing the client-end application, if they stay on our website. It also allows users to input
Chinese characters by writing with mouse and can correct wrong pinyin string automatically.

Baidu Toolbar and Baidu Companion. Baidu Toolbar and Baidu Companion are free, downloadable
software which, once installed, show up on a browser’s tool bar and make our search function and some specific
search capabilities readily available on every web page that a user browses.

Baidu Hi. Baidu Hi is our instant messaging service. In addition to the major instant messaging functions of
chat, grouping and personalization, Baidu Hi also integrates search services, online communities and various
other features that we provide.

Baidu Media Player. Baidu Media Player is an audio and video player using the streaming media
technology. Baidu Media Player enables users to play multimedia files of various popular formats online and
offline.

Baidu Reader. Baidu Reader is a document reader that supports major document formats, such as TXT,
DOC, PDF and PPT. Users can use Baidu Reader to read and organize their own documents, browse the library
of books already on Baidu WenKu and purchase reading materials directly through the application.

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Mobile Related Products and Services

Baidu Mobile Search. Baidu Mobile Search enables users to access our search and community-based
products and services such as Baidu News, Baidu Post Bar, Baidu Knows and Baidu Map Search using mobile
devices, including WAP-enabled mobile phones. Baidu Mobile Search supports voice-activated search to better
serve users of mobile devices. By minimizing graphics and interactive contents, Baidu Mobile Search offers a
user friendly and productive mobile internet search experience. We have entered into arrangements with China
Telecom, China Unicom and China Mobile, three mobile carriers in China, respectively, to provide mobile search
for their 3G mobile service subscribers. Under these arrangements, our mobile search service will be embedded
in the mobile carriers’ selected 3G phone modules. Their mobile subscribers will be able to use the pre-installed
applications to access various Baidu products and services available to mobile phone users.

Baidu Cloud Smart Terminal Platform. Baidu Cloud Smart Terminal Platform is a mobile platform
designed for mobile devices based on Android. It integrates our core technologies and services, including our
cloud technology, supports box computing, cloud storage and various Baidu applications and local features,
aiming to provide users with more extensive, diversified and personalized social networking experiences on the
cloud. The platform provides mobile devices with built-in applications and services, while being compatible with
most Android applications developed by third-party developers. In addition, through the platform, third-party
developers can have APIs to integrate search, maps, payments and other features into the applications they
develop for the platform.

Baidu Mobile Browser. We offer this web browser for mobile phones based on Windows and Android.

Baidu Palm. Baidu Palm is a user-end application designed specifically for mobile phone users. By
downloading and installing Baidu Palm, mobile phone users can access various Baidu products including Baidu
Web Search, Baidu News, Baidu Map Search, Baidu Post Bar and Baidu Knows without the need to make
multiple registrations.

Baidu Mobile Phone Input Method Editor. Baidu Mobile Phone Input Method Editor is a user-end
application that supports multiple methods of inputting Chinese characters on mobile phones. It is designed to
allow mobile phone users to conduct searches more efficiently.

Baidu Contacts. Baidu Contacts is a contact management tool enhanced with special features. It enables
users to search for contacts stored in mobile phones more easily by voice or inputting simple characters and to
identify odd calls by viewing the record of number of rings from an unanswered call. Users can also choose to
synchronize all their contacts to our servers for backup and send free textual and short voice messages to each
other when they stay online after signing in Baidu Contacts. In addition, Baidu Contacts makes recommendations
to users on people they may know or want to know and enables users to connect with others and access their
contacts’ Weibo directly after setting up the connections.

Baidu Netdisk. Baidu Netdisk is a cloud computing based online storage service, which provides users

limited free space to store and access their materials online.

Baidu PhotoWonder. Baidu PhotoWonder is an application for users of smart phones based on iOS and

Android to take and beautify photos and share them among some social networking sites.

Baidu Wallpaper. Baidu Wallpaper is an application for users of smart phones based on Android and iOS

enabling them to change the wallpapers of their phones.

Baidu Desktop. Baidu Desktop is an application for users of smart phones based on Android enabling them

to manage the desktop of their phones.

Baidu One-click-root. Baidu One-click-root allows the users to clean up their phone systems, manage

startup and improve the performance of their mobile phones.

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Baidu Voice Assistant. Baidu Voice Assistant enables users to operate their smart phones via natural
language, such as making calls, sending messages, setting alarms, playing music, making inquiries and chatting
without typing. Baidu Voice Assistant can also tell jokes and stories on a variety of topics. Using our voice
recognition technology and combined with the semantic recognition ability of Chinese language, the product
allows users to be understood correctly when dictating instructions in a colloquial way. In collaboration with
Baidu Encyclopedia, Baidu Knows and Baidu Open Platform, Baidu Voice Assistant has access to
comprehensive and high-quality web information resources.

Other Baidu Mobile Applications. We offer several other mobile applications which provide functions
similar to those provided by their substitutes for non-mobile devices such as Baidu Map Search, Baidu Travel,
Baidu Video, Baidu Post Bar, Baidu Music, Baidu Knows, Baidu Encyclopedia, Baidu WenKu, Baidu Album
and Baidu News. These applications are tailored for mobile device users and also offer some particular functions.

Products and Services for Developers

Baidu Developer Center. Baidu Developer Center aims to create a one-stop comprehensive solution plan
for application developers. Utilizing our open technology, data statistics, marketing channels and development
tools, Baidu Developer Center provides development, operation, channel marketing and monetization support to
developers in the various phases of the application development and commercialization cycle.

Personal Cloud Storage (PCS). PCS provides cloud storage and service to individual users. The service
allows users to backup or restore personal data, synchronize data among various devices, and share data with
others. In addition, PCS provides developers with abundant capabilities, such as handling both file data and
structured data, generating thumbnail,
labeling, Cloud Match and third-party ID access/
authorization.

transcoding,

Baidu App Engine (BAE). BAE provides developers with a runtime environment for PHP, JAVA and
Python. Additionally, cloud storage, message service and cloud database are also provided by BAE. The goal of
BAE is to enable developers to deploy and manage their applications easily and automatically and provide a
running environment of dynamic scaling and load balancing. Owing to BAE, developers can focus on the
business logic instead of the maintenance work.

T5 browsing engine. T5 browsing engine is a Webkit based browsing engine that supports the rendering of
both web pages and web applications at a fast speed. With the complete HTML5 support and running efficiency,
T5 browser has topped in a series of tests such as HTML5test, SunSpider, V8 benchmark and Web GL 3D.

Mobile Test Center (MTC). MTC provides developers with overall and automated test services based on
hundreds of models, free of charge. It covers both native application and web application, including all the
mainstream resolutions, models and Android versions.

LBS Open Platform. LBS open platform provide Web, Android or iOS-based third-party application
developers with free services, including positioning, maps, data on local merchants, cloud storage and cloud
computing of LBS data. Based on these basic services, developers can develop their own LBS applications. We
also provide automobile manufacturers, telematics service providers (TSPs), automobile terminal hardware
manufacturers, and hardware related software developers with automobile networking API in order to facilitate
the developments of automobile terminal applications, including location search, driving routes search, latitude
and longitude search by addresses, sending routes information on the web to mobile phones and inquires about
transportation events at current city.

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Baidu Webmaster Platform. Baidu Webmaster Platform consists primarily of the tools section, data
section and discussion section, and provides website managers with tools and data to allow them to better
monitor and manage their websites and improve the search engine optimization (SEO) and hence the user
experiences of their websites.

Baidu Statistics. Baidu Statistics is a platform that helps our online marketing customers to evaluate the
effect of our online marketing solutions by providing various data and analyses that could be used to monitor
ROI. Baidu Union members and other website owners can also benefit from Baidu Statistics in web analytics and
user experience optimization. Baidu Statistics can be used for mobile applications based on iOS and Android,
allowing application developers to monitor the performance of applications on a real-time basis.

Baidu Share. Baidu Share is a tool, shown as a list of buttons, that can be embedded into other websites by
website owners, and allows users of such other websites to share contents among many social networking sites
and communities. By clicking the buttons embedded next to certain contents, links of the contents will be posted
in the target social networking sites and communities. Contents shared using Baidu Share and the number of
times these contents being shared can also be presented in our search results.

Other Products and Services

Qunar. Qunar offers real-time searches on flights, hotels and packages, group-buy deals, visa and other
travel-related information to consumers, and internet and mobile technology solutions to travel industry players.
According to China Internet Network Information Center (CNNIC) report, Qunar is the most popular online
travel application for mobile phones in China as of September 5, 2012. Qunar had 61.0 million monthly visits in
December 2012. Qunar’s search scope covers over 900 data sources, 213,000 hotels, and 69,000 domestic and
international flight routes. Qunar also provides over 3,000 daily travel deals in more than 400 travel destinations
inside and outside China.

IQiyi. IQiyi allows users to search and watch copyrighted movies, television series, cartoons, variety shows
and other programs without charge. The programs are provided by content providers under licensing
arrangements. Apart from sourcing copyrighted contents, iQiyi also produces a variety of original content. In
addition, iQiyi provides online community services to facilitate user communication and interaction. Users can
now search and watch iQiyi.com videos on their mobile phones free of charge. According to iResearch, iQiyi
was ranked as the No. 2 online video platform in China in terms of average time spent per user per day and No. 3
in terms of total monthly time spent in December 2012.

Baidu Baijob. Baidu Baijob, offered at Baijob.com, is a platform primarily offering online recruitment and

related services. Users can discover and apply for job opportunities through Baidu Baijob.

BaiduPay. BaiduPay is our online payment service, which can be used by some of our online marketing
customers, users of some of our products and services, and users of some affiliated, associated or third-party
websites. In addition, the revenue sharing with Baidu Union members can also be made through BaiduPay.

Baidu Games. Baidu Games is a channel where registered users can play web games provided by our
online game operator partners. In addition, we also offer a web games portal, providing game players with
updated web game-related information such as new releases, walk-throughs and reviews.

Baidu Search and Store. Baidu Search and Store is a free online bookmarking service that allows
registered users to bookmark, store and organize website links in an online space and conduct searches within the
bookmarked websites.

Baidu Application Store. Baidu Application Store is a platform that enables users to find popular third
party developed applications including games by category or by typing relevant search terms in a Baidu search
box. Users can also find these applications through mobile devices by voice-command search and the other
methods mentioned above.

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Baidu Ads Manager. Baidu Ads Manager is a technology platform which helps publishers manage their

advertisement inventory more effectively.

Baidu Data Research Center. Baidu Data Research Center is an online channel providing research reports,
news and other content relating to more than 10 industry sectors such as automobiles, online games,
telecommunications, financial services, retail, and education. These industry-specific research reports are
developed primarily by mining search queries data generated on our websites. Users registered with Baidu Data
Research Center can download these reports for market research purpose.

Baidu Sky. Baidu Sky is a platform through which our users can browse and download software. We also
cooperate with telecommunication operators and websites to build mirrored software platforms of Baidu Sky for
users.

Baidu Senior Citizen Search. Baidu Senior Citizen Search is web search specifically designed for senior
users. Supported by Hanvon, Baidu Senior Citizen Search allows users to handwrite search terms in Chinese by
moving around the mouse and produce search results more tailored to senior users’ interests and experiences. It
also selects websites that may be of interest to senior users and organizes these into categories and subjects.

Baidu Search for Visually Impaired. Baidu Search for Visually Impaired is designed to assist visually
impaired users to conduct a more effective search by removing certain advertisement, images and other content
that may interrupt with the functioning of viewing software used by visually impaired users.

Baidu Patent Search. Baidu Patent Search is operated in cooperation with the China Patent Information
Center under the PRC State Intellectual Property Office. Baidu Patent Search enables users to search for specific
Chinese patents and provides basic patent
including the patent name,
application number, filing date, issue date, inventor information and brief description of the patent.

information in the search results,

Baidu Translation. Baidu Translation is a free online translation service that provides instant translation of
texts and web pages between Chinese, on one side, and English or Japanese, on the other side. Baidu Translation
supports functions as dictionary, example search and translation services in one interface, and provides open
translation API to translate texts and localize web pages for users’ convenience. Baidu Translation is also applied
on iPhone and Android-based mobile phones, through which mobile phone users can get access to translation
services online and off-line. Users can type in, speak to the phone or take a picture of the words and get
translations instantly.

Baidu Missing Person Search Site. We launched this missing person search site in support of those
looking for missing persons. Families can upload to the site photos of the missing persons with the date they
went missing and a range of other personal information that can be tracked by local law enforcement. Internet
users who have come across missing persons or those suspected to be the victims of human-trafficking can
upload details of the encounter.

Major Products and Services by Associated or Cooperative Websites

Leho. Leho is a platform focusing on providing users information on life services and local merchants, and
is operated by Youa.com Inc., a company over which we do not have control but have a significant influence.
The platform was launched at Leho.com in December 2011 and subsequently integrated Youa Life, which was
spun off from us as an independent business operated by Youa.com Inc in November 2011. Leho is designed to
help merchants set up brand pages to share their information, offer special deals and connect with customers, and
allow consumers to share their life-styles and experience online by “timeline.”

Baidu Leju. Baidu Leju is a real estate information search platform jointly developed by Baidu and China
Real Estate Information Corporation, or CRIC. Baidu Leju is designed to provide Chinese internet users with

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timely information relating to the real estate markets throughout China. Pursuant

comprehensive,
to the
cooperation agreement entered into between Baidu and CRIC in May 2010, CRIC has the exclusive right to build
and operate Baidu’s web channels related to real estate and home furnishing.

International Products and Services

Baidu Japanese Products. Our Japanese search services currently offer web search, image search and
video search. We also offer Baidu Type, a Japanese input method editor for PC users, and an acquired Japanese
mobile phone input method editor for Android, named Simeji. A new version of Simeji can replay voice
recordings on devices running on the Android operating system.

Hao123 International. Hao123 International is a web directory navigation product targeted at international

users, covering six countries or regions currently.

Products and Services for Customers

We focus on providing customers with cost-effective and targeted marketing solutions. We generate almost
all of our revenues from online marketing services, including online marketing services based on search queries,
online marketing services based on contextuals, online marketing services based on search behaviors of internet
users, online marketing services of display placements, online marketing services based on social attributes and
online marketing services of other forms. Our online marketing services generally comprise text links, images,
multimedia files and interactive forms.

Online Marketing Services Based on Search Queries

Online marketing services based on search queries are keyword-based marketing services targeted at and
triggered by internet users’ search queries, which include our P4P services and other search query based online
marketing services, for example, Brand-Link. Typically, a P4P customer pays us when users click on one of its
website links on Baidu search result pages or Baidu Union members’ properties, while a Brand-Link customer
pays us based on the duration of the placement on Baidu search result pages. Users could reach our P4P
sponsored links and Brand-Link on either mobile or non-mobile devices.

P4P. Our auction-based P4P services enable our customers to bid for priority placement of their links in
keyword search results. We believe we were the first auction-based P4P service provider in China. Our P4P
platform enables our customers to reach users who search for information related to their products or services.
Customers may use our automated online tools to create text-based descriptions of their web pages and bid on
keywords that trigger the display of their web page information and links. Our P4P platform features an
automated online sign-up process that allows customers to activate and manage their accounts at any time.

Our P4P platform is an online marketplace that introduces internet search users to customers who bid for
priority placement in the search results. Our intelligent ranking system takes into consideration the “quality
factor” of a sponsored link for a search query in addition to the price bid on the keyword. The quality factor of a
sponsored link for a search query is determined based on the relevance and certain other factors. The relevance is
determined based on our analysis of past search and click-through results. Links to customers’ websites are
ranked according to a comprehensive ranking index, calculated based on both the quality factor of a sponsored
link for a search query and the price bid on that keyword. Our P4P online marketing customers may choose to set
a daily limit on the amount spent and may also choose to target only users accessing our website from specified
regions in China and/or during specific time period of the day.

We also offer certain value-added consultative services that help customers maximize their ROI, including

keyword suggestions, account management and performance reporting.

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We adopted Phoenix Nest, our current online marketing system, in December 2009. Phoenix Nest is
designed to improve relevance in paid search and increase value for customers, thus driving monetization
efficiency. Compared to our previous auction-based online marketing system, Phoenix Nest adopts enhanced
algorithms that generate more relevant advertisements and provides customers with additional
tools and
information to help them better manage their spending and achieve higher ROI.

Since its adoption, we have made enhancements continually to our Phoenix Nest platform. We have opened
online marketing on mobile search to all customers to allow them to promote their products and services. Besides
text descriptions, customers can also promote their applications on mobile search. In order to help advertisers
achieve better ROI from mobile search campaigns, we provide a series of special management tools in Phoenix
Nest, including wap site building tool for enhanced user experience, online chatting tool for better user
engagement, mobile statistics analysis tool for enhanced conversion tracking, and performance reporting for
managing campaign effectiveness. Meanwhile, we provide optimization packages in Phoenix Nest to help
customers enhance the advertising performance more easily. Moreover, we have launched Phoenix Nest App
(Android) allowing customers to manage their online marketing anywhere and anytime. We provide tools and
features, such as Phone Calls, App Downloads, Site-Links on Mobile, Brand-Link on Mobile, allowing
advertisers to manage and optimize mobile advertisement and understand the mobile opportunity properly.

Brand-Link. We offer a brand advertising service, Brand-Link. When internet users conduct a keyword
search using brand names of our customers who subscribe to our Brand-Link services, the search will generate a
wide range of brand-specific content, including news reports, promotional announcements, product information
and marketing campaigns.

Online Marketing Services Based on Contextuals

Online marketing services based on contextuals refer to our Network Marketing services. Using our
ProTheme contextual promotion technology, we offer Network Marketing, a service that enables our customers’
promotional links to be displayed on both Baidu’s properties and Baidu Union members’ properties where the
customers’ links are relevant to the subject and content of such web pages. We generate revenues from our
Network Marketing service based on the number of clicks on our customers’ links and share the revenues with
our Baidu Union members for displaying our customers’ promotional links on Baidu Union members’ properties
in accordance with pre-agreed terms.

Online Marketing Services Based on Search Behaviors of Internet Users

Online marketing services based on search behaviors of internet users include, among others, Targetizement
and Grand Media using our Targetizement technology, both of which enable our customers’ advertisements to
match their targeted internet users, who are automatically identified based on the users’ past behaviors on the
internet. Targetizement customers pay us a fee based on the number of clicks on their advertisements displayed
on Baidu’s properties, while Grand Media customers pay us on a cost per thousand impressions basis for the
links on Baidu Union members’ properties.

Online Marketing Services of Display Placements

Online marketing services of display placements allow our customers to display links insensitive to search
queries at a designated location on Baidu’s properties or Baidu Union members’ properties. Our customers
mainly pay us, among other less common forms of payments, based on the duration of the placement on Baidu’s
properties or on a cost per action basis, for example, number of registered users, on Baidu Union members’
properties.

Online Marketing Services Based on Social Attributes

Online marketing services based on social attributes refer to our Post Bar Marketing services. Baidu Post
Bar enables our customers to conduct social marketing and brand promotion using a variety of Post Bar

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Marketing solution packages. They are able to distribute advertising posts in certain interest-aggregated bars,
fulfilling the social marketing requirements. At the same time, we offer the Post Bar Brand Community that
enables customers to have broader and deeper interactions in social network scenarios, which meets their brand
promotion requirements.

Online Marketing Services of Other Forms

We offer other forms of online marketing services, including directing traffic to customer’s content to allow
more exposure of the content to users, and to enable users to purchase and use the content through non-mobile
devices. Users could also access some of the content through mobile devices.

Sales and Distribution

We sell our online marketing services directly and through our distribution network. We have direct sales
presence in Beijing, Shanghai and major cities in Guangdong Province, including Shenzhen, Guangzhou and
Dongguan, covering the major regional markets for our online marketing services.

Our distributors provide numerous services, including identifying customers, collecting payments, assisting
customers in setting up accounts with us, suggesting keywords to maximize ROI and engaging in other marketing
and educational services aimed at acquiring customers. We offer discounts to distributors as consideration for
their services. We have relied on distributors for several reasons. Our P4P customer base in China is
geographically diverse and fragmented, as many of our P4P customers are SMEs located in different regions in
China. Moreover, SMEs are generally less experienced with online marketing as compared to large companies
and therefore benefit from the extensive services provided by distributors. Finally, secure online payment and
credit card systems are in early stages of development in China. Distributors serve as an important channel to
reach SME customers throughout China and collect payments from them. We offer our online marketing services
to medium and large corporate customers through third-party agencies and our direct sales force. We have also
engaged third-party agencies to identify and reach the potential customers outside of China.

Marketing

We focus on continually improving the quality of our products and services, as we believe satisfied users
and customers are more likely to recommend our products and services to others. Through these efforts and the
increased use of internet in China, we have built our brand with modest marketing expenditures.

Our initial public offering in 2005 and subsequent positive media coverage have significantly enhanced our
brand recognition. We have also implemented a number of marketing initiatives designed to promote our brand
awareness among potential users, customers and Baidu Union members, and we invested significant resources on
the promotion activities for our mobile products in 2012. For example, we have purchased advertising time on
several
television channels in China, cooperated with mobile device producers for our mobile products
promotion, conducted cross-marketing activities with a number of leading consumer brands, conducted
marketing activities targeted at specific types of users like students, launched localized marketing initiatives
tailored to potential customers in various regions with the assistance of our distributors, organized and sponsored
seminars and discussion forums targeted at existing and potential customers, conducted marketing activities
aiming at keeping close relationships with website owners which are or may become Baidu Union members and
educated new customers with tailored online or offline search engine marketing trainings to strengthen their
search engine marketing abilities.

Competition

The internet search industry in China is rapidly evolving and highly competitive. Our primary competitors
include U.S.-based internet search providers providing Chinese language internet search services and

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China-based internet companies. We compete with these entities for both users and customers on the basis of
user traffic, quality (relevance) and quantity (index size) of search results, availability and ease of use of products
and services, the number of customers, distribution channels and the number of associated third-party websites.
We also face competition from traditional advertising media.

U.S.-based Internet Search Providers. U.S.-based internet search providers such as Google have a strong
global presence, well established brand names, more users and customers and significantly greater financial
resources than we do. We may also continue to face competition from other existing competitors and new
entrants in the Chinese language search market.

China-based Internet Companies. Chinese internet portals such as Sohu and Tencent offer a broad range of
online services, including search service. Sohu has its own search engine, “Sogou”, and Tencent also has its own
search engine, “SOSO”. These portals have widely recognized brand names in China and some have greater
financial resources than we do. We compete with these portals primarily for user traffic and online advertising.
We also compete with B2B service providers such as Alibaba, which also offers search services on its websites.
In addition, Qihoo 360, a company operating an internet platform and primarily providing security products,
launched its search services in 2012 and is competing with us on internet search.

Other Advertising Media. Other advertising media, such as newspapers, yellow pages, magazines,
billboards, other forms of outdoor media, television, radio and mobile applications compete for a share of our
customers’ marketing budgets. Large enterprises currently spend a relatively small percentage of their marketing
budgets on online marketing as compared to other advertising media.

Technology

We provide our web search and P4P technology using our network of computers running customized

software developed in-house. Our key technologies include:

Web Search Technology

Our web search technology applies a combination of techniques to determine the importance of a web page

independent of any particular search query and the relevance of that page to a particular search query.

Link Analysis Techniques. Link analysis is a technique that determines the relevance between a user query
and a web page by evaluating the combination of the anchor texts and the number of web pages linked to that
web page. We treat a link from web page A to web page B as a “vote” by page A in favor of page B. The subject
of the “vote” is described in the anchor texts of that link. The more “votes” a web page gets, the higher the
relevance. We compare search queries with the content of web pages to help determine relevance. Our text-based
scoring techniques do more than just counting the number of times a search term appears on a web page. For
example, our technology determines the proximity of individual search terms to each other on a given web page,
and prioritizes results where the search terms are near each other. Other aspects of a page’s content are also
considered. By combining link analysis with our information extraction techniques, we are able to deliver
relevant search results.

Information Extraction Techniques. We extract information from a web page using high performance
algorithms and information extraction techniques. Our techniques enable us to understand web page content,
delete extraneous data, build link structures, identify duplicate and junk pages and decide whether to include or
exclude a web page based on its quality. Our techniques can process millions of web pages quickly. In addition,
our anti-spam algorithms and tools can identify and respond to spam web pages quickly and effectively.

Web Crawling Techniques. Our powerful computer clusters and intelligent scheduling algorithms allow us
to crawl web pages efficiently. We can easily scale up our system to collect an ever-growing number of Chinese
web pages. Our spider technology enables us to refresh web indices at intervals ranging from every few minutes

50

to every few weeks. We set the index refresh frequency based on our knowledge of internet search users’ needs
and the nature of the information. For example, our news index is typically updated every five minutes, and can
be as frequent as every minute, throughout the day given the importance of timely information for news. We also
mine multimedia and other forms of files from web page repositories.

Our Project Aladdin, an ongoing research and development project, aims at uncovering useful information
of the “Hidden Web,” the part of the internet that traditional search engine technology may not be able to index.
The resulted Aladdin platform enriches our search index and hence provides richer search results to our users.
Aladdin has become Baidu Open Platform. In 2012, we made a major upgrade to the Aladdin platform, which not
only provides a better and faster way to integrate new “hidden web” information into our search index, but also
revolutionizes the search result presentation of the left side of the search result page. Furthermore, the upgraded
platform integrates Baidu’s knowledge base to render highly relevant “knowledge panel” at the right side of the
search result page to encourage users to acquire more knowledge or take actions directly within the page.

Natural Language Processing Techniques. We analyze and understand user queries and web pages by using
various natural language processing techniques, including, among others, word segmentation, named entity
recognition, syntax and semantic analysis, paraphrasing and language dependent encoding. For example, we can
identify Chinese names on a web page. When a user searches for a person based on the person’s Chinese name,
we can display the web pages that are specifically related to that person. We also mine user behavior and search
interests from our large search query logs. We provide additional web search features such as advanced search,
spelling check and search by Chinese phonetics (Pinyin).

Multimedia Technologies. We work on developing intelligent algorithms and systems to better understand
human spoken languages, identify audio contents, and recognize the meaning of images and videos. These
technologies will enable users to access information in a most natural way, and help our search engine better
organize the vast amount of multimedia contents on the web. For example, our speech recognition technology
has been applied to Baidu’s mobile search on smart phones, and our face recognition technology will be applied
to generate relevant photos when a person is searched.

P4P Technology

Our P4P platform serves billions of relevant, targeted sponsored links each day based on search terms users

enter or content they view on the web page. Our key P4P technology includes:

P4P Auction System. We use a web-based auction system to enable customers to bid for positions and
automatically deliver relevant, targeted promotional links on Baidu’s properties and Baidu Union members’
properties. The system starts by screening the relevance between the sponsored links and a particular query. Our
intelligent ranking system takes into consideration the quality factor of a sponsored link for a search query in
addition to the price bid on the keyword. The quality factor of a sponsored link for a search query is determined
based on the relevance and certain other factors. The relevance is determined based on the analysis of past search
and click-through results. Links to customers’ websites are ranked according to a comprehensive ranking index,
calculated based on both the quality factor of a sponsored link for a search query and the price bid on that
keyword. We employ a dynamic mechanism in determining the minimum bidding price for each keyword.

Our current online marketing system, Phoenix Nest, is designed to generate more relevant advertisements,
compared with the previous auction-based online marketing system we used before December 2009. Phoenix
Nest helps customers more easily find users’ favorite search terms to bid on, and provides customers with more
tools for budget management and more data for the effective measurement of ROI.

P4P Billing System. We record every click and charge customers a fee by multiplying the number of clicks
by the cost per click. Our system is designed to detect fraudulent clicks based on factors such as click patterns
and timestamps. This system also computes the amount a Baidu Union member or a distributor should be paid.
The billing information is integrated with our internal Oracle ERP financial system.

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P4P Customer Service System. This system offers data and tools to analyze data for our customers to
evaluate and optimize the performance of our online marketing services provided to them. Through this system,
our customers can also manage information relating to online marketing services such as their budgets and time
periods for the services.

ProTheme Contextual Promotion Technology. Our ProTheme technology employs techniques that consider
factors such as theme finding, keyword analysis, word frequency and the overall link structure of the web to
analyze the content of individual web pages and to match sponsored links in our P4P platform to the web pages
almost instantaneously. With this targeting technology, we can automatically provide contextually relevant
promotional links. For example, our technology can provide links offering tickets to fans of a specific sports
team or a news story about that team.

Targetizement Technology

Our Targetizement technology matches our customers’ promotional links with their targeted internet users.
Our automatic algorithm can analyze a user’s interests based on his or her past search experience and display
promotional links that the user may be interested in viewing.

Large-Scale Systems and Technologies

We generally develop custom software for our products or services that are running on clusters of
commodity hardware. Our investment
in large-scale system infrastructure produces several key benefits:
reduction in cost of storing and processing large amounts of data, simplification of deployment and operation of
large-scale products and services, and automation of administration tasks of large-scale clusters of computers.
Moreover, our infrastructure can be easily scaled to deal with traffic growth and data volume increase.

Our large-scale system infrastructure uses distributed software and high performance parallel computing
technologies. It provides high-quality web search services and web page collections using cost-effective servers
running linux operating system. We have management information systems that enable us to perform tasks such
as service operations, administration, and trouble-shooting very efficiently. In addition, we have developed
framework that can help us conduct live effect test of new ideas without affecting major live services.

Our infrastructure significantly improves the relevance between a user query and advertising results by
using advanced search and information retrieval algorithms that are computationally intensive. Our infrastructure
also shortens our product development life cycle and allows us to innovate more quickly and cost-effectively. We
constantly evaluate new hardware alternatives and software techniques to further reduce our infrastructure cost.

Intellectual Property

We rely on a combination of trademark, copyright and trade secret protection laws in China and other
jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property
and our brand. We have 60 issued patents in China and intend to apply for more patents to protect our core
technologies. We also enter into confidentiality, non-compete and invention assignment agreements with our
employees and consultants and nondisclosure agreements with selected third parties. “
”, our company’s
name “Baidu” in Chinese, has been recognized as a well-known trademark in China by the Trademark Office
” and the
under the State Administration for Industry and Commerce. In addition to owning the trademark “
related logo, we have applied for registration of additional trademarks and logos, including “
Hi”
and “
” and our company logo,
including “Baidu”. In addition, we have registered our domain name Baidu.com,
and the United States,
hao123.com and baifubao.com with MarkMonitor.com, Baidu.jp with humeia.co.jp and Baidu.cn, Baidu.com.cn,
and certain other websites with China National Network Information Center, or CNNIC. We own a variety of
intellectually property rights relating to our acquired businesses such as Qunar.

”. We also have registered certain trademarks in Hong Kong, including “

”, “

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Internet, technology and media companies are frequently involved in litigation based on allegations of
infringement or other violations of intellectual property rights. Furthermore, the application of laws governing
intellectual property rights in China and abroad is uncertain and evolving and could involve substantial risks to
us. See “Item 3.D. Key Information—Risk Factors—Risks Related to Our Business—We may face intellectual
property infringement claims and other related claims that could be time-consuming and costly to defend and
may result in an adverse impact over our operations” and “—We may be subject to patent infringement claims
with respect to our P4P platform.”

Regulation

The PRC government extensively regulates the telecommunications industry, including the internet sector.
The State Council, the MIIT and other relevant government authorities have promulgated an extensive regulatory
scheme governing internet-related services. This section summarizes the principal PRC laws and regulations
relating to our business.

In the opinion of Han Kun Law Offices, our PRC legal counsel, (i) the ownership structure relating to our
consolidated affiliated entities complies with current PRC laws and regulations; (ii) subject to the disclosure and
risks disclosed under “Item 3.D. Key Information—Risk Factors—Risks Related to Our Corporate Structure,”
“—Risks Related to Doing Business in China” and “—Regulation,” our contractual arrangements with our
consolidated affiliated entities and the nominee shareholders are valid and binding on all parties to these
arrangements and do not violate current PRC laws or regulations; and (iii) subject to the disclosure and risks
disclosed under “Item 3.D. Key Information—Risk Factors—Risks Related to Our Corporate Structure,”
“—Risks Related to Doing Business in China” and “—Regulation,” the business operations of our consolidated
affiliated entities, as described herein, comply with current PRC laws and regulations in all material respects.

China’s internet industry and online advertising market are evolving. There are substantial uncertainties
regarding the interpretation and application of existing or proposed PRC laws and regulations. We cannot assure
you that the PRC regulatory authorities would find that our corporate structure and our business operations
comply with PRC laws and regulations. If the PRC government finds us to be in violation of PRC laws and
regulations, we may be required to pay fines and penalties, obtain certain licenses or permits and change, suspend
or discontinue our business operations until we comply with applicable PRC laws and regulations.

Regulations on Value-Added Telecommunications Services and Internet Content Services

Internet content services. The Telecommunications Regulations promulgated by the PRC State Council in
September 2000 categorize all telecommunications businesses in the PRC as either basic or value-added. Internet
content services, or ICP services, are classified as value-added telecommunications businesses. Pursuant to the
Telecommunications Regulations, commercial operators of value-added telecommunications services must first
obtain an operating license from the MIIT or its provincial level counterparts. The Administrative Measures on
Internet Information Services, also promulgated by the PRC State Council
in September 2000, require
commercial ICP service operators to obtain an ICP license from the relevant government authorities before
engaging in any commercial ICP operations within the PRC.

The Administrative Measures for Telecommunications Business Operating License, promulgated by the
MIIT with latest amendments becoming effective in April 2009, set forth the types of licenses required for value-
added telecommunications services and the qualifications and procedures for obtaining such licenses. For
example, an ICP operator providing commercial value-added services in multiple provinces is required to obtain
an inter-regional license, whereas an ICP operator providing the same services in one province is required to
obtain a local license.

BBS services. The Internet Electronic Messaging Service Administrative Measures promulgated by the
MIIT in November 2000 require ICP operators to obtain specific approvals before providing BBS services. BBS
services include electronic bulletin boards, electronic forums, message boards and chat rooms. On July 4, 2010,

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the approval requirement for operating BBS services was terminated by a decision issued by the PRC State
Council. However, in practice, the competent authorities in Beijing still require the relevant operating companies
to obtain such approval for the operation of BBS services.

Content regulation. National security considerations are an important factor in the regulation of internet
content in China. The National People’s Congress, the PRC’s national legislature, has enacted laws with respect
to maintaining the security of internet operation and internet content. Under these laws and applicable
regulations, violators may be subject to penalties, including criminal sanctions, for internet content that:

•

•

•

•

•

•

•

•

•

opposes the fundamental principles stated in the PRC constitution;

compromises national security, divulges state secrets, subverts state power or damages national unity;

harms the dignity or interests of the state;

incites ethnic hatred or racial discrimination or damages inter-ethnic unity;

undermines the PRC’s religious policy or propagates heretical teachings or feudal superstitions;

disseminates rumors, disturbs social order or disrupts social stability;

disseminates obscenity or pornography, encourages gambling, violence, murder or fear or incites the
commission of a crime;

insults or slanders a third party or infringes upon the lawful rights and interests of a third party; or

is otherwise prohibited by law or administrative regulations.

ICP operators are required to monitor their websites, including electronic bulletin boards. They may not post
or disseminate any content that falls within the prohibited categories and must remove any such content from
their websites. The PRC government may shut down the websites of ICP license holders that violate any of the
above-mentioned content restrictions and revoke their ICP licenses.

Restrictions on Foreign Ownership in Value-Added Telecommunications Services

Pursuant

satisfy a number of

stringent performance and operational experience requirements,

to the Provisions on Administration of Foreign-Invested Telecommunications Enterprises,
promulgated by the PRC State Council with latest amendments becoming effective in September 2008, the
ultimate foreign equity ownership in a value-added telecommunications services provider must not exceed 50%.
In order to acquire any equity interest in a value-added telecommunication business in China, a foreign investor
must
including
demonstrating good track records and experience in operating value-added telecommunication business overseas.
Foreign investors that meet these requirements must obtain approvals from the MIIT and the Ministry of
Commerce (or the Ministry of Commerce’s authorized local counterparts), which retain considerable discretion
in granting approvals. According to publicly available information,
the PRC government has issued
telecommunications business operating licenses to only a limited number of foreign-invested companies, all of
which are Sino-foreign joint ventures engaging in the value-added telecommunication business. We believe that
it would be impracticable for us to acquire any equity interest in our consolidated affiliated entities without
diverting management attention and resources. Moreover, we believe that our contractual arrangements with
these entities and the individual nominee shareholders provide us with sufficient and effective control over these
entities. Accordingly, we currently do not plan to acquire any equity interest in any of these entities.

An Notice on Intensifying the Administration of Foreign Investment in Value-added Telecommunications
Services, issued by the MIIT in July 2006, prohibits domestic telecommunication services providers from
leasing, transferring or selling telecommunications business operating licenses to any foreign investor in any
form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of a
telecommunications business
the holder of a value-added
telecommunication business operating license or its shareholders must directly own the domain names and

to this notice, either

in China. Pursuant

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trademarks used by such license holders in their provision of value-added telecommunication services. The
notice further requires each license holder to have the necessary facilities, including servers, for its approved
business operations and to maintain the facilities in the regions covered by its license. If a license holder fails to
comply with the requirements in the notice and cure such non-compliance, the MIIT or its local counterparts
have the discretion to take measures against such license holders, including revoking their valued-added
telecommunication business operating licenses.

To comply with these PRC regulations, we operate our websites mainly through Baidu Netcom and Beijing
Perusal, operate an online payment platform through BaiduPay, and provide online employment agency services
through Baidu HR. Baidu Netcom, Beijing Perusal, BaiduPay and Baidu HR are our PRC consolidated affiliated
entities, and are considered domestic PRC entities under PRC law given that the nominee shareholders are PRC
citizens or PRC entities. Each of Baidu Netcom, Beijing Perusal, Baidu HR, BaiduPay and some of our other
PRC consolidated affiliated entities holds a value-added telecommunications business operating license. It
remains unclear whether the provision of online payment services by BaiduPay will require BaiduPay to apply
for a value-added telecommunications business operating license for “online data processing and transaction
processing businesses” as provided in the Catalog of Telecommunications Businesses promulgated by the MIIT,
although in practice many companies conducting such business do not apply for such license.

To comply with the Notice of the MIIT on Intensifying the Administration of Foreign Investment in Value-
added Telecommunications Services, we have transferred certain domain names primarily used in our business to
Baidu Netcom, Beijing Perusal and Baidu HR, and have transferred certain trademarks to BaiduPay. We are also
in the process of transferring certain trademarks, including pending trademark applications made by Baidu
Online, to Baidu Netcom, Beijing Perusal and Baidu HR. See “Item 3.D. Key Information—Risk Factors—Risks
Related to Doing Business in China—We may be adversely affected by the complexity, uncertainties and
changes in PRC regulation of internet business and companies.”

Regulations on News Display

Displaying news on a website and disseminating news through the internet are highly regulated in the PRC.
The Provisional Measures for Administrating Internet Websites Carrying on the News Displaying Business,
jointly promulgated by the State Council News Office and the MIIT in November 2000, require an ICP operator
(other than a government authorized news unit) to obtain State Council News Office approval to post news on its
the disseminated news must come from
website or disseminate news through the internet. Furthermore,
government-approved sources pursuant to contracts between the ICP operator and the sources, copies of which
must be filed with the relevant government authorities.

In September 2005, the State Council News Office and the MIIT jointly issued the Provisions on the
Administration of Internet News Information Services, requiring internet news information service organizations
to provide services as approved by the State Council News Office, subject to annual inspection under the
provisions. Pursuant to the provisions, no internet news information service organizations may take the form of a
foreign-invested enterprise, whether a joint venture or a wholly foreign-owned enterprise, and no cooperation
between internet news information service organizations and foreign-invested enterprises is allowed prior to the
security evaluation by the State Council News Office.

In December 2006, Baidu Netcom obtained the internet news license, which permits it to publish internet
news pursuant to the relevant PRC laws and regulations. The internet news license is subject to annual inspection
by relevant government authorities.

Regulations on Internet Drug Information Services

According to the Measures for the Administration of Internet Drug Information Services, issued by the State
Food and Drug Administration in July 2004, on ICP operator publishing drug-related information must obtain a
qualification certificate from the State Food and Drug Administration or its provincial level counterpart.

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In November 2007, Baidu Netcom obtained the qualification certificate for internet drug information
services, which permits it to publish drug-related information on its website. The certificate was renewed in
September 2012.

Regulations on Internet Culture Activities

The amended Internet Culture Administration Measures, promulgated by the Ministry of Culture and
becoming effective in April 2011, require ICP operators engaging in “internet culture activities” to obtain a
permit from the Ministry of Culture. The “internet culture activities” include, among other things, online
dissemination of internet cultural products (such as audio-video products, games, performances of plays or
programs, works of art and cartoons) and the production, reproduction, importation, distribution and broadcasting
of internet cultural products. Imported internet cultural products are subject to content review by the Ministry of
Culture before they are disseminated online, while domestic internet cultural products must be filed with the
local branch of the Ministry of Culture within 30 days following the online dissemination. Baidu Netcom was
granted an internet culture business permit in April 2007, which was renewed in October 2010. Beijing Perusal
was granted an internet culture business permit in February 2011.

The Several Suggestions on the Development and Administration of the Internet Music, issued by the
Ministry of Culture and becoming effective in November 2006, reiterate the requirement for the internet service
provider to obtain the internet culture business permit to carry on any business of internet music products. In
addition, foreign investors are prohibited from engaging in the internet culture business operation.

Furthermore, the Notice on Strengthening and Improving the Content Review of Online Music, issued by
Ministry of Culture in August 2009, provides that only “internet culture operating entities” approved by the
Ministry of Culture may engage in the production, release, dissemination (including providing direct links to
music products) and importation of online music products. Internet culture operating entities should establish
strict self-monitoring system of online music content and set up special department in charge of such monitoring.

Regulations on Internet Publishing

The Interim Provisions for the Administration of Internet Publishing, jointly issued by the GAPP and the
MIIT and becoming effective in August 2002, require entities that engage in internet publishing to obtain
approval from the GAPP. Pursuant to the provisions, “internet publishing” refers to the act of online spreading of
articles, whereby the internet information service providers select, edit and process works created by themselves
or others and subsequently post such works on the internet or transmit such works to the users’ end through
internet for the public to browse, read, use or download. Baidu Netcom is in the process of applying for the
internet publication business license.

Regulation on Broadcasting Audio/Video Programs through the Internet

In July 2004, the State Administration of Radio Film and Television promulgated the Rules for the
Administration of Broadcasting of Audio/Video Programs through the Internet and Other Information Networks,
the Audio/Video Broadcasting Rules. The Audio/Video Broadcasting Rules apply to the opening,
or
broadcasting,
transmission or download of audio/video programs through internet and other
information networks. Anyone who wishes to engage in internet broadcasting activities must first obtain an
audio/video program transmission license, with a term of two years, issued by the State Administration of Radio
Film and Television and operate in accordance with the scope as stipulated in such license. Foreign-invested
enterprises are not allowed to engage in the above-mentioned business activities.

integration,

The Rules for the Administration of Internet Audio and Video Program Services, commonly known as
Document 56, jointly promulgated by the State Administration of Radio Film and Television and the MIIT in
December 2007, reiterate the requirement set forth in the Audio/Video Broadcasting Rules that online

56

audio/video service provider must obtain a license from the State Administration of Radio Film and Television.
Furthermore, Document 56 requires all online audio/video service providers to be either wholly state-owned or
state-controlled. According to some official answers to press inquiries published on the State Administration of
Radio Film and Television’s website in February 2008, officials from the State Administration of Radio Film and
Television and the MIIT clarified that online audio/video service providers that already had been operating
lawfully prior to the issuance of Document 56 may re-register and continue to operate without becoming state-
owned or controlled, provided that the providers have not engaged in any unlawful activities. This exemption
will not be granted to online audio/video service providers established after Document 56 was issued. Baidu
Netcom has renewed its online audio/video program transmission license, which is valid from July 2012 to
July 2015, and iQiyi has an online audio/video program transmission license valid from October 2012 to October
2015.

Regulations on Payment Services by Non-financial Institutions

Pursuant

to the People’s Bank of China’s Measures Concerning Payment Services by Non-financial
Institutions, which took effect in September 2010, and its implementation rules, non-financial institutions that
have been providing monetary transfer services as an intermediary between payees and payers, including online
payment, issuance and acceptance of prepaid card or bank card, and other payment services as specified by the
People’s Bank of China, must obtain a license from the People’s Bank of China prior to September 1, 2011, in
order to continue providing monetary transfer services. We have applied for the license to provide monetary
transfer services, and the application is currently being processed by the People’s bank of China. We received the
acceptance notice from the local branch of the People’s Bank of China, which practically extends the
September 1, 2011 deadline to the point in time that the People’s Bank of China makes a final decision whether
to grant the license. We have not received such license as of the date of this annual report. There is no assurance
that we will be able to obtain such license. We will have to cease conducting our online payment business if we
fail to obtain such license.

Regulations on Internet Map Services

According to the Administrative Rules of Surveying Qualification Certificate and the amended Standard for
Internet Map Services issued by the National Administration of Surveying, Mapping and Geoinformation
(formerly known as the State Bureau of Surveying and Mapping) in March 2009 and May 2010, respectively, the
provision of internet map services by any non-surveying and mapping enterprise is subject to the approval of the
National Administration of Surveying, Mapping and Geoinformation and requires a surveying and mapping
qualification certificate. Internet maps refer to maps called or transmitted through internet. Pursuant to the Notice
on Further Strengthening the Administration of Internet Map Services Qualification issued by the National
Administration of Surveying, Mapping and Geoinformation in December 2011, any entity without applying for a
surveying and mapping qualification certificate for internet map services is prohibited from providing any
internet map services. Baidu Netcom currently provides online traffic information inquiry services as well as
internet map services and has obtained a Surveying and Mapping Qualification Certificate for internet map
services.

Regulations on Online Games

Pursuant to the Interim Provisions for the Administration of Internet Publishing, the online games services
provided on our websites by our online game operator partners may be deemed as a type of “internet publication”
provided by us, and we may be required to obtain an internet publication license from the GAPP. Baidu Netcom
is in the process of applying for the internet publication business license. The required approval by the GAPP of
each online game provided on our websites is handled by our online game operator partners.

In June 2010, the Ministry of Culture promulgated the Interim Administration Measures of Online Games.
In accordance with these measures, an ICP service provider operating online games, must obtain an Online
Culture Business Permit. Baidu Netcom has obtained an Online Culture Business Permit for operating online

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games. These measures also specify that the Ministry of Culture is responsible for the censorship of imported
online games and the filing of records of domestic online games. The procedures for the filing of records of
domestic online games must be conducted with the Ministry of Culture within 30 days after the commencement
date of the online operation of such online games or the occurrence date of any material alteration of such online
games. The approval by or filing with the Ministry of Culture of each online game provided on our website has
been handled primarily by our online game operator partners.

In September 2009, the GAPP together with several other government agencies issued a Circular 13, which
explicitly prohibits foreign investors from participating in online game operating businesses through
wholly-owned enterprises, equity joint ventures or cooperative joint ventures in China, and from controlling and
participating in such businesses directly or indirectly through contractual or technical support arrangements. We
offer online games provided by our game operator partners on our websites. If we are found to be in violation of
any existing or future PRC laws or regulations, including the MIIT notice and the Circular 13, the relevant
regulatory authorities would have broad discretion in dealing with such violations.

Regulations on Online Game Virtual Currency

The Interim Administration Measures of Online Games require companies that (i) issue online game virtual
currency (including prepaid cards and/or pre-payment or prepaid card points), or (ii) offer online game virtual
currency transaction services to apply for the Online Culture Business Permit from provincial branches of the
Ministry of Culture. The regulations prohibit companies that issue online game virtual currency from providing
services that would enable the trading of such virtual currency. Any company that fails to submit the requisite
application will be subject to sanctions, including but not limited to termination of operation, confiscation of
incomes and fines. The regulations also prohibit online game operators from allocating virtual items or virtual
currency to players based on random selection through lucky draw, wager or lottery that involves cash or virtual
currency directly paid by the players. In addition, companies that issue online game virtual currency must comply
with certain specific requirements, for example, online games virtual currency can only be used for products and
services related to the issuance company’s own online games. Baidu Netcom has obtained the Online Culture
Business Permit for issuing online game virtual currency.

Regulations on Advertisements

The PRC government regulates advertising, including online advertising, principally through the State
Administration for Industry and Commerce, although there are no national PRC laws or regulations regulating
online advertising business specifically. Under the Rules for Administration of Foreign-Invested Advertising
Enterprise, promulgated by the State Administration for Industry and Commerce and the Ministry of Commerce
in March 2004 and amended in October 2008, foreign investors are permitted to own equity interests in
PRC advertising companies. However, foreign investors in wholly foreign-owned and joint venture advertising
companies are required to have at least three years and two years, respectively, of direct operations in the
advertising industry outside of China. Our subsidiaries Baidu Times and Baidu China have recently obtained
approvals to expand their respective business scope to include advertising business. We currently conduct our
online advertising business through our consolidated affiliated entities in China, Baidu Netcom and Beijing
Perusal.

The Administrative Regulations for Advertising Operation Licenses, taking effect in January 2005, exempt
enterprises (other than radio stations, television stations, newspapers and magazines, non-corporate entities and
other specified entities) from the previous requirement to obtain an advertising operation license in addition to a
business license. We conduct our online advertising business through Baidu Netcom and Beijing Perusal, each of
which holds a business license that covers online advertising in its business scope. Our subsidiaries Baidu Times
and Baidu China have also expanded their respective business license to cover advertising in their respective
business scope.

Advertisers, advertising operators and advertising distributors are required by PRC advertising laws and
regulations to ensure that the contents of the advertisements they prepare or distribute are true and in full

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compliance with applicable laws and regulations. In addition, where a special government review is required for
certain categories of advertisements before publishing, the advertisers, advertising operators and advertising
distributors are obligated to confirm that such review has been performed and the relevant approval has been
obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising
income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the
misleading information. In the case of serious violations, the State Administration for Industry and Commerce or
its local branches may force the violator to terminate its advertising operation or even revoke its business license.
Furthermore, advertisers, advertising operators or advertising distributors may be subject to civil liability if they
infringe on the legal rights and interests of third parties.

Regulations on Employment Agency Services

Pursuant to the Employment Promotion Law and the Regulations on Employment Service and Employment
Management, which became effective in January 2008, an employment agency that provides intermediary and
other services for recruitment by employers and job applications by employees must obtain a license from the
relevant labor authority. A wholly foreign-owned enterprise (other than owned by Hong Kong and Macao service
providers) is prohibited from conducting employment agency business. Baidu HR obtained the required license
in September 2011 to conduct its employment agency business, which was renewed in April 2012.

Tort Liability Law

In accordance with the PRC Tort Liability Law, which became effective in July 2010, internet users and
internet service providers bear tortious liabilities in the event that they infringe upon other persons’ rights and
interests through the internet. Where an internet user conducts tortious acts through internet services, the
infringed person has the right to request the internet service provider take necessary actions such as deleting
contents, screening and de-linking. Failing to take necessary actions after being informed, the internet service
provider will be subject to joint and several liabilities with the internet user with regard to the additional damages
incurred. Where an internet service provider knows that an internet user is infringing upon other persons’ rights
and interests through its internet service but fails to take necessary actions, it is jointly and severally liable with
the internet user.

Regulations on Intellectual Property Rights

China has adopted legislation governing intellectual property rights,

including patents, copyrights,

trademarks, and domain names.

Patent. The PRC Patent Law provides for patentable inventions, utility models and designs, which must
meet three conditions: novelty, inventiveness and practical applicability. The State Intellectual Property Office
under the State Council is responsible for examining and approving patent applications. A patent is valid for a
term of twenty years in the case of an invention and a term of ten years in the case of utility models and designs.

Copyright. The PRC Copyright Law and its implementation rules extend copyright protection to products
disseminated over the internet and computer software. There is a voluntary registration system administered by
the China Copyright Protection Center. Creators of protected works enjoy personal and property rights,
including, among others, the right of disseminating the works through information network.

Pursuant to the relevant PRC regulations, rules and interpretations, ICP operators will be jointly liable with
the infringer if they (i) participate in, assist in or abet infringing activities committed by any other person through
the internet, (ii) are or should be aware of the infringing activities committed by their website users through the
internet, or (iii) fail to remove infringing content or take other action to eliminate infringing consequences after
receiving a warning with evidence of such infringing activities from the copyright holder. The court will
determine whether an internet service provider should have known of their internet users’ infringing activities
based on how obvious the infringing activities are by taking into consideration a number of factors, including

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(i) the information management capabilities that the provider should have based on the possibility that the
services provided by it may trigger infringing acts, (ii) the degree of obviousness of the infringing content,
(iii) whether it has taken the initiative to select, edit, modify or recommend the contents involved, (iv) whether it
has taken positive and reasonable measures against infringing acts, and (v) whether it has set up convenient
programs to receive notices of infringement and made timely and reasonable responses to the notices. Where an
internet service provider has directly obtained economic benefits from any contents made available by an internet
user, it shall have a higher duty of care with respect to the internet user’s act of infringement of others’
copyrights. Advertisements placed for or other benefits particularly connected with specific contents may be
deemed as direct economic benefits from such contents, but general advertising fees or service fees charged by
an internet service provider for its internet services will not be included. In addition, where an ICP operator is
clearly aware of the infringement of certain content against another’s copyright through the internet, or fails to
take measures to remove relevant contents upon receipt of the copyright holder’s notice, and as a result, it
damages the public interest, the ICP operator could be ordered to stop the tortious act and be subject to other
administrative penalties such as confiscation of illegal income and fines. An ICP operator is also required to
retain all infringement notices for a minimum of six months and to record the content, display time and
IP addresses or the domain names related to the infringement for a minimum of 60 days.

An internet service provider may be exempted from liabilities for providing links to infringing or illegal
content or providing other internet services which are used by its users to infringe others’ copyright, if it does not
know and does not have constructive knowledge that such content is infringing upon other parties’ rights or is
illegal. However, if the legitimate owner of the content notifies the internet service provider and requests removal
of the links to the infringing content, the internet service provider would be deemed to have constructive
knowledge upon receipt of such notification, but would be exempted from liabilities if it removes or disconnects
the links to the infringing content at the request of the legitimate owner. At the request of the alleged infringer,
the internet service provider should immediately restore links to content previously disconnected upon receipt of
initial non-infringing evidence.

We have adopted measures to mitigate copyright infringement risks. For example, our policy is to remove
links to web pages and materials uploaded by the users if we know these web pages or materials contain
materials that infringe upon third-party rights or if we are notified by the legitimate copyright holder of the
infringement with proper evidence.

Software Products. The amended Administrative Measures on Software Products, promulgated by the MIIT
and becoming effective in April 2009, provide a registration and filing system with respect to software products
made in or imported into China. Software products may be registered with the relevant local authorities in charge
of software industry administration. Registered software products may enjoy preferential treatment status granted
by applicable software industry regulations. Software products can be registered for five years, and the
registration is renewable upon expiration.

In addition,

the Computer Software Protection Regulations and the Computer Software Copyright
Registration Procedures apply to software copyright registration, license agreement registration and transfer
agreement registration. Although such registration is not mandatory under PRC law, software copyright owners
are encouraged to go through the registration process and registered software may receive better protection.

Trademark. The PRC Trademark Law and its implementation rules protect registered trademarks. The
Trademark Office under the State Administration for Industry and Commerce handles trademark registrations
and grants a term of ten years to registered trademarks. Trademark license agreements must be filed with the
” is recognized as a well-known trademark in China by the Trademark Office
Trademark Office for record. “
” and the
under the State Administration for Industry and Commerce. In addition to owning the trademark “
related logo, we have applied for registration of additional trademarks and logos, including “
Hi”
and “

”, “

”.

60

Domain name. Domain names are protected under the Administrative Measures on the Internet Domain
Names promulgated by the MIIT in November 2004. The MIIT is the major regulatory body responsible for the
administration of the PRC internet domain names, under supervision of which the China Internet Network
Information Center, or CNNIC, is responsible for the daily administration of .cn domain names and Chinese
domain names. We have registered Baidu.cn, Baidu.com.cn, hao123.com and certain other domain names with
CNNIC.

Regulations on Information Security

The National People’s Congress has enacted legislation that prohibits use of the internet that breaches the
public security, disseminates socially destabilizing content or leaks state secrets. Breach of public security
includes breach of national security and infringement on legal rights and interests of the state, society or citizens.
Socially destabilizing content includes any content that incites defiance or violations of PRC laws or regulations
or subversion of the PRC government or its political system, spreads socially disruptive rumors or involves cult
activities, superstition, obscenities, pornography, gambling or violence. State secrets are defined broadly to
include information concerning PRC national defense, state affairs and other matters as determined by the PRC
authorities.

Pursuant to applicable regulations, ICP operators must complete mandatory security filing procedures and
regularly update information security and censorship systems for their websites with local public security
authorities, and must also report any public dissemination of prohibited content.

In addition, the State Secrecy Bureau has issued provisions authorizing the blocking of access to any
website it deems to be leaking state secrets or failing to comply with the relevant legislation regarding the
protection of state secrets during online information distribution. Specifically, internet companies in China with
bulletin boards, chat rooms or similar services must apply for specific approval prior to operating such services.

Furthermore, the Provisions on Technological Measures for Internet Security Protection, promulgated by the
Ministry of Public Security, require all ICP operators to keep records of certain information about its users
(including user registration information, log-in and log-out time, IP address, content and time of posts by users)
for at least 60 days and submit the above information as required by laws and regulations. The Network
Information Protection Decision states that ICP operators must request identity information from users when
ICP operators provide information publication services to the users. If ICP operators come across prohibited
information, they must immediately cease the transmission of such information, delete the information, keep
relevant records, and report to relevant government authorities.

As Baidu Netcom, Beijing Perusal, Baidu HR and BaiduPay are ICP operators, they are subject to the
regulations relating to information security. They have taken measures to comply with these regulations. They
are registered with the relevant government authority in accordance with the mandatory registration requirement.
Baidu Netcom’s policy is to remove links to web pages which to its knowledge contain information that would
be in violation of PRC laws or regulations. In addition, we monitor our websites to ensure our compliance with
the above-mentioned laws and regulations.

Regulations on Internet Privacy

The PRC Constitution states that PRC law protects the freedom and privacy of communications of citizens
and prohibits infringement of these rights. In recent years, PRC government authorities have enacted legislation
on internet use to protect personal information from any unauthorized disclosure. The Network Information
Protection Decision provides that electronic information that identifies a citizen or involves privacy of any
citizen is protected by law and must not be unlawfully collected or provided to others. ICP operators collecting or
using personal electronic information of citizens must specify the purposes, manners and scopes of information
information
collection and uses, obtain consent of the relevant citizens, and keep the collected personal

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confidential. ICP operators are prohibited from disclosing, tampering with, damaging, selling or illegally
providing others with, collected personal information. ICP operators are required to take technical and other
measures to prevent the collected personal information from any unauthorized disclosure, damage or loss. The
Administrative Measures on Internet Information Services prohibit an ICP operator from insulting or slandering a
third party or infringing upon the lawful rights and interests of a third party. Pursuant to the Internet Electronic
Messaging Service Administrative Measures, ICP operators that provide electronic messaging services must keep
users’ personal information confidential and must not disclose the personal information to any third party without
the users’ consent or unless required by law.

The relevant

telecommunications authorities are further authorized to order ICP operators to rectify
unauthorized disclosure. ICP operators are subject to legal liability, including warnings, fines, confiscation of
illegal gains, revocation of licenses or filings, closing of the relevant websites, administrative punishment,
criminal
if they violate relevant provisions on internet privacy. The PRC
government, however, has the power and authority to order ICP operators to turn over personal information if an
internet user posts any prohibited content or engages in illegal activities on the internet.

liabilities, or civil

liabilities,

Regulations on Foreign Exchange

Foreign Currency Exchange

Pursuant to the Foreign Currency Administration Rules, as amended, and various regulations issued by
SAFE and other relevant PRC government authorities, RMB is freely convertible to the extent of current account
items, such as trade related receipts and payments, interest and dividends. Capital account items, such as direct
equity investments, loans and repatriation of investment, unless expressly exempted by laws and regulations, still
require prior approval from SAFE or its provincial branch for conversion of RMB into a foreign currency, such
as U.S. dollars, and remittance of the foreign currency outside of the PRC.

Payments for transactions that take place within the PRC must be made in RMB. Foreign currency revenues
received by PRC companies may be repatriated into China or retained outside of China in accordance with
requirements and terms specified by SAFE.

Dividend Distribution

Wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends
only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and
regulations. Additionally, these foreign-invested enterprises may not pay dividends unless they set aside at least
10% of their respective accumulated profits after tax each year, if any, to fund certain reserve funds, until such
time as the accumulative amount of such fund reaches 50% of the enterprise’s registered capital. In addition,
these companies also may allocate a portion of their after-tax profits based on PRC accounting standards to
employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends.

Foreign Exchange Registration of Offshore Investment by PRC Residents

Pursuant to SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC
Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles, or SAFE
Circular No. 75, issued in October 2005, and a series of implementation rules and guidance, including the most
recent circular relating to operating procedures that came into effect in July 2011, PRC residents, including PRC
resident natural persons or PRC companies, must register with local branches of SAFE in connection with their
direct or indirect offshore investment in an overseas special purpose vehicle, or SPV, for the purposes of
overseas equity financing activities. Such PRC residents are also required to amend their registration or filing
with the local branches of SAFE for the injection of equity interests or assets of an onshore enterprise into the
offshore company, or the overseas funds raised by such offshore company or any other material change involving
a change in the capital of the offshore company. PRC residents who are shareholders of SPVs that were
established and which have completed their inbound investment before November 1, 2005 were required to

62

register with the local SAFE branch before March 31, 2006. Under SAFE Circular No. 75, failure to comply with
the registration procedures set forth above may result in penalties, including restrictions on a PRC subsidiary’s
foreign exchange activities and its ability to distribute dividends to the SPV.

Pursuant to the Measures for the Administration of Individual Foreign Exchange and implementation rules
promulgated by SAFE, PRC residents who are granted stock options by an overseas publicly listed company are
required, through a PRC agent or PRC subsidiary of such overseas publicly listed company, to register with
SAFE and complete certain other procedures. Failure of the option holders to complete their SAFE registrations
may subject these PRC employees to fines and legal sanctions and may also limit the ability of the overseas
publicly listed company to contribute additional capital into its PRC subsidiary and limit the PRC subsidiary’s
ability to distribute dividends.

Regulations on Labor

The Labor Contract Law, which became effective in January 2008, and its implementation rules, impose
more restrictions on employers and have been deemed to increase labor costs for employers, compared to the
Labor Law, which became effective in January 1995. For example, pursuant to the Labor Contract Law, an
employer is obliged to sign labor contract with unlimited term with an employee if the employer continues to hire
the employee after the expiration of two consecutive fixed-term labor contracts. The employer has to compensate
the employee upon the expiration of a fixed-term labor contract, unless the employee refuses to renew such
contract on terms the same as or more favorable to the employee than those contained in the expired contract.
The employer also has to indemnify an employee if the employer terminates a labor contract without a cause
permitted by law. In addition, under the Regulations on Paid Annual Leave for Employees, which became
effective in January 2008, employees who have served more than one year for an employer are entitled to a paid
vacation ranging from 5 to 15 days per year, depending on their length of service. Employees who waive such
vacation time at the request of employers must be compensated for three times their regular salaries for each
waived vacation day.

Regulations on Taxation

For a discussion of applicable PRC tax regulations, see “Item 5.A. Operating and Financial Review and

Prospects—Operating Results—Taxation.”

Regulations in Japan

Although current Japanese law and regulations contain no provisions expressly directed toward legal control
of internet search services such as those operated by our Japanese subsidiaries in Japan, certain existing Japanese
law and regulations may nonetheless affect such services. The application to our Japanese subsidiaries of existing
Japanese law and regulations relating to issues such as intellectual property ownership and infringement,
obscenity and other content regulation, user privacy and data protection, defamation, consumer protection and
quality of services in many instances is unclear or unsettled. In all such cases, there is a possibility that providing,
editing and processing by an internet search service of links to web pages which contain materials in violation of
applicable Japanese law could result in civil or criminal legal liability on the part of such internet search service.
In addition to the foregoing, there is political and social support within Japan for the adoption of legislation
expressly directed to the legal control of harmful information on the internet. With this support, a law which aims
to protect juveniles from harmful information on the internet was introduced in June 2008. The law requires
internet service providers, mobile phone internet service providers and other internet related businesses to make
efforts to take certain measures to protect juveniles from harmful information on the internet such as introducing
filtering software. We conduct our Japan operations in accordance with this law where applicable.

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C. Organizational Structure

The following is a list of our principal subsidiaries and consolidated affiliated entities as of the date of this

annual report on Form 20-F:

Name

Place of Formation

Relationship

. . China

Baidu Online Network Technology (Beijing) Co., Ltd.
Wholly owned subsidiary
Baidu Holdings Limited . . . . . . . . . . . . . . . . . . . . . . . . . . British Virgin Islands Wholly owned subsidiary
Beijing Baidu Netcom Science Technology Co., Ltd. . . . . China
Baidu (China) Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . China
Baidu.com Times Technology (Beijing) Co., Ltd.
. . . . . . China
Beijing Perusal Technology Co., Ltd. . . . . . . . . . . . . . . . . China
Baidu Japan Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan
Baidu (Hong Kong) Limited . . . . . . . . . . . . . . . . . . . . . . . Hong Kong
Beijing BaiduPay Science and Technology Co., Ltd. . . . . China
Baidu HR Consulting (Shanghai) Co., Ltd. . . . . . . . . . . . . China
Qunar Cayman Islands Limited . . . . . . . . . . . . . . . . . . . . . Cayman Islands
Qiyi.com, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cayman Islands
B.D. Mobile Telecommunications Limited . . . . . . . . . . . . Cayman Islands
Baidu Cloud Computing Technology (Shanxi) Co.,

Consolidated affiliated entity
Wholly owned subsidiary
Wholly owned subsidiary
Consolidated affiliated entity
Wholly owned subsidiary
Wholly owned subsidiary
Consolidated affiliated entity
Consolidated affiliated entity
Majority-owned subsidiary
Majority-owned subsidiary
Majority-owned subsidiary

Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China

Wholly owned subsidiary

Baidu Cloud Computing Technology (Beijing) Co.,

Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China

Wholly owned subsidiary

Contractual Arrangements with Our Consolidated Affiliated Entities and the Nominee Shareholders

PRC laws and regulations restrict and impose conditions on foreign investment

in internet, online
advertising, online audio and video services and employment agency businesses. Accordingly, we operate these
businesses in China through our consolidated affiliated entities. We have entered into a series of contractual
arrangements with our consolidated affiliated entities and the nominee shareholders of our consolidated affiliated
entities. These contractual arrangements enable us to:

•

•

•

receive substantially all of the economic benefits from our consolidated affiliated entities in
consideration for the services provided by our subsidiaries;

exercise effective control over our consolidated affiliated entities; and

hold an exclusive option to purchase all or part of the equity interests in our consolidated affiliated
entities when and to the extent permitted by PRC law.

We do not have any equity interest in our consolidated affiliated entities. However, as a result of contractual
arrangements, we have effective control over and are considered the primary beneficiary of these companies, and
we have consolidated the financial results of these companies in our consolidated financial statements. If our
consolidated affiliated entities or the nominee shareholders fail to perform their respective obligations under the
contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us
effective control over our consolidated affiliated entities. Further, if we are unable to maintain effective control,
we would not be able to continue to consolidate the financial results of our consolidated affiliated entities in our
financial statements. In 2010, 2011 and 2012, we derived approximately 23%, 29% and 29% of our total
revenues, respectively, from our consolidated affiliated entities through contractual arrangements. For a detailed
description of the regulatory environment that necessitates the adoption of our corporate structure, see “Item 4.B.
Information on the Company—Business Overview—Regulation.” For a detailed description of the risks
associated with our corporate structure, see “Item 3.D. Key Information—Risk Factors—Risks Related to Our
Corporate Structure.”

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The following is a summary of the material provisions of the agreements among (i) our wholly-owned PRC
subsidiary, Baidu Online, (ii) each of Baidu Netcom, Beijing Perusal, BaiduPay and Baidu HR, our principal
consolidated affiliated entities, and (iii) the nominee shareholders of these consolidated affiliated entities.

Exclusive Technology Consulting and Services Agreement

Pursuant to the exclusive technology consulting and services agreement between Baidu Online and Baidu
Netcom, Baidu Online has the exclusive right to provide to Baidu Netcom technology consulting and services
related to, among other things, the maintenance of servers, software development, design of advertisements, and
e-commerce technical services. Baidu Online owns the intellectual property rights resulting from the
performance of this agreement. Baidu Netcom agrees to pay a monthly service fee to Baidu Online based on the
formula as provided in the agreement in exchange for the technology consulting and services provided by Baidu
Online. Under the agreement, the monthly service fee is equal to the product of the standard monthly fee for page
view per thousand times multiplied by the actual times of page view for the month divided by 1,000. Baidu
Online has the right to adjust the service fees at its sole discretion without the consent of Baidu Netcom. The
agreement shall be in effect for an unlimited term, until the term of business of one party expires and is denied
extension by the relevant approval authorities.

The exclusive technology consulting and services agreement between Baidu Online and each of Beijing Perusal,
BaiduPay and Baidu HR contains the same terms as those between Baidu Online and Baidu Netcom described above.
In the agreement with Baidu HR, Baidu HR must pay its entire net income as service fee and only with Baidu
Online’s consent, such service fee can be adjusted. Each of the agreements shall be in effect for an unlimited term,
until the term of business of one party expires and is denied extension by the relevant approval authorities.

The amount of service fees Baidu Netcom paid to Baidu Online was 90%, 89% and 88% of its net income
before income taxes and the service fees were charged for 2010, 2011 and 2012, respectively. The amount of
service fees Beijing Perusal paid to Baidu Online was 87%, over 100% and over 100% of its net income before
income taxes and the service fees were charged for 2010, 2011 and 2012, respectively. After paying service fees
to Baidu Online, net income of Baidu Netcom and Beijing Perusal is insignificant because substantially all of
their operating profits have been paid as service fees to Baidu Online. BaiduPay and Baidu HR have not paid any
service fees to Baidu Online due to their break-even or loss position since their respective inception.

Operating Agreement

Pursuant

to the operating agreement by and among Baidu Online, Baidu Netcom and the nominee
shareholders of Baidu Netcom, Baidu Online provides guidance and instructions on Baidu Netcom’s daily
operations and financial affairs. Baidu Online has the right to appoint senior executives of Baidu Netcom. The
nominee shareholders of Baidu Netcom must appoint candidates recommended by Baidu Online as their
representatives on Baidu Netcom’s board of directors. In addition, Baidu Online agrees to guarantee Baidu
Netcom’s performance under any agreements or arrangements relating to Baidu Netcom’s business arrangements
with any third party, while Baidu Netcom, in return, agrees to pledge its accounts receivable and all of its assets
to Baidu Online. Moreover, Baidu Netcom agrees that without the prior consent of Baidu Online, Baidu Netcom
will not engage in any transactions that could materially affect the assets, liabilities, rights or operations of Baidu
Netcom, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any
assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a
third party or transfer of any agreements relating to its business operation to any third party. The agreement shall
be in effect for an unlimited term, until the term of business of one party expires and is denied extension by the
relevant approval authorities.

The operating agreement by and among Baidu Online, each of Beijing Perusal, BaiduPay and Baidu HR and
the respective nominee shareholders contains the same terms as those described above. Each of the agreements
shall be in effect for an unlimited term, until the term of business of one party expires and is denied extension by
the relevant approval authorities.

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License Agreements

Baidu Online and Baidu Netcom entered into a software license agreement, a trademark license agreement,
and a web layout copyright license agreement. Pursuant to these license agreements, Baidu Online has granted to
Baidu Netcom the right to use, including but not limited to, a software license, a webpage copyright license and a
trademark license. Baidu Netcom may only use the licenses in its own business operations. Baidu Online has the
right to adjust the service fees at its sole discretion. The term of the software license agreement, after being
renewed in March 2010, will expire on March 10, 2015. The software license agreement may be extended by
both parties in writing upon the expiration of this agreement. The term of the web layout copyright license
agreement, after being renewed in March 2009, will expire on February 28, 2014. After Baidu Online transferred
its trademarks (including pending trademark applications) to Baidu Netcom, the trademark license agreement
was terminated in February 2013.

Baidu Online entered into a trademark license agreement and a web layout copyright license agreement with
Beijing Perusal. Each of the license agreements between Baidu Online and Beijing Perusal contains the same
terms as those between Baidu Online and Baidu Netcom described above. The initial term of each agreement is
five years from the date of execution, i.e., June 23, 2006, and shall be extended for one year automatically at the
expiration of the initial term or each extension thereof unless Baidu Online provides prior written notice not to
extend the agreements. After Baidu Online transferred its pending trademark applications to Beijing Perusal, the
trademark license agreement was terminated in February 2013.

Baidu Online entered into a trademark license agreement and a web layout copyright license agreement with
BaiduPay. Each of the license agreements between Baidu Online and BaiduPay contains the same terms as those
between Baidu Online and Baidu Netcom described above. The initial term of each agreement is five years from
the date of execution, i.e., February 28, 2008, and shall be extended for one year automatically at the expiration
of the initial term or each extension thereof unless Baidu Online provides prior written notice not to extend the
agreements. After the transfers of certain trademarks (including pending trademark applications) from Baidu
Online to BaiduPay, the trademark license agreement was terminated in February 2013. The web layout
copyright license agreement will be in effect for an unlimited term.

Baidu Online had entered into a domain name license agreement with each of Baidu Netcom, Beijing
Perusal and BaiduPay previously. After the transfers of the relevant domain names from Baidu Online to the
relevant entity, the relevant domain name license agreement was terminated. As of December 31, 2012, no
domain license agreement was outstanding between Baidu Online and each of Baidu Netcom, Beijing Perusal
and BaiduPay.

Baidu Online and Baidu HR have not entered into any license agreements as of December 31, 2012.

Exclusive Equity Purchase and Transfer Option Agreement

Pursuant to the exclusive equity purchase and transfer option agreement by and among Baidu Online, Baidu
Netcom and the nominee shareholders of Baidu Netcom, the nominee shareholders of Baidu Netcom have
irrevocably granted Baidu Online an exclusive option to purchase, or require any of the nominee shareholders of
Baidu Netcom to transfer to another person designated by Baidu Online, to the extent permitted under PRC law,
all or part of the equity interests in Baidu Netcom for the cost of the initial contributions to the registered capital
or the minimum amount of consideration permitted by applicable PRC law. The nominee shareholders shall remit
to Baidu Online any amount that is paid by Baidu Online or its designated person in connection with the
purchased equity interest. Baidu Online has sole discretion to decide when to exercise the option, whether in part
or in full. Any and all dividends and other capital distributions from Baidu Netcom to the nominee shareholders
shall be paid to Baidu Online in full. Baidu Online shall provide unlimited financial support to Baidu Netcom, if
Baidu Netcom shall become in need of any form of reasonable financial support in the normal operation of
business. If Baidu Netcom were to incur any loss and as a result cannot repay any loans from Baidu Online,
Baidu Online shall unconditionally forgive any such loans to Baidu Netcom given that Baidu Netcom provides

66

sufficient proof for its loss and incapacity to repay. The agreement shall
terminate upon the nominee
shareholders of Baidu Netcom have transferred all their equity interests in Baidu Netcom to Baidu Online or its
designated person or upon expiration of the term of business of Baidu Online or Baidu Netcom.

The exclusive equity purchase and transfer option agreement by and among Baidu Online, each of Beijing
Perusal, BaiduPay and Baidu HR and the respective nominee shareholders contains the same terms as those
described above. Each of the agreements shall terminate upon the nominee shareholders of Beijing Perusal,
BaiduPay or Baidu HR have transferred all their equity interests in Beijing Perusal, BaiduPay or Baidu HR, as
the case may be, to Baidu Online or its designated person or upon expiration of the term of business of Baidu
Online or the relevant consolidated affiliated entity.

Loan Agreements

Pursuant to loan agreements between Baidu Online and the nominee shareholders of Baidu Netcom, Baidu
Online provided interest-free loans with an aggregate amount of RMB100.0 million to the nominee shareholders
of Baidu Netcom solely for the latter to fund the capitalization of Baidu Netcom. The loans can be repaid only
with the proceeds from sale of the nominee shareholders’ equity interest in Baidu Netcom to Baidu Online or its
designated person. The term of each loan agreement is ten years from the date of the agreement with the earliest
expiring on April 26, 2014 and can be extended with the written consent of both parties before expiration.

The loan agreements between Baidu Online and the nominee shareholders of Beijing Perusal, BaiduPay and
Baidu HR contain the same terms as those described above, except that the amount of loans extended to the
nominee shareholders is RMB10.0 million, RMB9.0 million and RMB50.0 million, respectively. The term of the
loan agreements will expire on January 15, 2022, April 22, 2022 and December 27, 2020, respectively, and can
be extended with the written consent of both parties before expiration.

Proxy Agreement/Power of Attorney

Pursuant to the proxy agreement between Baidu Online and the nominee shareholders of Baidu Netcom, the
nominee shareholders of Baidu Netcom agree to entrust all the rights to exercise their voting power to the
person(s) designated by Baidu Online. Each of the nominee shareholders of Baidu Netcom has executed an
irrevocable power of attorney to appoint the person(s) designated by Baidu Online as his/her attorney-in-fact to
vote on his/her behalf on all matters requiring shareholder approval. The proxy agreement shall be in effect for
an unlimited term unless terminated in writing by Baidu Online. The power of attorney shall be in effect for as
long as the nominee shareholders of Baidu Netcom hold any equity interests in Baidu Netcom.

Each of the proxy agreements and powers of attorney between Baidu Online and the nominee shareholders
of Beijing Perusal, BaiduPay and Baidu HR contains the same terms as those described above. Each of the proxy
agreements shall be in effect for an unlimited term unless terminated in writing by Baidu Online. Each of the
powers of attorney shall be in effect for as long as the relevant nominee shareholder of Beijing Perusal, BaiduPay
or Baidu HR holds any equity interests in Beijing Perusal, BaiduPay or Baidu HR, as the case may be.

Equity Pledge Agreement

Pursuant to the equity pledge agreement between Baidu Online and the nominee shareholders of Baidu
Netcom, the nominee shareholders of Baidu Netcom have pledged all of their equity interests in Baidu Netcom to
Baidu Online to guarantee their obligations under the loan agreement and Baidu Netcom’s performance of its
obligations under the exclusive technology consulting and service agreement. If Baidu Netcom or the nominee
shareholders breach their respective contractual obligations, Baidu Online, as the pledgee, will be entitled to
certain rights, including the right to sell the pledged equity interests. The nominee shareholders of Baidu Netcom
agree not to dispose of the pledged equity interests or take any actions that would prejudice Baidu Online’s
interest. The equity pledge agreement will expire two years after expiration of the term of or the fulfillment by
Baidu Netcom and the nominee shareholders of their respective obligations under the exclusive technology
consulting and service agreement and the loan agreement.

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Each of the equity pledge agreements between Baidu Online and the nominee shareholders of Beijing

Perusal, BaiduPay and Baidu HR contains the same terms as those described above.

The equity pledges described above have been perfected by registration with the relevant
administration for industry and commerce as required for a property right under the PRC Property Rights Law.

local

Through the design of the aforementioned agreements, the nominee shareholders of these affiliated entities
effectively assigned their full voting rights to Baidu Online, which gives Baidu Online the power to direct the
activities that most significantly impact the affiliated entities’ economic performance. Baidu Online obtains the
ability to approve decisions made by the affiliated entities and the ability to acquire the equity interests in the
affiliated entities when permitted by PRC law. Baidu Online is obligated to absorb a majority of the expected
losses from the affiliated entities’ activities through providing unlimited financial support to the affiliated entities
and is entitled to receive a majority of residual returns from the affiliated entities through the exclusive
technology consulting and service fees. As a result of these contractual arrangements, Baidu Online is
determined to be the primary beneficiary of these affiliated entities. Despite the lack of technical majority
ownership, there exists a parent-subsidiary relationship between us and these affiliated entities through these
contractual arrangements, and we consolidate these affiliated entities through Baidu Online.

D. Property, Plant and Equipment

In November 2009, we moved into Baidu Campus, our corporate headquarters located in Shangdi, an area
designated by the Beijing municipal government as the center of the city’s information technology industry.
Baidu Campus occupies 91,500 square meters of gross floor area and currently houses our principal executive
offices, information and technology center, as well as administrative and support departments, and approximately
4,500 of our employees. We own the land use right to the land on which Baidu Campus was built. We have
offices in Beijing, Tokyo (Japan), California (USA), Thailand and branch offices in Beijing, Shanghai and
selected cities in Guangdong Province, where we lease premises from unrelated third parties.

We host our servers in China at the internet data centers of China Telecom, China Unicom and China
Mobile in Beijing, Tianjin, Nanjing, Hangzhou and Suzhou, and we also have content delivery network locations
in various cities across China. We expect to use three additional data centers located in other cities in 2013. We
also have a data center of our own in Beijing. We currently host our servers in Hong Kong and Japan at internet
data centers operated by NTT Com Asia Limited and Olympus Business Creation Corp., respectively.

In December 2011, we commenced construction of an office building in Shenzhen, which will serve as our
international center in Southern China. We have paid RMB129.5 million (US$20.8 million) for the land use
right. Our capital expenditure in connection with the construction of this office building in Shenzhen was
RMB36.5 million (US$5.9 million) in 2012. We expect to complete the planned construction at the end of 2015.

In August 2012, we commenced construction of another office building, Baidu Science Park, in Beijing. We
have paid in advance RMB444.0 million (US$71.3 million) for the land use right. Our capital expenditures in
connection with the construction of Baidu Science Park was RMB15.6 million (US$2.5 million) in 2012. We
expect to complete the planned construction in 2015.

In September 2012, we commenced construction of Shanxi Cloud Computing Center, which will serve as
our internet data centers in northern China. We have paid RMB71.5 million (US$11.5 million) for the land use
right. Our capital expenditure in connection with the construction of Shanxi Cloud computing Center was
RMB28.6 million (US$4.6 million) in 2012. We expect to fully complete the planned construction in 2017.

We currently plan to fund these expenditures with our cash, cash equivalents, short-term investments and

anticipated cash flow generated from our operating activities.

68

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

The following discussion of our financial condition and results of operations is based upon, and should be
read in conjunction with, our audited consolidated financial statements and the related notes included in this
annual
report on Form 20-F. This report contains forward-looking statements. See “Forward-Looking
Information.” In evaluating our business, you should carefully consider the information provided under the
caption “Item 3.D. Key Information—Risk Factors” in this annual report on Form 20-F. We caution you that our
businesses and financial performance are subject to substantial risks and uncertainties.

A. Operating Results

Overview

Our operations are primarily based in China, where we derive almost all of our revenues. Total revenues in
2012 were RMB22.3 billion (US$3.6 billion), a 53.8% increase over 2011. Operating profit in 2012 was
RMB11.1 billion (US$1.8 billion), a 45.9% increase over 2011. Net income attributable to Baidu, Inc. in 2012
was RMB10.5 billion (US$1.7 billion), a 57.5% increase over 2011.

Our total assets as of December 31, 2012 were RMB45.7 billion (US$7.3 billion), of which cash and cash
equivalent amounted to RMB11.9 billion (US$1.9 billion). Our total
liabilities were RMB18.5 billion
(US$3.0 billion), accounting for 40.4% of total liabilities and equity. As of December 31, 2012, our retained
earnings accumulated to RMB24.0 billion (US$3.9 billion).

In July 2011, we completed our acquisition of a majority stake in Qunar and have since then consolidated

the financial results of Qunar in our consolidated financial statements.

In November 2012, we purchased all of the series A and series B preferred shares of Qiyi.com, Inc. held by
Providence Equity Partners, which allowed us to control Qiyi.com, Inc., and have since then consolidated the
financial results of Qiyi.com, Inc. in our consolidated financial statements.

We own 100% of the ordinary shares in Youa.com, Inc. However, we do not consolidate the financial
results of Youa.com, Inc. in our financial statements under the U.S. GAAP because of our lack of “control” over
the board of directors of Youa.com, Inc. and certain substantive participating rights provided to the preferred
shareholders of Youa.com, Inc.

The major factors affecting our results of operations and financial condition are discussed below.

Revenues

Revenue Generation

We derive almost all of our revenues from online marketing services, which accounted for approximately

100.0%, 99.9% and 99.7% of our total revenues in 2010, 2011 and 2012, respectively.

A substantial majority of our revenues from online marketing services were derived from our P4P services.
Our P4P platform is an online marketplace that introduces internet search users to customers who pay us a fee
based on click-throughs for priority placement of their links in the search results. We recognize P4P revenues
when a user clicks on a customer’s link in the search results, based on the amount that the customer has agreed to
pay for each click-through.

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We also provide to our customers other performance-based online marketing services and time-based online
advertising services. For other performance-based online marketing services, our customers pay us based on
performance criteria other than click-throughs, such as the number of telephone calls brought to our customers,
the successful booking of air tickets or hotel rooms, the number of users registered with our customers, or the
number of minimum click-throughs. For time-based online advertising services, our customers pay us based on
the duration of the advertisement placed on our websites.

The most significant factors that directly or indirectly affect our online marketing revenues are:

•

•

•

•

•

•

the number of our users and online marketing customers;

the number of searches initiated on our websites and our Baidu Union members’ properties;

the rate at which users click on paid search results;

the competitiveness of bidding for keywords by P4P customers;

the total online marketing budgets of our customers; and

the total number of sponsored links and advertisements displayed on our websites and the bidding price
for each click-through.

Our P4P services revenues have primarily been driven by the increase in the number of page views, the
increase in the number of P4P customers, and our success in optimizing the display of sponsored links. We
believe that an increase in the number of active P4P customers generally leads to an increase in the number of
sponsored links and a higher average price per click-through for selected keywords. Our P4P customer growth
has primarily been driven by the adoption of our P4P services by SMEs and, to a lesser extent, large enterprises.

Our online marketing services have historically been driven by the general increase in our customers’ online
marketing budgets. We expect the number of our online marketing customers to grow and our customer mix may
change. However, we expect our online marketing customer base to remain diverse for the foreseeable future.
Any prolonged economic slowdown in China may cause our customers to decrease or delay their online
marketing spending, hamper our efforts to grow our customer base, or result in fewer clicks by our users on
sponsored links or advertisements displayed on our or Baidu Union members’ websites. Any of these
consequences could negatively affect our online marketing revenues.

Our online marketing customers are increasingly seeking marketing solutions with measurable results in
order to maximize their ROI. To meet our customers’ needs, we will continue to evaluate the effectiveness of our
various products and services and adjust the mix of our service offerings to optimize our customers’ ROI. We
expect that we will continue to earn a substantial majority of our revenues from our online marketing services.
As a result, we plan to continue focusing most of our resources on expanding our online marketing services.

Revenue Collection

We collect payments for our P4P services both from our customers directly and through our distributors. We
have expanded our direct sales effort in several cities in China, including Beijing, Shanghai, Guangzhou,
Shenzhen and Dongguan, and as a result, P4P payments collected through our direct sales have been increasing.
We require our P4P customers to pay a deposit before using our P4P services and remind them by an automated
notice to replenish the accounts after their account balance falls below a designated amount. We deduct the
amount due to us from the deposit paid by a customer when a user clicks on the customer’s link in the search
results.

We offer payment terms to some of our customers of other performance-based online marketing services
and time-based online advertising services. In addition, we offer longer payment terms to certain qualified
distributors, consistent with industry practice.

70

As of December 31, 2012, we had accounts receivable of RMB1.3 billion (US$202.1 million), net of
allowance of RMB5.8 million (US$0.9 million), mainly due from customers of other performance-based online
marketing services and time-based online advertising services.

Operating Costs and Expenses

Our operating costs and expenses consist of cost of revenues, selling, general and administrative expenses,
and research and development expenses. Share-based compensation expenses are allocated among the above
three categories of operating costs and expenses, based on the nature of the work of the employees who have
received share-based compensation. Our total operating costs and expenses increased significantly from 2010 to
2012 due to the growth of our business.

Cost of Revenues

The following table sets forth the components of our cost of revenues both in absolute amount and as a

percentage of total revenues for the periods indicated.

For the Years Ended December 31,

2010

2011

2012

RMB

%

RMB

%

RMB

US$

%

Total revenues . . . . . . . . . . . . . . . .

7,915,074

100.0

(In thousands, except percentages)
100.0

14,500,786

22,306,026

3,580,364

100.0

Cost of revenues:
Sales tax and surcharges . . . . . . . .
Traffic acquisition costs . . . . . . . .
Bandwidth costs . . . . . . . . . . . . . . .
Depreciation of servers and other

equipment

. . . . . . . . . . . . . . . . .
Operational costs . . . . . . . . . . . . . .
Content costs . . . . . . . . . . . . . . . . .
Share-based compensation

(504,846)
(758,078)
(310,540)

(331,685)
(208,035)
(29,802)

(6.4)
(9.6)
(3.9)

(4.2)
(2.6)
(0.4)

(1,024,858)
(1,155,546)
(626,444)

(657,845)
(358,169)
(66,494)

(7.1)
(8.0)
(4.3)

(4.5)
(2.5)
(0.4)

(1,572,420)
(1,929,966)
(1,069,306)

(252,391)
(309,781)
(171,636)

(1,062,060)
(589,555)
(215,133)

(170,472)
(94,630)
(34,531)

(7.0)
(8.7)
(4.8)

(4.8)
(2.6)
(1.0)

expenses . . . . . . . . . . . . . . . . . . .

(6,302)

(0.1)

(7,527)

(0.1)

(10,105)

(1,622)

(0.0)

Total cost of revenues . . . . . . . . . .

(2,149,288)

(27.2)

(3,896,883)

(26.9)

(6,448,545)

(1,035,063)

(28.9)

Traffic Acquisition Costs. Traffic acquisition costs represent the portion of our online marketing revenues
that we share with our Baidu Union members. We typically pay a Baidu Union member, based on a pre-agreed
arrangement, a portion of the online marketing revenues generated from valid click-throughs by users of that
member’s properties.

Bandwidth Costs. Bandwidth costs are the fees we pay to telecommunications carriers such as China
Telecom and China Unicom for telecommunications services and for hosting our servers at their internet data
centers. We expect our bandwidth costs, as variable costs, to increase with the increasing number of racks of
servers and the increasing traffic on our websites. Our bandwidth costs could also increase if
the
telecommunications carriers increase their service charges.

Depreciation of Servers and Other Equipment. We include in our cost of revenues depreciation expenses of

servers and other computer hardware that are directly related to our business operations and technical support.

Operational Costs. Operational costs include primarily salary and benefit expenses and travel and other
expenses incurred by our operating and technical support personnel. Salary and benefit expenses include wages,
bonuses, medical insurance, unemployment insurance, pension benefits, employee housing fund and other
welfare benefits.

71

Content Costs. Content costs consist primarily of the fees we paid for the licensed content from copyright

owners or content distributors, and the amortization of the licensed copyrights for video content.

Operating Expenses

The following table sets forth the components of our operating expenses both in absolute amount and as a

percentage of total revenues for the periods indicated.

For the Years Ended December 31,

2010

2011

2012

RMB

%

RMB

%

RMB

US$

%

Total revenues . . . . . . . . . . . . . . .

7,915,074

100.0

(In thousands, except percentages)
100.0

22,306,026

14,500,786

3,580,364

100.0

Cost of revenues . . . . . . . . . . . . . .
Operating expenses:
Selling, general and

administrative . . . . . . . . . . . . . .
Selling and marketing . . . . .
General and

administrative . . . . . . . . . .
Research and development . . . . . .
Total costs and operating

(2,149,288)

(27.2)

(3,896,883)

(26.9)

(6,448,545)

(1,035,063)

(28.9)

(1,088,980)
(778,353)

(13.7)
(9.8)

(1,692,810)
(1,216,718)

(11.7)
(8.4)

(2,501,336)
(1,841,590)

(401,492)
(295,596)

(11.3)
(8.3)

(310,627)
(718,038)

(3.9)
(9.1)

(476,092)
(1,334,434)

(3.3)
(9.2)

(659,746)
(2,304,825)

(105,896)
(369,950)

(3.0)
(10.3)

expenses . . . . . . . . . . . . . . . . . .

(3,956,306)

(50.0)

(6,924,127)

(47.8)

(11,254,706)

(1,806,505)

(50.5)

Selling, General and Administrative Expenses

Our selling and marketing expenses primarily consist of compensation for our sales and marketing
personnel and promotional and marketing expenses. We expect to incur higher selling and marketing expenses as
increased
a result of efforts on our diversified mobile and PC applications distribution and operation,
compensation for our sales and marketing personnel and our intensified marketing and brand promotion efforts.

Our general and administrative expenses primarily consist of salaries and benefits for our general and

administrative personnel and fees and expenses for legal, accounting and other professional services.

Research and Development Expenses

Research and development expenses primarily consist of salaries and benefits for research and development
personnel. We expense research and development costs as they are incurred, except for capitalized software
development costs that fulfill the capitalization criteria under Accounting Standards Codification, or ASC,
subtopic 350-40, Intangibles-Goodwill and Other: Internal-Use Software.

Share-based Compensation Expenses

Baidu, Inc. grants options to our employees as a type of share-based compensation award. As of
December 31, 2012, there was RMB317.5 million (US$51.0 million) unrecognized share-based compensation
cost related to options of Baidu, Inc., which is expected to be recognized over a weighted-average vesting period
of 3.59 years. To the extent the actual forfeiture rate is different from our original estimate, actual share-based
compensation cost related to these awards may be different from our expectation.

In addition to options, Baidu, Inc. started awarding restricted shares to employees in 2006. As of
December 31, 2012, there was RMB640.5 million (US$102.8 million) unrecognized share-based compensation
cost related to restricted shares, which is expected to be recognized over a weighted-average vesting period of
3.06 years. To the extent the actual forfeiture rate is different from our original estimate, actual share-based
compensation cost related to these awards may be different from our expectation.

72

Certain of our subsidiaries also have equity incentive plans granting share-based awards. Total share-based

compensation expenses recognized and unrecognized were insignificant, both individually or in the aggregate.

The following table sets forth the allocation of our share-based compensation expenses both in absolute
amount and as a percentage of total share-based compensation expenses among our employees based on the
nature of work which they were assigned to perform.

For the Year Ended December 31,

2010

2011

RMB

%

RMB

%

RMB

2012

US$

%

(In thousands, except percentages)

Allocation of Share-based Compensation

Expenses
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . .
Research and development . . . . . . . . . . . . . . . .

6,302
36,811
50,623

6.7
39.3
54.0

7,527
50,012
94,489

4.9
32.9
62.2

10,105
54,512
147,692

1,622
8,750
23,706

4.8
25.6
69.6

Total share-based compensation expenses . . . . . .

93,736

100.0

152,028

100.0

212,309

34,078

100.0

Taxation

We are not subject to income or capital gain tax under the current laws of the Cayman Islands and the
British Virgin Islands. Under the current laws of Hong Kong, our subsidiaries incorporated in Hong Kong are
exempted from income tax on their foreign-derived income. Additionally, none of these jurisdictions impose a
withholding tax on dividends.

PRC Enterprise Income Tax

Enterprise Income Tax. The current EIT Law, which became effective on January 1, 2008, imposes a
uniform EIT rate of 25% on all PRC resident enterprises, including foreign-invested enterprises and domestic
enterprises, unless they qualify for certain exceptions. Pursuant to a Caishui (2008) No. 1 Notice promulgated
jointly by the Ministry of Finance and the State Administration of Taxation in February 2008, all preferential EIT
treatments granted prior to January 1, 2008 are eliminated, except for those specified under the EIT Law and
certain other tax regulations.

An enterprise may benefit from a preferential tax rate of 15% under the EIT Law if it qualifies as a “High
and New Technology Enterprise strongly supported by the state.” Pursuant to the Administrative Measures on the
Recognition of High and New Technology Enterprises, the provincial counterparts of the Ministry of Science and
Technology, the Ministry of Finance and the State Administration of Taxation shall jointly determine whether an
enterprise is qualified as a “High and New Technology Enterprise” under the EIT Law. In making such
determination, these government agencies shall consider, among other factors, ownership of core technology,
whether the products or services fall within the scope of high and new technology strongly supported by the state
as specified in the measures, the ratios of technical personnel and research and development personnel to total
personnel, the ratio of research and development expenditures to annual sales revenues, the ratio of revenues
attributed to high and new technology products or services to total revenues, and other measures set forth in
relevant guidance. All enterprises that had been granted the “High and New Technology Enterprise” status before
the effectiveness of the EIT Law are required to be re-examined in accordance with the measures mentioned
above before they can be entitled to the preferential tax rate.

In December 2008, our PRC subsidiaries Baidu Online and Baidu Times were designated by relevant
government authorities as “High and New Technology Enterprise” under the EIT Law. Baidu Online and Baidu
Times received the “High and New Technology Enterprise” certificates in February 2009 and obtained the
renewed certificates in January 2012. Our PRC consolidated affiliated entity, Baidu Netcom, was also designated

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by relevant government authorities as “High and New Technology Enterprise” under the EIT Law in December
2010 and received the “High and New Technology Enterprise” certificate in May 2011. Moreover, Baidu China
was designated as “High and New Technology Enterprise” under the EIT Law in December 2011 and received
the “High and New Technology Enterprise” certificate in May 2012. Therefore, Baidu Online, Baidu Times,
Baidu Netcom and Baidu China are entitled to enjoy a preferential tax rate of 15% as long as they maintain their
qualification as “High and New Technology Enterprise” under the EIT Law.

Pursuant to a Caishui Circular 69 jointly promulgated by the same government authorities in April 2009,
subject to verification, a qualified software enterprise established prior to January 1, 2008 may continue to enjoy
the tax holidays previously granted to it as a “software enterprise.” Where the software enterprise had already
started to enjoy its tax holidays before 2008, it may continue to enjoy the remaining tax holidays from 2008 until
the expiration of such tax holidays. Baidu China was granted “software enterprise” status by the Shanghai
Municipal Information Commission in 2006 and was entitled to a full exemption from EIT from 2006 to 2007
and a 50% tax reduction from 2008 to 2010. Therefore, Baidu China continued to enjoy a 50% reduced EIT rate
from 2008 to 2010 as a “software enterprise.” The EIT rate applicable to Baidu China was 11% for 2010 because
of its “software enterprise” status, and 15% for 2011 and 2012 due to its qualification as a “High and New
Technology Enterprise”.

In addition, Baidu Times continued to benefit from the remaining tax holidays granted to it before
January 1, 2008, namely, a preferential 7.5% EIT rate for the three years from 2009 to 2011 as a certified
foreign-invested High and New Technology Enterprise located in Beijing Zhongguancun Science Park (part of
the Beijing New Technology Industry Development Zone).

Furthermore, in February 2011, Baidu Online was designated as a “Key Software Enterprise” jointly by the
National Development and Reform Commission, MIIT, Ministry of Commerce and State Administration of
Taxation, which entitled it to enjoy a preferential income tax rate of 10% for 2010. Baidu Online has applied for
“Key Software Enterprise” status for 2011 and 2012, which is in the process of being assessed by the relevant
government authorities. There is no assurance that Baidu Online will continue to maintain the “Key Software
Enterprise” status.

If any of Baidu Online, Baidu Times, Baidu Netcom and Baidu China fails to maintain the “High and New
Technology Enterprise” qualification under the EIT Law, their tax rates will increase, which could have a
material and adverse effect on our results of operations and financial position.

If our PRC subsidiaries or consolidated affiliated entities no longer qualify for preferential tax treatment, we
will consider available options under applicable law that would enable us to qualify for alternative preferential
tax treatment. To the extent we are unable to offset the impact of the expiration of existing preferential tax
treatment with new tax exemptions, tax incentives or other tax benefits, the expiration of existing preferential tax
treatment may cause our effective tax rate to increase. The amount of income tax payable by our PRC
subsidiaries and consolidated affiliated entities in the future will depend on various factors, including, among
other things, the results of operations and taxable income of, and the statutory tax rate applicable to, each of the
entities. Our effective tax rate depends partially on the extent of the relative contribution of each of our
subsidiaries and consolidated affiliated entities to our consolidated taxable income. In 2010, 2011 and 2012, our
consolidated effective tax rate was 13.20%, 15.22% and 13.16%, respectively.

Withholding Tax

Under the EIT Law and its implementation rules, dividends, interests, rent or royalties payable by a
foreign-invested enterprise, such as our PRC subsidiaries, to any of its non-resident enterprise investors, and
proceeds from any such non-resident enterprise investor’s disposition of assets (after deducting the net value of
such assets) shall be subject to a 10% EIT, namely withholding tax, unless the non-resident enterprise investor’s
jurisdiction of incorporation has a tax treaty or arrangement with China that provides for a reduced withholding

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tax rate or an exemption from withholding tax. The Caishui (2008) No. 1 Notice clarifies that undistributed
profits earned by foreign-invested enterprises prior to January 1, 2008 will be exempted from any withholding
tax.

The British Virgin Islands, where Baidu Holdings Limited, the sole shareholder of our PRC subsidiary
Baidu Online, was incorporated, does not have such a tax treaty with China. Hong Kong, where Baidu
(Hong Kong) Limited, our wholly owned subsidiary and the sole shareholder of certain of our PRC subsidiaries
such as Baidu Times and Baidu China, was incorporated, has a tax arrangement with China that provides for a
lower withholding tax rate of 5% on dividends subject to certain conditions and requirements, such as the
requirement that the Hong Kong resident enterprise own at least 25% of the PRC enterprise distributing the
dividend at all times within the 12-month period immediately preceding the distribution of dividends and be a
“beneficial owner” of the dividends. However, pursuant to a SAT Circular 81 issued by the State Administration
of Taxation in February 2009, if the relevant PRC tax authorities determine, in their discretion, that a company
benefits from the reduced withholding tax rate on dividends due to a structure or arrangement designed for the
primary purpose of obtaining favorable tax treatment, the PRC tax authorities may adjust the preferential tax
treatment. Moreover, pursuant to a SAT Circular 601 issued by the State Administration of Taxation in October
2009, a resident of a contracting state will not qualify for the benefits under the tax treaties or arrangements, if it
is not
interest and royalty income. According to SAT
Circular 601, a “beneficial owner” shall have ownership and right to dispose of the income or the rights and
properties giving rise to the income, and generally engages in substantive business activities. An agent or conduit
company will not be regarded as a “beneficial owner” and, therefore, will not qualify for treaty benefits. A
conduit company normally refers to a company that is set up primarily for the purpose of evading or reducing
taxes or transferring or accumulating profits.

the “beneficial owner” with respect

to dividend,

If our PRC subsidiaries declare and distribute profits earned after January 1, 2008 to us in the future, the
dividend payments will be subject to withholding tax, which will increase our tax liability and reduce the amount
of cash available to our company.

Tax Residence

Under the EIT Law and its implementation rules, an enterprise established outside of the PRC with “de facto
management body” within the PRC is considered a resident enterprise and will be subject to the EIT at the rate of
25% on its worldwide income. The term “de facto management body” refers to “the establishment that exercises
substantial and overall management and control over the production, business, personnel, accounts and properties
of an enterprise.”

Pursuant to SAT Circular 82 issued by the State Administration of Taxation in April 2009, an overseas
registered enterprise controlled by a PRC company or a PRC company group will be classified as a “resident
enterprise” with its “de facto management body” located within China if the following requirements are satisfied:
(i) the senior management and core management departments in charge of its daily operations are mainly located
in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by persons
or bodies located in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its
board and shareholders’ meetings are located or kept in the PRC; and (iv) no less than half of the enterprise’s
directors or senior management with voting rights reside in the PRC. In July 2011, the State Administration of
Taxation issued additional rules to provide more guidance on the implementation of SAT Circular 82. Although
the SAT Circular 82 and the additional guidance only apply to overseas registered enterprises controlled by PRC
enterprises and not those controlled by PRC individuals or foreigners, the determining criteria set forth in the
circular may reflect the State Administration of Taxation’s general position on how the “de facto management
body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether
they are controlled by PRC enterprises, individuals or foreigners.

If we are deemed a PRC resident enterprise, we may be subject to the EIT at the rate of 25% on our global
income, except that the dividends we receive from our PRC subsidiaries may be exempt from the EIT to the

75

extent such dividends are deemed “dividends among qualified resident enterprises.” If we are considered a
resident enterprise and earn income other than dividends from our PRC subsidiaries, a 25% EIT on our global
income could significantly increase our tax burden and materially and adversely affect our cash flow and
profitability.

PRC Business Tax and VAT

In November 2011, the PRC Ministry of Finance and the State Administration of Taxation jointly issued
two circulars setting out the details of the pilot VAT reform program, which change the charge of sales tax from
business tax to VAT for certain pilot industries. The pilot VAT reform program initially applied only to the pilot
industries in Shanghai, and has been expanded to eight additional regions, including, among others, Beijing and
Guangdong province, in 2012. The pilot program will also be expanded nationwide when conditions permit.

With respect to our entities located outside of Shanghai, Beijing and Guangdong province and for the period
immediately prior to the implementation of the pilot VAT reform program, revenues from our P4P services,
online advertising services and other services are subject to a 5% PRC business tax. Revenues from our online
advertising services are subject to an additional 3% cultural business construction fee.

Our entities located in Shanghai, Beijing and Guangdong Province fall within the scope of the pilot program
and have been recognized as the VAT general taxpayers since January 1, 2012, September 1, 2012 and
November 1, 2012, respectively, the effective time of the pilot program in each of the regions. From the
applicable effective time onwards,
these entities are required to pay VAT instead of business tax for
P4P services, online advertising services and other services that are deemed by the relevant tax authorities to be
within the pilot industries at a rate of 6%. In addition, cultural business construction fee is imposed at the rate of
3% on revenues derived from our online advertising services.

PRC Urban Maintenance and Construction Tax and Education Surcharge

From December 1, 2010, the urban maintenance and construction tax and education surcharge that were
only applicable to pure PRC domestic enterprises and individuals previously, began to apply to foreign-invested
enterprises, foreign enterprises and individuals as well. Any entity, foreign-invested or purely domestic, or
individual that is subject to consumption tax, VAT and business tax is also required to pay urban maintenance
and construction tax. The rates of urban maintenance and construction tax are 7%, 5% or 1% of the amount of
consumption tax, VAT and business tax actually paid depending on where the taxpayer is located. All entities
and individuals who pay consumption tax, VAT and business tax are also required to pay education surcharge at
a rate of 3%, and local education surcharges at a rate of 2%, of the amount of VAT, business tax and
consumption tax actually paid.

76

Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated.
The period-to-period comparisons of results of operations should not be relied upon as indicative of future
performance.

For the Years Ended December 31,

2010

RMB

2011

RMB

2012

RMB

US$

(In thousands)

Consolidated Statements of Comprehensive

Income Data

Revenues:

Online marketing services . . . . . . . . . . . . . .
Other services . . . . . . . . . . . . . . . . . . . . . . .

7,912,869
2,205

14,489,767
11,019

22,245,643
60,383

3,570,672
9,692

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,915,074

14,500,786

22,306,026

3,580,364

Operating costs and expenses(1):

Cost of revenues . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . .
. . . . . . . . . . . . .
Research and development

(2,149,288)
(1,088,980)
(718,038)

(3,896,883)
(1,692,810)
(1,334,434)

(6,448,545)
(2,501,336)
(2,304,825)

(1,035,063)
(401,492)
(369,950)

Total operating costs and expenses . . . . . . . . . . .

(3,956,306)

(6,924,127)

(11,254,706)

(1,806,505)

Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . .

3,958,768

7,576,659

11,051,320

1,773,859

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net, including exchange gains or

losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from equity method investments . . . . . . . .
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103,096
(35,975)

418,201
(82,551)

866,465
(107,857)

139,077
(17,312)

44,239
(8,965)
(535,995)

76,278
(179,408)
(1,188,861)

449,738
(294,229)
(1,574,159)

72,188
(47,227)
(252,670)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,525,168

6,620,318

10,391,278

1,667,915

Less: Net loss attributable to noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(18,319)

(64,750)

(10,393)

Net income attributable to Baidu, Inc.

. . . . . . . .

3,525,168

6,638,637

10,456,028

1,678,308

(1) Share-based compensation expenses:

Cost of revenues . . . . . . . . . . . . . . . . .
Selling, general and administrative . .
Research and development
. . . . . . . . .

(6,302)
(36,811)
(50,623)

(7,527)
(50,012)
(94,489)

(10,105)
(54,512)
(147,692)

(1,622)
(8,750)
(23,706)

(93,736)

(152,028)

(212,309)

(34,078)

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenues. Our total revenues increased by 53.8% from RMB14.5 billion in 2011 to RMB22.3 billion
(US$3.6 billion) in 2012. This increase was due to a substantial increase in our revenues from online marketing
services. Our online marketing revenues increased by 53.5% from RMB14.5 billion in 2011 to RMB22.2 billion
(US$3.6 billion) in 2012. This increase was mainly attributable to the increase in the number of our active online
marketing customers from approximately 488,000 in 2011 to over 596,000 in 2012, and the increase in the
average revenue per customer
from approximately RMB29,700 in 2011 to approximately RMB37,300
(US$5,987) in 2012. The increase in our online marketing customers was mainly due to our effective distribution

77

network and our expanded direct sales, especially in Beijing, Shanghai, Guangzhou, Shenzhen and Dongguan.
The increase in the average revenue per customer was primarily attributable to the increase in the number of paid
clicks and the higher price per click as more customers participated in our P4P auction platform. The number of
paid clicks increased by approximately 26.9% from 2011 to 2012.

Operating Costs and Expenses. Our total operating costs and expenses increased by 62.5% from
RMB6.9 billion in 2011 to RMB11.3 billion (US$1.8 billion) in 2012. This increase was primarily due to the
expansion of our business.

•

Cost of Revenues. Our cost of revenues increased by 65.5% from RMB3.9 billion in 2011 to
RMB6.4 billion (US$1.0 billion) in 2012. This increase was primarily due to the following factors:

•

•

•

•

•

Traffic Acquisition Costs. Our traffic acquisition costs increased by 67.0% from RMB1.2 billion
in 2011 to RMB1.9 billion (US$309.8 million) in 2012. Traffic acquisition costs represent 8.7% of
total revenues in 2012, compared to 8.0% in 2011. The increase in traffic acquisition costs as a
percentage of total revenues reflects an increased revenue contribution from our Baidu Union
members, such as expanded contextual ads revenue contribution from our Baidu Union members.

Bandwidth Costs and Depreciation Expenses. Our bandwidth costs increased by 70.7% from
RMB626.4 million in 2011 to RMB1.1 billion (US$171.6 million) in 2012. Our depreciation
expenses of servers and other equipment increased by 61.4% from RMB657.8 million in 2011 to
RMB1.1 billion (US$170.5 million) in 2012. The absolute increases in these costs were due to an
increase in network infrastructure capacity.

Sales Tax and Surcharges. Our sales tax and surcharges increased by 53.4% from RMB1.0 billion
in 2011 to RMB1.6 billion (US$252.4 million) in 2012, primarily as a result of the increase in our
online marketing revenues.

Operational Costs. Our operational costs increased by 64.6% from RMB358.2 million in 2011 to
RMB589.6 million (US$94.6 million) in 2012, primarily due to higher compensation paid to our
operation and technical support staff and amortization of acquired intangible assets related to the
Qunar acquisition.

Content Costs. Our content costs increased by 223.5% from RMB66.5 million in 2011 to
RMB215.1 million (US$34.5 million) in 2012, primarily due to the video content cost of iQiyi,
which was consolidated into our financial statements in 2012, and higher music and flight
information content cost due to the expansion of our business.

•

Selling, General and Administrative Expenses. Our selling, general and administrative expenses
increased by 47.8% from RMB1.7 billion in 2011 to RMB2.5 billion (US$401.5 million) in 2012. This
increase was primarily due to the following factors:

•

•

•

•

total salaries and benefits and staff-related expenses increased by 40.5% from RMB859.0 million
in 2011 to RMB1.2 billion (US$193.8 million) in 2012, primarily due to the increased direct sales
commission and headcount to support our expanded online marketing services;

total office operating expenses increased by 27.4% from RMB146.4 million in 2011 to
RMB186.5 million (US$29.9 million) in 2012, primarily as a result of increase and expansion of
our offices;

total traveling, communication and business development expenses increased by 60.7% from
RMB63.0 million in 2011 to RMB101.3 million (US$16.3 million) in 2012, primarily due to the
increased headcount and activities to support our expanded online marketing services;

marketing and promotion expenses increased by 72.1% from RMB376.8 million in 2011 to
RMB648.7 million (US$104.1 million) in 2012, primarily due to the increased marketing and
promotion activities in connection with the distribution and operations of our mobile application
products.

78

•

share-based compensation expenses allocated to selling, general and administrative expenses
increased by 9.0% from RMB50.0 million in 2011 to RMB54.5 million (US$8.8 million) in 2012.

•

Research and Development Expenses. Our research and development expenses increased by 72.7%
from RMB1.3 billion in 2011 to RMB2.3 billion (US$370.0 million) in 2012, primarily due to an
increase in the number of research and development staff.

Operating Profit. As a result of the foregoing, we generated an operating profit of RMB11.1 billion

(US$1.8 billion) in 2012, a 45.9% increase from RMB7.6 billion in 2011.

Other income, net, including exchange gains or losses. Our other income, net, including exchange gains or
losses was RMB449.7 million (US$72.2 million) in 2012, compared to RMB76.3 million in 2011, primarily due
to gains arising from re-measurement of some existing equity method investments immediately before the
acquisition of these investees.

Loss from equity method investments: Our

loss from equity method investments increased from
RMB179.4 million in 2011 to RMB294.2 million (US$47.2 million) in 2012, primarily due to the recognized
accumulated losses of Youa.com Inc. and Qiyi.com, Inc.

Taxation. Our income tax expenses increased by 32.4% from RMB1.2 billion in 2011 to RMB1.6 billion

(US$252.7 million) in 2012, primarily due to the significant increase in profit before tax in 2012.

Net income attributable to Baidu, Inc. As a result of the foregoing, net income attributable to Baidu, Inc.

increased by 57.5% from RMB6.6 billion in 2011 to RMB10.5 billion (US$1.7 billion) in 2012.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenues. Our total revenues increased by 83.2% from RMB7.9 billion in 2010 to RMB14.5 billion in 2011.
This increase was due to a substantial increase in our revenues from online marketing services. Our online
marketing revenues increased by 83.1% from RMB7.9 billion in 2010 to RMB14.5 billion in 2011. This increase
was mainly attributable to the increase in the number of our active online marketing customers from
approximately 412,000 in 2010 to over 488,000 in 2011, and the increase in the average revenue per customer
from approximately RMB19,200 in 2010 to approximately RMB29,700 in 2011. The increase in our online
marketing customers was mainly due to our effective distribution network and our expanded direct sales,
especially in Beijing, Shanghai, Guangzhou, Shenzhen and Dongguan. The increase in the average revenue per
customer was primarily attributable to the increase in the number of paid clicks and the higher price per click as
more customers participated in our P4P auction platform. The number of paid clicks increased by approximately
64.2% from 2010 to 2011.

Operating Costs and Expenses. Our total operating costs and expenses increased by 75.0% from
RMB4.0 billion in 2010 to RMB6.9 billion in 2011. This increase was primarily due to the expansion of our
business.

•

Cost of Revenues. Our cost of revenues increased by 81.3% from RMB2.1 billion in 2010 to
RMB3.9 billion in 2011. This increase was primarily due to the following factors:

•

•

Traffic Acquisition Costs. Our
52.4% from
RMB758.1 million in 2010 to RMB1.2 billion in 2011. Traffic acquisition costs represent 8.0% of
total revenues in 2011, compared to 9.6% in 2010. The decrease in traffic acquisition costs as a
percentage of total revenues is primarily due to our traffic optimization efforts.

acquisition

increased

traffic

costs

by

Bandwidth Costs and Depreciation Expenses. Our bandwidth costs increased by 101.7% from
RMB310.5 million in 2010 to RMB626.4 million in 2011. Our depreciation expenses of servers
and other equipment increased by 98.3% from RMB331.7 million in 2010 to RMB657.8 million
in 2011. The absolute increases in these costs were due to the expansion of our business.

79

•

•

•

Sales Tax and Surcharges. Our
increased by 103.0% from
RMB504.8 million in 2010 to RMB1.0 billion in 2011, primarily as a result of the increase in our
online marketing revenues.

tax and surcharges

sales

Operational Costs. Our operational costs increased by 72.2% from RMB208.0 million in 2010 to
RMB358.2 million in 2011, primarily due to amortization of acquired intangible assets related to
Qunar acquisition, the increase in consumption of durable computer parts, higher compensation
paid to our operation and technical support staff and higher music content acquisition cost.

Content costs. Our content costs increased by 123.1% from RMB29.8 million in 2010 to
RMB66.5 million in 2011, primarily due to the expansion of our business.

•

Selling, General and Administrative Expenses. Our selling, general and administrative expenses
increased by 55.4% from RMB1.1 billion in 2010 to RMB1.7 billion in 2011. This increase was
primarily due to the following factors:

•

•

•

•

•

total salaries and benefits and staff-related expenses increased by 57.2% from RMB546.5 million
in 2010 to RMB859.0 million in 2011, primarily due to the increased direct sales commission and
headcount to support our expanded online marketing services;

total office operating expenses increased by 34.6% from RMB108.8 million in 2010 to
RMB146.4 million in 2011, primarily as a result of increase and expansion of our offices;

total traveling, communication and business development expenses increased by 66.1% from
RMB37.9 million in 2010 to RMB63.0 million in 2011, primarily due to the increased headcount
and activities to support our expanded online marketing services;

marketing and promotion expenses increased by 74.8% from RMB215.6 million in 2010 to
RMB376.8 million in 2011 primarily due to the increased marketing and promotion activities; and

share-based compensation expenses allocated to selling, general and administrative expenses
increased by 35.9% from RMB36.8 million in 2010 to RMB50.0 million in 2011.

•

Research and Development Expenses. Our research and development expenses increased by 85.8%
from RMB718.0 million in 2010 to RMB1.3 billion in 2011, primarily due to an increase in the number
of research and development staff.

Operating Profit. As a result of the foregoing, we generated an operating profit of RMB7.6 billion in 2011,

a 91.4% increase from RMB4.0 billion in 2010.

Other income, net, including exchange gains or losses. Our other income, net, including exchange gains or
losses was RMB76.3 million in 2011, compared to RMB44.2 million in 2010, primarily due to the increase of
subsidies received in 2011.

Loss from equity method investments: Our

loss from equity method investments increased from
RMB9.0 million in 2010 to RMB179.4 million, primarily due to the recognized accumulated losses of Qiyi.com,
Inc. and some joint ventures in 2011.

Taxation. Our

income tax expenses increased by 121.8% from RMB536.0 million in 2010 to
RMB1.2 billion in 2011, primarily due to the significant increase in profit before tax in 2011 and the expiration
of preferential tax treatment for one of our PRC subsidiaries in 2011.

Net income attributable to Baidu, Inc. As a result of the foregoing, net income attributable to Baidu, Inc.

increased by 88.3% from RMB3.5 billion in 2010 to RMB6.6 billion in 2011.

Inflation

Inflation in China has not materially impacted our results of operations. According to the National Bureau
of Statistics of China, the annual average percent changes in the consumer price index in China for 2010, 2011

80

and 2012 were increases of 3.3%, 5.4% and 2.6%, respectively. The year-over-year percent changes in the
consumer price index for January 2011, 2012 and 2013 were increases of 4.9%, 4.5% and 2.0%, respectively.
Although we have not been materially affected by inflation in the past, we can provide no assurance that we will
not be affected in the future by higher rates of inflation in China. For example, certain operating costs and
expenses, such as employee compensation and office operating expenses may increase as a result of higher
inflation. Additionally, because a substantial portion of our assets consists of cash and cash equivalents and
short-term investments, high inflation could significantly reduce the value and purchasing power of these assets.
We are not able to hedge our exposure to higher inflation in China.

Foreign Currency

The average exchange rate between U.S. dollar and RMB has declined from RMB8.2264 per U.S. dollar in
July 2005 to RMB6.2328 per U.S. dollar in December 2012. The functional currency of our subsidiaries in Japan
is the Japanese yen, and their reporting currency is RMB. During 2012, the Japanese yen depreciated by
approximately 12.1% against RMB. As of December 31, 2012, we recorded RMB89.7 million (US$14.4 million)
of net foreign currency translation loss in accumulated other comprehensive loss as a component of shareholders’
equity. We have not hedged exposures to exchange fluctuations using any hedging instruments. See also
“Item 3.D. Key Information—Risk Factors—Risks Related to Doing Business in China—Fluctuation in the value
of the RMB may have a material and adverse effect on your investment.” and “Item 11.Quantitative and
Qualitative Disclosures about Market Risk—Foreign Exchange Risk.”

Critical Accounting Policies

We prepare financial statements in accordance with U.S. GAAP, which requires us to make judgments,
estimates and assumptions that affect the reported amounts of our assets and liabilities and the disclosure of our
contingent assets and liabilities at the end of each fiscal period and the reported amounts of revenues and
expenses during each fiscal period. We continually evaluate these judgments and estimates based on our own
historical experience, knowledge and assessment of current business and other conditions, our expectations
regarding the future based on available information and assumptions that we believe to be reasonable, which
together form our basis for making judgments about matters that are not readily apparent from other sources.
Since the use of estimates is an integral component of the financial reporting process, our actual results could
differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in
their application.

The selection of critical accounting policies, the judgments and other uncertainties affecting application of
those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that
should be considered when reviewing our financial statements. For further information on our significant
accounting policies, see Note 2 to our consolidated financial statements. We believe the following accounting
policies involve the most significant judgments and estimates used in the preparation of our financial statements.

Consolidation of Affiliated Entities

In order to comply with PRC laws and regulations limiting foreign ownership of or imposing conditions on
internet, online advertising, online audio and video services and employment agency businesses, we operate our
websites and conduct our online advertising, online audio and video services and employment agency businesses
through our affiliated entities in China by means of contractual arrangements. We have entered into certain
exclusive agreements with the affiliated entities through our subsidiaries, which obligate them to absorb a
majority of the risk of loss and receive a majority of the residual returns from the affiliated entities’ activities. In
addition, we have entered into certain agreements with the affiliated entities and the nominee shareholders of
affiliated entities through our subsidiaries, which enable us to direct the activities that most significantly affect
the economic performance of the affiliated entities. Based on these contractual arrangements, we consolidate the
affiliated entities as required by SEC Regulation SX-3A-02 and ASC subtopic 810-10, Consolidation: Overall,

81

because we hold all the variable interests of the affiliated entities through the subsidiaries, which are the primary
beneficiaries of the affiliated entities. We will reconsider the initial determination of whether a legal entity is a
consolidated affiliated entity upon certain events listed in ASC 810-10-35-4 occurred. We will also continuously
reconsider whether we are the primary beneficiaries of our affiliated entities as facts and circumstances change.
See “Item 3.D. Risk Factors—Risks Related to Our Corporate Structure.”

Revenue Recognition

We recognize revenues based on the following principles:

(1) Auction-based pay-for-performance service

Our auction-based P4P platform enables a customer to place its website link and related description on our
search result list. The customers make bids on keywords based on how much they are willing to pay for each
click to their listings in the search results listed on our website and the relevance between the keywords and the
customer’s businesses. Internet users’ search of the keyword will trigger the display of the listings. The ranking
of the customer’s listing depends on both the bidding price and the listing’s relevance to the keyword searched.
Customer pays us only when a user clicks on one of its website links. Other than the auction-based P4P platform,
we have certain vertical P4P platforms from which we generate revenue through pre-determined prices per click.
Revenue is recognized when a user clicks on one of the customer-sponsored website links, as there is persuasive
evidence of an arrangement, the fee is fixed or determinable and collection is reasonably assured, as prescribed
by ASC subtopic 605-10, or ASC 605-10, Revenue Recognition: Overall.

For certain P4P customers engaged through direct sales, we may provide certain value-added consultative
support services to help its customers to better utilize its P4P online marketing system. Fees for such services are
recognized as revenue on a pro-rata basis over the contracted service period.

(2) Other performance-based online marketing services

To the extent we provide online marketing services based on performance criteria other than click-throughs,
such as the number of telephone calls brought to our customers, the number of users registered with our
customers, the number of minimum click-throughs and the number of successful reservation of hotels or issuance
of air tickets, revenue is recognized when the specified performance criteria are met together with satisfaction of
other applicable revenue recognition criteria as prescribed by ASC 605-10.

(3) Time-based online advertising services

For time-based online advertising services such as text

links, banners, or other forms of graphical
advertisements, we recognize revenue, in accordance with ASC 605-10, on a pro-rata basis over the contractual
term commencing on the date the customer’s advertisement is displayed on a specified web page. For certain
time-based contractual agreements, we may also provide certain performance guarantees, in which cases revenue
is recognized at the later of the completion of the time commitment or performance guarantee.

(4) Online marketing services involving Baidu Union

Baidu Union is the program through which we expand distribution of our customers’ sponsored links or
advertisements by leveraging traffic of the Baidu Union members’ internet properties. We make payments to
Baidu Union members for acquisition of traffic. We recognize gross revenue for the amount of fees we receive
from our customers. Payments made to Baidu Union members are included in cost of revenues as traffic
acquisition costs.

82

(5) Barter transactions

We engage in barter transactions from time to time and in such situations follow the guidance set forth in
ASC subtopic 845-10, Nonmonetary Transactions: Overall. While nonmonetary transactions are generally
recorded at fair value, if such value is not determinable within reasonable limits, the transaction is recognized
based on the carrying value of the products or services provided. The amount of revenues recognized for barter
transactions was insignificant for each of the periods presented.

In certain instances, we are granted equity instruments in exchange for services. In accordance with ASC
subtopic 505-50, or ASC 505-50, Equity: Equity-based Payments to Non-Employees, if we provide services in
exchange for equity instruments, we measure the fair value of those equity instruments for revenue recognition
purposes as of the earlier of either of the following dates:

•

•

The date the parties come to a mutual understanding of the terms of the equity-based compensation
arrangement and a commitment for performance by us to earn the equity instruments is reached;

The date when our performance necessary to earn the equity instruments is completed.

If, as of the measurement date, the fair value of the equity instruments received is not determinable within
reasonable limits, the transaction is recognized based on the fair value of the services provided. If the fair value
of both the equity instruments received and the services provided cannot be determined, no revenue is recognized
for the services provided and the equity instrument received is recorded at zero carrying value. The amount of
revenues recognized for such transactions was insignificant in each of the years presented.

(6) Other revenue recognition related policies

We prospectively adopted Accounting Standards Update No. 2009-13, or ASU 2009-13, Multiple-
Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force that amends
ASC 605-25, on January 1, 2011.

Prior to the adoption of ASU 2009-13, if a sales arrangement involves multiple deliverables, which are
considered separate units of accounting in accordance with ASC subtopic 605-25, or ASC 605-25, Revenue
Recognition: Multiple-Element Arrangements,
is allocated to the
individual deliverables based on their relative fair values. If sufficient vendor-specific objective evidence of fair
value, or VSOE, does not exist for the allocation of revenue, the fee for the entire arrangement is recognized
ratably over the term of the arrangement or upon the delivery of the last deliverable, when other revenue
recognition criteria have been met.

the total revenue on such arrangement

In accordance with ASU 2009-13, certain delivered items in multiple-element arrangements, which
previously would not qualify for separate units of accounting due to the lack of VSOE or third-party evidence, or
TPE, of selling price, are accounted for as separate units of accounting, to which the total consideration of the
arrangements is allocated based on management’s best estimate of the selling price, or BESP. We consider all
reasonably available information in determining the BESP, including both market and entity-specific factors. The
adoption of ASU 2009-13 did not have a material effect on our financial statements, as the pattern and timing of
revenue recognition was not changed materially.

We deliver some of our online marketing services to end customers through engaging third party
distributors. In this context, we may provide cash incentives to distributors. The cash incentives are accounted for
as reduction of revenue in accordance with ASC subtopic 605-50, Revenue Recognition: Customer Payments and
Incentives.

We provide sales incentives to customers to entitle customers to receive reductions in the price of the online
marketing services by meeting certain cumulative consumption requirements. We account for these award credits
granted to members in conjunction with a current sale of products or services as a multiple-element arrangement

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by analogizing to ASC 605-25. The consideration allocated to the award credits, as deferred revenue, is based on
an assumption that the customer will purchase the minimum amount of future service necessary to obtain the
maximum award credits available. The deferred revenue is recognized as revenue proportionately as the future
services are delivered to the customer or when the award credits expire.

Cash received in advance from customers is recorded as customer advances and deposits. The unused cash
balances remaining in customers’ accounts are included as liabilities of us. Deferred revenue is recorded when
services are provided before the other revenue recognition criteria set forth in ASC 605-10 are fulfilled.

We operate an online game platform, on which registered users could access games provided by online
game developers. The rights and obligations of each party to the arrangement indicate that we are acting as an
agent whereas the online game developer is the principal as a result of being the primary obligor in the
arrangement. We recognize the shared revenue on a net basis, based on the ratios pre-determined with the online
game developers when all the revenue recognition criteria set forth in ASC 605-10 are met, which is generally
when the user purchases virtual currencies issued by the game developers through our payment channel. The
amount of revenues recognized was insignificant in each of the years presented.

Share-based Compensation

We account for share-based compensation in accordance with ASC subtopic 718-10, or ASC 718-10,
Compensation-Stock Compensation: Overall. We have elected to recognize share-based compensation using the
straight-line method for all share-based awards issued with no performance conditions. For awards with
performance conditions, compensation cost is recognized on an accelerated basis if it is probable that the
performance condition will be achieved.

Forfeitures have been estimated based on historical experience and are periodically reviewed. Cancellation
of an award accompanied by the concurrent grant of a replacement award is accounted for as a modification of
the terms of the cancelled award, or the modification awards. The compensation costs associated with the
modification awards are recognized if either the original vesting condition or the new vesting condition has been
achieved. Such compensation costs cannot be less than the grant-date fair value of the original award. The
incremental compensation cost is measured as the excess of the fair value of the replacement award over the fair
value of the cancelled award at the cancellation date. Therefore, in relation to the modification awards, we
recognize share-based compensation over the vesting periods of the new options, which comprises, (i) the
amortization of the incremental portion of share-based compensation over the remaining vesting term, and
(ii) any unrecognized compensation cost of original award, using either the original term or the new term,
whichever results in higher expenses for each reporting period.

We account for share awards issued to non-employees in accordance with the provisions of ASC 505-50.
Under ASC 505-50, we use the Black-Scholes-Merton option pricing model method to measure the value of
options granted to non-employees at each vesting date to determine the appropriate charge to share-based
compensation. ASC 718-10 also requires share-based compensation to be presented in the same manner as cash
compensation rather than as a separate line item.

Income Taxes

We recognize income taxes under the liability method. Deferred income taxes are recognized for differences
between the financial reporting and tax bases of assets and liabilities at enacted tax rates in effect for the years in
which the differences are expected to reverse. We record a valuation allowance against the amount of deferred
tax assets that we determine is not more likely than not to be realized. The effect on deferred taxes of a change in
tax rates is recognized in earnings in the period that includes the enactment date. For reconciliation of tax
computed by applying the respective statutory income tax rate to pre-tax income, please see “Income taxes”
under Note 12 to our audited consolidated financial statements.

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We comply with the provisions of ASC subtopic 740-10, or ASC 740-10, Income Taxes: Overall, in
accounting for uncertainty in income taxes. ASC 740-10 clarified the accounting for uncertainty in income taxes
by prescribing the recognition threshold a tax position is required to meet before being recognized in the
financial statements. We have elected to classify interest and penalties related to an uncertain tax position (if and
when required) as part of income tax expense in the consolidated statements of comprehensive income. As of and
for the years ended December 31, 2010, 2011 and 2012, no unrecognized tax benefits or interest and penalties
associated with uncertainty in income taxes have been recognized.

Allowance for Doubtful Accounts

Accounts receivable are recognized and carried at original invoiced amount less an allowance for any
potential uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no
longer probable. Bad debts are written off as incurred. We generally do not require collateral from our customers.

We maintain allowances for doubtful accounts for estimated losses resulting from the failure of customers to
make payments on time. We review the accounts receivable on a periodic basis and make general and specific
allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of
individual receivable balances, we consider many factors, including the age of the balance, the customer’s
payment history, its current credit-worthiness and current economic trends.

Impairment of Long-Lived Assets Other Than Goodwill

We evaluate long-lived assets, such as fixed assets and purchased or internally developed intangible assets
with finite lives, for impairment whenever events or changes in circumstances indicate the carrying value of an
asset may not be recoverable in accordance with ASC subtopic 360-10, or ASC 360-10, Property, Plant and
Equipment: Overall. When such events occur, we assess the recoverability of the assets group based on the
undiscounted future cash flow the assets group is expected to generate and recognize an impairment loss when
estimated undiscounted future cash flow expected to result from the use of the assets group plus net proceeds
expected from disposition of the assets group, if any, is less than the carrying value of the assets group. If we
identify an impairment, we reduce the carrying amount of the assets group to its estimated fair value based on a
discounted cash flow approach or, when available and appropriate, to comparable market values. We use
estimates and judgments in our impairment tests and if different estimates or judgments had been utilized, the
timing or the amount of any impairment charges could be different. Asset groups to be disposed of would be
reported at the lower of the carrying amount or fair value less costs to sell, and no longer depreciated. The assets
and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset
and liability sections of the balance sheet. The impairment charges of long-lived assets are nil, RMB5.5 million
and nil for 2010, 2011 and 2012, respectively.

Impairment of Goodwill

We assess goodwill for impairment in accordance with ASC subtopic 350-20, or ASC 350-20, Intangibles—
Goodwill and Other: Goodwill, which requires that goodwill be tested for impairment at the reporting unit level
at least annually and more frequently upon the occurrence of certain events, as defined by ASC 350-20.

Prior to 2011, we had one reporting unit because no discrete financial information was available below the
consolidation level. Subsequent to the acquisitions in 2011 and thereafter, there were segment managers who
regularly review the operating results of certain acquired entities and the rest of our group, which constituted two
and three separate reporting units as of December 31, 2011 and 2012, respectively.

Goodwill was tested for impairment in the annual impairment tests on December 31 in each year using the
two-step process required by ASC 350-20. First, we reviewed the carrying amount of the reporting unit compared

85

to the fair value of the reporting unit based on either quoted market prices of the ordinary shares or estimated fair
value using a combination of the income approach and the market approach. If the fair value of the reporting unit
exceeds the carrying value of the reporting unit, goodwill is not impaired and we are not required to perform
further testing. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then we
must perform the second step of the impairment test in order to determine the implied fair value of the reporting
unit’s goodwill, which means we would then prepare the discounted cash flow analyses. Such analyses are based
on cash flow assumptions that are consistent with the plans and estimates being used to manage the business. An
excess carrying value compared to fair value would indicate that goodwill may be impaired. Finally, if we
determined that goodwill may be impaired, the implied fair value of the goodwill, as defined by ASC 350-20,
would be compared to its carrying amount to determine the impairment loss, if any. We early adopted ASU
No. 2011-08, Intangibles—Goodwill and Other, in 2011, pursuant to which we can elect to perform a qualitative
assessment to determine whether the two-step impairment testing on goodwill is necessary.

In 2012, we elected to assess goodwill for impairment test for goodwill at the two reporting units,
representing entities acquired in 2011 and 2012, using the two-step process. The fair value of these two reporting
units exceeded their respective carrying amount, and therefore goodwill related to the two reporting units were
not impaired and we were not required to perform further testing. We performed a qualitative assessment for the
remaining reporting unit. Based on the requirements of ASU No. 2011-08, we evaluated all relevant factors,
weighed all factors in their totality and concluded that it was not more-likely-than-not the fair value was less than
the carrying amount of the third reporting unit, and further impairment testing on goodwill was unnecessary as of
December 31, 2012.

The impairment charges of goodwill are nil, RMB113.0 million and nil for 2010, 2011 and 2012,

respectively.

Impairment of Long-term Investments

Our long-term investments mainly consist of cost method investments and equity method investments in

privately held companies.

We periodically review our cost method investments and equity method investments for impairment. If we
conclude that any of such investments is impaired, we will assess whether such impairment is other-than-
temporary. Factors we consider to make such determination include the performance and financial position of the
investee as well as other evidence of market value. Such evaluation includes but is not limited to, reviewing the
investee’s cash position, recent financing, projected and historical financial performance, cash flow forecasts and
financing needs. An impairment loss is recognized in earnings equal to the excess of the investment’s cost over
its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value
would then become the new cost basis of investment.

The fair value determination, particularly for investments in privately-held companies, requires significant
judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could
affect the calculation of the fair value of the investments and the determination of whether any identified
impairment is other-than-temporary. If impairment is considered other-than-temporary, we will write down the
asset to its fair value and take the corresponding charge to the consolidated financial statements. The impairment
charges of long-term investments are nil, RMB47.9 million and RMB169.2 million (US$27.2 million) for 2010,
2011 and 2012, respectively.

Business Combination

We account for business combinations using the purchase method of accounting in accordance with
ASC 805: Business Combinations. The purchase method accounting requires that the consideration transferred to
be allocated to the assets, including separately identifiable assets and liabilities we acquired, based on their

86

estimated fair values. The consideration transferred of an acquisition is measured as the aggregate of the fair
values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the
contingent considerations and all contractual contingencies as of the acquisition date. The costs directly
attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities
acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the
extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the
noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over
(ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is
less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in
earnings.

In a business combination achieved in stages, we remeasured our previously held equity interest in the
acquiree immediately before obtaining control at its acquisition-date fair value and the re-measurement gain or
loss, if any, was recognized in earnings.

The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and
noncontrolling interests is based on various assumptions and valuation methodologies requiring considerable
judgment from management. The most significant variables in these valuations are discount rates, terminal
values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates
used to determine the cash inflows and outflows. We determine discount rates to be used based on the risk
inherent in the related activity’s current business model and industry comparisons. Terminal values are based on
the expected life of assets, forecasted life cycle and forecasted cash flows over that period.

Recent Accounting Pronouncements

In July 2012, the FASB issued ASU No. 2012-02, or ASU 2012-02, Testing Indefinite-Lived Intangible
Assets for Impairment, which is intended to reduce the cost and complexity of performing the impairment test for
indefinite-lived intangible assets other than goodwill by providing entities an option to perform a qualitative
assessment to determine whether further quantitative impairment testing is necessary. If an entity believes, as a
result of its qualitative assessment, that it is more-likely-than-not that an indefinite lived intangible asset is
impaired, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is
effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012,
with early adoption permitted. We early adopted ASU 2012-02 in the third quarter of 2012 and elected to
perform a qualitative assessment on certain indefinite-lived intangible assets to determine whether further
impairment testing was necessary. The adoption of ASU 2012-02 did not have a material impact on our
consolidated financial statements.

In February 2013, the FASB issued ASU No. 2013-02, or ASU 2013-02, Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income, which is intended to improve the reporting of
reclassifications out of accumulated other comprehensive income. It does not change the current requirements for
reporting net income or other comprehensive income in financial statements. However, the standard requires an
entity to provide information about the amounts reclassified out of accumulated other comprehensive income by
component. For public entities, the amendments are effective prospectively for reporting periods beginning after
December 15, 2012, with early adoption permitted. We will adopt ASU 2013-02 in periods beginning January 1,
2013 and do not expect the adoption to have a material impact on our consolidated financial statements.

B. Liquidity and Capital Resources

As of December 31, 2012, our principal sources of liquidity was RMB32.5 billion (US$5.2 billion) of cash,
cash equivalents and short-term investments. Our cash and cash equivalents consist of cash on hand and
investments in interest bearing demand deposit accounts, time deposits, money market funds and other liquid
investments which have original maturities of three months or less. The short-term investments consist of

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to meet our anticipated cash needs,

fixed-rate and adjustable-rate investments with original maturity of less than one year. We believe that our
current cash, cash equivalents, short-term investments and anticipated cash flow from operations will be
including our cash needs for working capital and capital
sufficient
expenditures, for at least the next 12 months. We may, however, require additional cash due to changing business
conditions or other future developments, including any investments or acquisitions we may decide to pursue. If
our existing cash is insufficient to meet our requirements, we may seek to sell additional equity securities, debt
securities or borrow from banks.

Furthermore, cash transfers from our PRC subsidiaries to their parent companies outside of China are
subject to PRC government control of currency conversion. Shortages in the availability of foreign currency may
restrict the ability of our PRC subsidiaries and consolidated affiliated entities to remit sufficient foreign currency
to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations.
See “Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion
may affect the value of your investment.”

In October 2010, we entered into a long-term credit arrangement with the Export-Import Bank of China with
a credit facility of RMB140.0 million (US$22.5 million) to finance some of government-sponsored research
projects, at the initial annual interest rate of 5.6%, which is to be adjusted quarterly referencing to the People’s
Bank of China’s benchmark rate over the same period. The government would provide a cash subsidy at the
amount that approximates the interest of the loan. We repaid the loan and all accrued interest in December 2012
before the maturity date, and there was no outstanding balance as of December 31, 2012.

In January 2011, we entered into a short-term loan arrangement with Bank of China (Macau Branch) with a
credit facility of US$30.0 million for general corporate purposes. We had drawn down US$20.0 million in
January 2011, with a floating interest rate of LIBOR plus 1.5% per annum and a maturity term of 12 months,
which was secured by the pledge of the Letter of Credit issued by Bank of China (Beijing Branch) to Baidu
Online. We repaid the loan and all accrued interest in January 2012 upon maturity, and there was no outstanding
balance as of December 31, 2012.

In July 2011, we entered into a two-year unsecured loan arrangement with Goldman Sachs Lending Partners
LLC of US$350.0 million, at an annual interest rate of 1.3%. The loan was used to acquire Qunar’s ordinary
shares. As of December 31, 2012, we had an outstanding balance of RMB2.2 billion (US$350.0 million), which
will be due in July 2013.

In September 2012, we entered into a loan agreement with Australia and New Zealand Banking Group
Limited (Hong Kong Branch), whereby we committed to borrow an unsecured loan of AU$105.0 million
(US$108.0 million) for general working capital purposes. The loan commitment can be drawn down from time to
time within two years. We drew down AU$55.0 million (settled by US$56.8 million) in October 2012 under the
loan commitment, with a term of two years and a fixed annual interest rate of 2.75%.

In November 2012, we issued an aggregate of US$1.5 billion senior unsecured notes in two equal tranches,
due in 2017 and 2022, with stated annual interest rates of 2.25% and 3.50%, respectively. The net proceeds from
the sale of the notes were and will be used for general corporate purposes. As of December 31, 2012, the total
carrying value and estimated fair value of these notes were US$1.5 billion and US$1.5 billion. The estimated fair
value was based on quoted prices for our publicly-traded debt as of December 31, 2012. We are not subject to
any financial covenants or other significant restrictions under the notes. No interest payments were due in year
2012 related to these notes.

As of December 31, 2012, we had RMB11.9 billion (US$1.9 billion) in long-term loans and notes payables

(including current portion of RMB2.2 billion (US$0.3 billion)) and had no short-term loans.

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Cash Flows and Working Capital

As of December 31, 2010, 2011 and 2012, we had RMB8.2 billion, RMB14.2 billion and RMB32.5 billion

(US$5.2 billion) in cash, cash equivalents and short-term investments.

The following table sets forth a summary of our cash flows for the periods indicated.

For the Years Ended December 31,

2010

RMB

2011

RMB

2012

RMB

US$

(In thousands)

Net cash generated from operating activities . . .
Net cash used in investing activities . . . . . . . . .
Net cash generated from financing activities . . .
Effect of exchange rate changes on cash . . . . . .

4,700,481
(1,217,522)
124,751
(6,110)

8,178,819
(14,250,529)
2,425,810
(8,594)

11,995,994
(13,750,100)
9,518,885
(11,629)

1,925,492
(2,207,045)
1,527,886
(1,867)

Net increase (decrease) in cash and cash

equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,601,600

(3,654,494)

7,753,150

1,244,466

Cash and cash equivalents at beginning of the

period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,180,376

7,781,976

4,127,482

662,507

Cash and cash equivalents at end of the

period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,781,976

4,127,482

11,880,632

1,906,973

Operating Activities

Net cash generated from operating activities increased to RMB12.0 billion (US$1.9 billion) in 2012 from
RMB8.2 billion in 2011. This increase was mainly attributable to the substantial increase in net income to
RMB10.4 billion (US$1.7 billion) in 2012 from RMB6.6 billion in 2011.

Net cash generated from operating activities increased to RMB8.2 billion in 2011 from RMB4.7 billion in
2010. This increase was mainly attributable to several factors, including (i) the substantial increase in net income
to RMB6.6 billion in 2011 from RMB3.5 billion in 2010; (ii) the increase in add-back of non-cash expenses,
mainly consisting of depreciation expenses, amortization of intangible assets and loss from equity method
investments; and (iii) the increases in customer advance and accounts payable.

Investing Activities

Net cash used in investing activities was about RMB14.3 billion and RMB13.8 billion (US$2.2 billion) in
2011 and 2012, respectively. Compared to 2011, our investment of short-term investments increased, while our
acquisitions of business decreased in 2012.

Net cash used in investing activities increased from RMB1.2 billion in 2010 to RMB14.3 billion in 2011,
primarily due to purchase of short-term investments, the acquisition of fixed assets, long-term investments and
acquisitions of certain businesses. The net cash outflow in the purchases and sales and maturities of short-term
investments in 2011 was RMB9.5 billion.

Financing Activities

Net cash flow generated from financing activities was RMB9.5 billion (US$1.5 billion) in 2012, compared
to a net cash flow of RMB2.4 billion generated from financing activities in 2011, primarily due to the proceeds
from the long-term notes issued in 2012.

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Net cash flow generated from financing activities was RMB2.4 billion in 2011, compared to a net cash flow
of RMB124.8 million generated from financing activities in 2010, primarily due to the increase in proceeds from
the short-term loan and the unsecured long-term debt incurred in 2011.

Holding Company Structure

Baidu, Inc. is a holding company with no operations of its own. We conduct our operations in China
primarily through our subsidiaries and consolidated affiliated entities in China. As a result, although other means
are available for us to obtain financing at the holding company level, Baidu, Inc.’s ability to pay dividends to the
shareholders and to service any debt it may incur may depend upon dividends paid by our PRC subsidiaries and
license and service fees paid by our PRC consolidated affiliated entities. If any of our subsidiaries incurs debt on
its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to
Baidu, Inc. In addition, our PRC subsidiaries and consolidated affiliated entities are required to make
appropriations to certain statutory reserve funds, which are not distributable as cash dividends except in the event
of a solvent liquidation of the companies.

Our PRC subsidiaries, being foreign-invested enterprises established in China, are required to make
appropriations to certain statutory reserves, namely, a general reserve fund, an enterprise expansion fund, a staff
welfare fund and a bonus fund, all of which are appropriated from net profit as reported in their PRC statutory
accounts. Each of our PRC subsidiaries is required to allocate at least 10% of its after-tax profits to a general
reserve fund until such fund has reached 50% of its respective registered capital. Appropriations to the enterprise
expansion fund and staff welfare and bonus funds are at the discretion of the board of directors of the PRC
subsidiaries.

Our consolidated affiliated entities must make appropriations from their after-tax profits as reported in their
PRC statutory accounts to non-distributable reserve funds, namely a statutory surplus fund, a statutory public
welfare fund and a discretionary surplus fund. Each of our consolidated affiliated entities is required to allocate at
least 10% of its after-tax profits to the statutory surplus fund until such fund has reached 50% of its respective
registered capital. Appropriations to the statutory public welfare fund and the discretionary surplus fund are at
the discretion of our consolidated affiliated entities.

Under PRC laws and regulations, our PRC subsidiaries and consolidated affiliated entities are subject to
certain restrictions with respect to paying dividends or otherwise transferring any of their net assets to us. The
amounts restricted include the paid up capital and the statutory reserve funds of our PRC subsidiaries and the net
assets of our consolidated affiliated entities in which we have no legal ownership, totaling approximately
RMB1.2 billion, RMB1.2 billion and RMB2.8 billion (US$0.4 billion) as of December 31, 2010, 2011 and 2012,
respectively.

Furthermore, cash transfers from our PRC subsidiaries to our subsidiaries outside of China are subject to
PRC government control of currency conversion. Shortages in the availability of foreign currency may restrict
the ability of our PRC subsidiaries and consolidated affiliated entities to remit sufficient foreign currency to pay
dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. See “Risk
Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may affect
the value of your investment.”

Capital Expenditures

We made capital expenditures of RMB895.3 million, RMB1.8 billion and RMB2.3 billion (US$0.4 billion)
in 2010, 2011 and 2012, representing 11.3%, 12.2% and 10.4% of our total revenues, respectively. In 2012, our
capital expenditures were used primarily for the purchase of servers, network equipment and other computer
hardware for our business. We funded our capital expenditures primarily with net cash flow generated from
operating activities.

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We commenced construction of an office building in Shenzhen in December 2011, Baidu Science Park in
Beijing in August 2012 and Shanxi Cloud Computing Center in September 2012, and we expect to complete the
planned construction of these buildings by the end of 2015, 2015 and 2017, respectively. See “Item 4.D. Property,
Plant and Equipment” for more details of our capital expenditures associated with these projects.

Our capital expenditures may increase substantially in the future as our business continues to grow, in
connection with the expansion and improvement of our network infrastructure, and our plan to build additional
office buildings and cloud computing based data centers. We currently plan to fund these expenditures with our
current cash, cash equivalents, short-term investments and anticipated cash flow generated from our operating
activities.

C. Research and Development

We have a team of experienced engineers who are mostly based at our headquarters in Beijing. We recruit
most of our engineers locally and have established various recruiting and training programs with leading
universities in China. We have also recruited experienced engineers from overseas. We compete aggressively for
engineering talent to help us address challenges such as Chinese language processing, information retrieval and
high performance computing.

In the three years ended December 31, 2010, 2011 and 2012, our research and development expenditures,
including share-based compensation expenses for research and development staff, were RMB718.0 million,
RMB1.3 billion and RMB2.3 billion (US$370.0 million), representing 9.1%, 9.2% and 10.3% of our total
revenues for 2010, 2011 and 2012, respectively. Our research and development expenses consist primarily of
personnel-related costs. We have expensed substantially all of the development costs for the research and
development of products and new functionality as incurred, except for certain internal-use software.

D. Trend Information

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties,
demands, commitments or events for the year ended December 31, 2012 that are reasonably likely to have a
material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would
cause the disclosed financial information to be not necessarily indicative of future results of operations or
financial conditions.

E. Off-Balance Sheet Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment
obligations of any third parties. We have not entered into any off-balance sheet derivative instruments.
Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity
that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any
unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.

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F. Contractual Obligations

The following table sets forth our contractual obligations by specified categories as of December 31, 2012.

Payment Due by Period

Total

Less Than
1 Year

1-3 Years

3-5 Years

(In RMB thousands)

More
Than
5 Years

Long-Term Debt Obligations(1) . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Capital Lease Obligations(2)
. . . . . . . . . . . . . . .
Operating Lease Obligations(3)
. . . . . . . . . . . . . . . . . . . . .
Purchase Obligations(4)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total

14,081,194
83,499
3,399,580
982,175
18,546,448

2,480,171
36,791
1,227,718
776,943
4,521,623

900,826
46,577
1,336,302
198,188
2,481,893

5,209,921
131
697,138
7,044
5,914,234

5,490,276

—

138,422

—

5,628,698

(1) The long-term debt obligations represent (i) a two-year unsecured loan from Goldman Sachs Lending Partners LLC, (ii) a two-year loan
from Australia and New Zealand Banking Group Limited (Hong Kong Branch), and (iii) senior unsecured notes due in 2017 and 2022.
The total interest to be paid for these loans is RMB21.1 million (US$3.4 million), RMB19.7 million (US$3.2 million) and RMB2.2
billion (US$0.3 billion), respectively. Please see “Loans Payable” under Note 10 and “Notes payable” under Note 11 to our audited
consolidated financial statements.

(2) Capital lease obligations represent our obligations for leasing servers, and the total amount of interest to be paid is RMB6.5 million

(US$1.0 million).

(3) Operating lease obligations represent our obligations for leasing premises and bandwidth.
(4) Purchase obligations consist primarily of expenditures in connection with the expansion and improvement of network infrastructure, our

plan to build additional office buildings and cloud computing-based data centers, and expenditures for video content.

Other than the contractual obligations set forth above, we do not have any contractual obligations that are
long-term debt obligations, capital (finance) lease obligations, purchase obligations or other long-term liabilities
reflected on our balance sheet.

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Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management

The following table sets forth information regarding our executive officers and directors as of the date of

this annual report.

Directors and
Executive Officers

Age

Position/Title

Robin Yanhong Li . . . .
Jennifer Xinzhe Li
. . .
William Decker . . . . . .
James Ding . . . . . . . . .
Nobuyuki Idei . . . . . . .
. . . . . . . .
Greg Penner

44 Chairman and Chief Executive Officer
45 Chief Financial Officer
66
47
75
43

Independent Director
Independent Director
Independent Director
Independent Director

Robin Yanhong Li is co-founder, chairman and chief executive officer of our company, and oversees our
overall strategy and business operations. Mr. Li has been serving as the chairman of our board of directors since
our inception in January 2000 and as our chief executive officer since January 2004. Mr. Li served as our
president from February 2000 to December 2003. Prior to founding our company, Mr. Li worked as a staff
engineer for Infoseek, a pioneer in the internet search engine industry, from July 1997 to December 1999. Mr. Li
was a senior consultant for IDD Information Services from May 1994 to June 1997. Mr. Li currently serves as an
independent director and chairman of the compensation committee of New Oriental Education & Technology
Group Inc., a NYSE-listed company that provides private educational services in China. Mr. Li also acts as the
vice chairman of the internet Society of China (ISC). Mr. Li has also been a vice chairman of All-China
Federation of Industry & Commerce since December 2012. Mr. Li received a bachelor’s degree in information
science from Peking University in China and a master’s degree in computer science from the State University of
New York at Buffalo.

Jennifer Xinzhe Li has served as our chief financial officer since March 2008. Ms. Li is in charge of our
finance and accounting, human resources, marketing and communications, purchasing, corporate development
and certain other areas. Ms. Li has extensive experience in U.S. GAAP reporting and in developing and leading
finance and accounting teams before she joined us. Prior to joining our company, Ms. Li served as controller of
General Motors Acceptance Corporation (GMAC)’s North American Operations from 2005 to 2008. Prior to
that, Ms. Li worked at General Motors China, where she was responsible for overseeing finance functions of
General Motors’ wholly owned and joint venture businesses in China from 2001 to 2004, with the last post as its
chief financial officer. From 1994 to 2001, she held several other finance positions at General Motors in Canada,
the United States and Singapore. Ms. Li has been serving as a director of Philip Morris International, Inc. since
May 2010. Ms. Li has been recognized by the Fortune Magazine as one of “Asia’s 25 hottest people in business”.
Ms. Li holds an M.B.A. degree from the University of British Columbia in Vancouver, B.C., Canada and a
bachelor of arts degree from Tsinghua University in China.

William Decker has served as our independent director and chairman of the audit committee since October
2005. Mr. Decker is a retired partner at PricewaterhouseCoopers LLP. Prior to his retirement in July 2005,
Mr. Decker was the partner in charge of PricewaterhouseCoopers LLP’s Global Capital Markets Group. He led a
team of more than 300 professionals in 25 countries that provided technical support to non-U.S. companies on
SEC regulations, U.S. GAAP reporting and assistance with Sarbanes-Oxley Act compliance work. Mr. Decker
has served as a senior adviser of VisionChina Media Inc., a NASDAQ-listed company that operates an out-of-
home advertising network on mass transportation systems in China, since December 2011, and served as an
independent director and the chairman of the audit committee of VisionChina Media Inc. from December 2007 to
December 2011. Mr. Decker received a bachelor of science degree in accounting from Fairleigh Dickinson
University in New Jersey.

93

James Ding has served as our independent director since our initial public offering in August 2005.
Mr. Ding has served as a co-chairman of the board of directors of AsiaInfo-Linkage Inc., a NASDAQ-listed
company, since AsiaInfo Holdings, Inc., or AsiaInfo, merged with Linkage Technologies International Holdings
Limited in July 2010. Prior to that, Mr. Ding served as the chairman of the board of AsiaInfo from April 2003 to
July 2010, and a member of the board since AsiaInfo’s inception in 1993. Mr. Ding served as the chief executive
officer and president of AsiaInfo from 1999 to 2003 and as senior vice president and chief technology officer of
AsiaInfo from 1993 to 1999. Mr. Ding is currently a general partner and managing director of GSR Ventures, an
early stage venture fund focusing on semiconductor, internet, wireless, new media and green technology
investment in China. Mr. Ding also serves as a director of NetQin Mobile Inc., a NYSE-listed mobile internet
service provider, and an independent director of Huayi Brothers Media Corporation, a ChiNext Shenzhen-listed
company. Mr. Ding received a master’s degree in information science from the University of California, Los
Angeles and a bachelor’s degree in chemistry from Peking University in China.

Nobuyuki Idei has served as our independent director since June 2007. Being an experienced director,
Mr. Idei currently also serves as director of Accenture, director of FreeBit Co, Ltd., director of Lenovo Group
and chairman of the National Conference on Fostering Beautiful Forests in Japan. Mr. Idei is founder and chief
executive officer of Quantum Leaps Corporation, a specialist consultancy that advises private and public
institutions on the changing role of technology in the 21st century. Mr. Idei is also founder and chairman of the
board of Asia Innovators’ Initiative, a private non-profit organization which he established in 2011 to serve as a
catalyst for social innovation in Asia by bringing together a diverse range of individuals and promoting
knowledge sharing. Mr. Idei was chairman and chief executive officer of Sony Corporation from 2000 to 2005,
chief corporate advisor from 2005 to 2007 and chairman of the advisory board from 2007 to 2012. Prior to that,
Mr. Idei held a range of leadership positions at Sony including general manager of the audio division, senior
general manager of the home video group, and president and representative director. Mr. Idei has also served in a
number of other advisory positions including as counselor to the Bank of Japan, member of Japan’s national IT
Strategy Council, and vice chairman of Nippon Keidanren. Mr. Idei received a bachelor of science degree in
economics and politics from Waseda University in Tokyo.

Greg Penner has served as our director since July 2004. Mr. Penner is a general partner at Madrone Capital
Partners, an investment management firm based in Menlo Park, California. From 2002 to 2004, Mr. Penner was
the senior vice president and chief financial officer of Wal-Mart Japan. From 2000 to 2002, Mr. Penner was
senior vice president of finance and strategy for Walmart.com. From 1997 to 2000, Mr. Penner was a general
partner at Peninsula Capital, an early stage venture capital fund. Previously, Mr. Penner worked in strategic
planning at Wal-Mart Stores, Inc. and corporate finance at Goldman, Sachs & Co. Mr. Penner serves as a director
of Wal-Mart Stores, Inc. and Hyatt Hotels Corporation, and as a director of several private companies. He is also
a director of The Charter Growth Fund and sits on the board of Teach for America. Mr. Penner received an
M.B.A. degree from the Stanford Graduate School of Business and a bachelor’s degree in international
economics from the School of Foreign Service at Georgetown University.

B. Compensation

In 2012, we paid an aggregate of approximately RMB11.3 million (US$1.8 million) ) in cash compensation
and granted options to purchase an aggregate of 7,824 Class A ordinary shares and 1,128 restricted Class A
ordinary shares to our executive officers as a group. We also paid an aggregate of approximately RMB0.5 million
(US$86,500) in cash compensation and granted 1,056 restricted Class A ordinary shares to our non-executive
directors as a group. Our PRC subsidiaries and consolidated affiliated entities are required by law to make
contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical
insurance, housing fund, unemployment and other statutory benefits. Other than the above-mentioned statutory
contributions mandated by applicable PRC law, we have not set aside or accrued any amount to provide pension,
retirement or other similar benefits to our executive officers and directors. No executive officer is entitled to any
severance benefits upon termination of his or her employment with our company except as required under
applicable PRC law.

94

Our board of directors and shareholders approved the issuance of up to 5,040,000 ordinary shares upon
exercise of awards granted under our 2000 option plan. Our 2000 option plan terminated in January 2010 upon
the expiration of its ten-year term. As of December 31, 2012, an aggregate of 14,872 Class A ordinary shares
were issuable upon exercise of outstanding awards granted under our 2000 option plan. At the annual general
meeting held on December 16, 2008, our shareholders approved a new 2008 share incentive plan, which has
reserved an additional 3,428,777 Class A ordinary shares for awards to be granted pursuant to its terms. As of
December 31, 2012, options to purchase an aggregate of 201,832 Class A ordinary shares and an aggregate of
146,433 restricted Class A ordinary shares had been granted under the 2008 share incentive plan.

The following table summarizes, as of December 31, 2012, the outstanding options and restricted Class A
ordinary shares that we granted to our current directors and executive officers and to other individuals as a group
under our 2000 option plan and 2008 share incentive plan. Each Class A ordinary share is represented by 10
ADSs.

Name

Robin Yanhong Li . . . . .

Jennifer Xinzhe Li . . . . .

William Decker . . . . . . .
James Ding . . . . . . . . . . .
Nobuyuki Idei
. . . . . . . .
Greg Penner . . . . . . . . . .
Other individuals as a

group . . . . . . . . . . . . .

Ordinary Shares
Underlying
Outstanding
Options

Exercise Price
(US$/Share)

12,500
4,247
4,515

35(1)
651(1)
*
*
*
*
*(1)
*(1)
*(1)
*(1)
*(1)
*(1)

133.86
1,058.90
1,418.30
—
—
133.86
424.36
1,058.90
1,418.30
—
—
—
—
—
—

Grant Date

Expiration Date

February 11, 2009
January 25, 2011
February 16, 2012
January 25,2011
February 16, 2012
February 11, 2009
January 27, 2010
January 25, 2011
February 16, 2012
January 25, 2011
February 16, 2012
February 16, 2012
February 16, 2012
February 16, 2012
February 16, 2012

February 11, 2014
January 24, 2016
February 16, 2017
N/A
N/A
February 11, 2014
January 26, 2015
January 24, 2016
February 16, 2017
N/A
N/A
N/A
N/A
N/A
N/A

293,942

—

—

—

*

The options and restricted shares in aggregate held by each of these directors and officers represent less than 1% of our total outstanding
shares.

(1) Restricted shares.

The following paragraphs summarize the key terms of our 2000 option plan, which was amended and

restated on December 16, 2008, and our 2008 share incentive plan adopted on December 16, 2008.

2000 Option Plan

Types of Awards. We may grant the following types of awards under our 2000 option plan:

•

•

•

our ordinary shares;

options to purchase our ordinary shares; and

any other securities with value derived from the value of our ordinary shares.

Plan Administration. Our board of directors, or a committee designated by our board of directors,
administers our 2000 option plan. In each case, our board of directors or the committee, will determine the
provisions and terms and conditions of each award. These include, among other things, the option vesting
schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment upon settlement of
an award, payment contingencies and satisfaction of any performance criteria.

95

Award Agreement. Awards granted under our 2000 option plan are evidenced by an award agreement that
sets forth the terms, conditions and limitations for each award. In addition, in the case of options, the award
agreement also specifies whether the option constitutes an incentive stock option, or ISO, or a non-qualifying
stock option.

Eligibility. We may grant awards to employees, directors and consultants of our company or any of our
related entities, which include our subsidiaries or any entities in which we hold a substantial ownership interest.
However, we may grant ISOs only to our employees and employees of our majority-owned subsidiaries.

Acceleration of Awards upon Corporate Transactions. The outstanding awards will accelerate upon
occurrence of a change-of-control corporate transaction in which the successor entity does not assume our
outstanding awards under our 2000 option plan. In such event, each outstanding award will become fully vested
and immediately exercisable, the transfer restrictions on the awards will be released (other than those applicable
to ISOs), and the repurchase or forfeiture rights will terminate immediately before the date of the change-of-
control transaction. If the successor entity assumes our outstanding awards and later terminates the grantee’s
employment or service without cause, or if the grantee resigns voluntarily with good cause within 12 months of
the change-of-control transaction, the outstanding awards automatically become fully vested and exercisable.

Exercise Price and Term of Awards. If we grant an ISO to an employee, who, at the time of that grant, owns
shares representing more than 10% of the voting power of all classes of our share capital, the exercise price
cannot be less than 110% of the fair market value of our ordinary shares on the date of that grant. To the extent
not prohibited by applicable law or exchange rules, a downward adjustment of the exercise price per share
subject to an outstanding option may be made in the absolute discretion of the plan administrator without the
approval of our shareholders or the affected grantees.

The term of each award is stated in the award agreement. The term may not exceed ten years from the date
of the grant, except that five years is the maximum term of an ISO granted to an employee who holds more than
10% of the voting power of our share capital.

Vesting Schedule. In general, the plan administrator determines, or the award agreement specifies, the
vesting schedule. Options generally vest over a four-year period beginning from one year after the grant date.
The award agreements may provide that grantees may elect at any time during their employment or service to
exercise any part or all of the awards prior to full vesting of the awards. But such early exercise may be subject to
a repurchase right as determined by the plan administrator. When an optionee’s employment or service is
terminated, the optionee may exercise his or her options that have vested as of the termination date within three
months of termination or as determined by our plan administrator.

Repurchase Rights. If an award agreement provides for repurchase rights upon termination of a grantee’s
employment or service, it must (or may, with respect to awards granted to officers, directors or consultants)
provide that (i) such repurchase right must be exercised within 90 days of termination of the grantee’s
employment or service (or, in the case of exercise of awards after termination of the grantee’s employment or
service, within 90 days following such exercise), (ii) the repurchase price must be equal to the original purchase
price paid by the grantee for each such share, and (iii) the right to repurchase will lapse at the rate of at least 20%
of the shares subject to the award per year over five years from the date the award is granted (without respect to
the date the award was exercised or became exercisable).

Amendment and Termination. Our board of directors may at any time amend, suspend or terminate our 2000
option plan. Amendments to our 2000 option plan are subject to shareholder approval, to the extent required by
law, or by stock exchange rules or regulations. Any amendment, suspension or termination of our 2000 option
plan must not adversely affect awards already granted without written consent of the recipient of such awards.
Our 2000 option plan had a term of ten years from the date of adoption and expired in January 2010.

96

2008 Share Incentive Plan

Types of Awards. We may grant the following types of awards under our 2008 share incentive plan:

•

•

•

•

options;

restricted shares;

restricted share units; and

any other form of award granted to a participant pursuant to the 2008 plan.

Plan Administration. The compensation committee of our board of directors administers our 2008 share
incentive plan, but may delegate to a committee of one or more members of our board of directors the authority
to grant or amend awards to participants other than independent directors and executive officers. The
compensation committee will determine the provisions and terms and conditions of each award grant, including,
but not limited to, the exercise price, the grant price or purchase price, any restrictions or limitations on the
award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an award, and
accelerations or waivers thereof, any provisions related to non-competition and recapture of gain on an award,
based in each case on such considerations as the committee in its sole discretion determines. The compensation
committee has the sole power and discretion to cancel, forfeit or surrender an outstanding award (whether or not
in exchange for another award or combination or awards).

Award Agreement. Awards granted under our 2008 share incentive plan are evidenced by an award
agreement that sets forth the terms, conditions and limitations for each award which may include the term of an
award, the provisions applicable in the event the participant’s employment or service ends, and our authority to
unilaterally or bilaterally amend, modify, suspend, cancel or rescind an award.

Eligibility. We may grant awards to employees, directors and consultants of our company or any of our
related entities, which include our subsidiaries or any entities in which we hold a substantial ownership interest.
However, we may grant ISOs only to our employees and employees of our majority-owned subsidiaries.

Acceleration of Awards upon Corporate Transactions. The outstanding awards will accelerate (i) upon
occurrence of a change-of-control corporate transaction where any person acquires at least 50% of the total
combined voting power of our outstanding securities or the incumbent board members no longer constitute at
least 50% of our board, or (ii) upon occurrence of any other change-of-control corporate transaction in which the
successor entity does not assume our outstanding awards under our 2008 share incentive plan, provided that the
plan participant remains an employee, consultant or member of our board of directors on the effective date of the
corporate transaction. In such event, each outstanding award will become fully exercisable and all forfeiture
lapse immediately prior to the specified effective date of the corporate
restrictions on such award will
transaction.

If the successor entity assumes our outstanding awards and later terminates the grantee’s employment or
service without cause within 12 months of the corporate transaction, or if the grantee resigns voluntarily with
good reason, the outstanding awards automatically will become fully vested and exercisable. The compensation
committee may also, in its sole discretion, upon or in anticipation of a corporate transaction, accelerate awards,
purchase the awards from the plan participants, replace the awards, or provide for the payment of the awards in
cash.

Exercise Price and Term of Awards. The exercise price per share subject to an option may be amended or
adjusted in the absolute discretion of the compensation committee, the determination of which shall be final,
binding and conclusive. To the extent not prohibited by applicable laws or exchange rules, a downward
adjustment of the exercise prices of options mentioned in the preceding sentence shall be effective without the
approval of our shareholders or the approval of the affected grantees. If we grant an ISO to an employee, who, at
the time of that grant, owns shares representing more than 10% of the voting power of all classes of our share
capital, the exercise price cannot be less than 110% of the fair market value of our ordinary shares on the date of

97

that grant. The compensation committee will determine the time or times at which an option may be exercised in
whole or in part, including exercise prior to vesting. The term may not exceed ten years from the date of the
grant, except that five years is the maximum term of an ISO granted to an employee who holds more than 10% of
the voting power of our share capital.

Restricted Shares and Restricted Share Unites. The compensation committee is also authorized to make
awards of restricted shares and restricted share units. Except as otherwise determined by the compensation
committee at the time of the grant of an award or thereafter, upon termination of employment or service during
the applicable restriction period, restricted shares that are at the time subject to restrictions shall be forfeited or
repurchased in accordance with the respective award agreements.

Vesting Schedule. The compensation committee determines, and the award agreement specifies, the vesting
schedule of options and other awards granted. The compensation committee determines the time or times at
which an option may be exercised in whole or in part, including exercise prior to vesting, and also determines
any conditions that must be satisfied before all or part of an option may be exercised. At the time of grant for
restricted share units, the compensation committee specifies the date on which the restricted share units become
fully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate.

Amendment and Termination. With the approval of our board of directors, the compensation committee may
at any time amend, suspend or terminate our 2008 share incentive plan. Amendments to our 2008 share incentive
plan are subject to shareholder approval, to the extent required by law, or by stock exchange rules or regulations.
Any amendment, suspension or termination of our 2008 share incentive plan must not adversely affect in any
material way awards already granted without written consent of the recipient of such awards. Unless terminated
earlier, our 2008 share incentive plan shall continue in effect for a term of ten years from the date of adoption.

C. Board Practices

Board of Directors

Our board of directors has five directors. A director is not required to hold any shares in the company by
way of qualification. A director may vote with respect to any contract, proposed contract or arrangement in
which he is materially interested. A director may exercise all the powers of the company to borrow money,
mortgage its undertakings, property and uncalled capital, and issue debentures or other securities whenever
money is borrowed or as security for any obligation of the company or of any third party. The remuneration to be
paid to the directors is determined by the board of directors. There is no age limit requirement for directors.

Committees of the Board of Directors

We have three committees under the board of directors: an audit committee, a compensation committee and

a corporate governance and nominating committee. We have adopted a charter for each of the three committees.

Audit Committee

Our audit committee consists of William Decker, James Ding and Greg Penner, all of whom satisfy the
“independence” requirements of Rule 5605(a)(2) of the NASDAQ Stock Market Rules and Rule 10A-3 under the
Exchange Act. Our board of directors has determined that Mr. Decker is an audit committee financial expert as
defined in the instructions to Item 16A of the Form 20-F. The audit committee oversees our accounting and
financial reporting processes and the audits of the financial statements of our company. The audit committee is
responsible for, among other things:

•

•

appointing, retaining and overseeing the work of the independent auditors,
disagreements between the management and the independent auditors relating to financial reporting;

including resolving

pre-approving all auditing and non-auditing services permitted to be performed by the independent
auditors;

98

•

•

•

•

•

reviewing annually the independence and quality control procedures of the independent auditors;

reviewing and approving all proposed related party transactions;

discussing the annual audited financial statements with the management;

meeting separately with the independent auditors to discuss critical accounting policies, management
letters, recommendations on internal controls, the auditor’s engagement letter and independence letter
and other material written communications between the independent auditors and the management; and

attending to such other matters that are specifically delegated to our audit committee by our board of
directors from time to time.

In 2012, our audit committee held meetings or passed resolutions by unanimous written consent five times.

Compensation Committee

Our compensation committee consists of James Ding and Greg Penner, both of whom satisfy the
“independence” requirements of Rule 5605(a)(2) of the NASDAQ Stock Market Rules. The compensation
committee assists the board in reviewing and approving our compensation structure, including all forms of
compensation relating to our directors and executive officers. Our chief executive officer may not be present at
any committee meeting while his compensation is deliberated. The compensation committee is responsible for,
among other things:

•

•

•

•

reviewing and approving executive compensation;

reviewing periodically and approving any long-term incentive compensation or equity plans, programs
or similar arrangements, annual bonuses, employee pension and welfare benefit plans;

determining our policy with respect to change of control or “parachute” payments; and

managing and reviewing director and executive officer indemnification and insurance matters.

In 2012, our compensation committee held meetings or passed resolutions by unanimous written consent

five times.

Corporate Governance and Nominating Committee

Our corporate governance and nominating committee consists of James Ding and Greg Penner, both of
whom satisfy the “independence” requirements of Rule 5605(a) (2) of the NASDAQ Stock Market Rules. The
corporate governance and nominating committee assists the board of directors in selecting individuals qualified
to become our directors and in determining the composition of the board and its committees. The corporate
governance and nominating committee is responsible for, among other things:

•

•

•

•

recommending to the board nominees for election or re-election to the board or for appointments to fill
any vacancies;

reviewing annually the performance of each incumbent director in determining whether to recommend
such director for an additional term;

overseeing the board in the board’s annual review of its own performance and the performance of the
management; and

considering, preparing and recommending to the board such policies and procedures with respect to
corporate governance matters as may be required or required to be disclosed under the applicable laws
or otherwise considered to be material.

In 2012, our corporate governance and nominating committee passed resolutions by unanimous written

consent once

99

Terms of Directors and Executive Officers

All directors hold office until their successors have been duly elected and qualified. None of our directors is
subject to a fixed term of office. In addition, the service agreements between us and the directors do not provide
benefits upon termination of their services. Director nomination is subject to the approval of our corporate
governance and nominating committee. Our shareholders may remove any director by ordinary resolution and
may in like manner appoint another person in his stead. A valid ordinary resolution requires a majority of the
votes cast at a shareholder meeting that is duly constituted and meets the quorum requirement. Officers are
elected by and serve at the discretion of the board of directors.

D. Employees

We had 10,887, 16,082 and 20,877 employees as of December 31, 2010, 2011 and 2012, respectively. As of
December 31, 2012, we had 1,010 employees in management and administration, 9,322 employees in research
and development, 2,037 employees in operation and service, and 8,508 employees in sales and marketing. As of
December 31, 2012, we had 14,688 employees in Beijing, 6,139 employees outside of Beijing but within China,
and 50 employees outside of China. We also hire temporary employees and contractors from time to time. Our
employees are not covered by any collective bargaining agreement. We consider our relations with our
employees to be generally good. However, as our operations and employee base further expand, we cannot assure
you that we will always be able to maintain good relations with all of our employees. See “Item 3.D. Key
Information—Risk Factors—Risks Related to Our Business—We may not be able to manage our expanding
operations effectively.”

E. Share Ownership

The following table sets forth information with respect to the beneficial ownership of our shares as of

December 31, 2012 by:

•

•

each of our current directors and executive officers; and

each person known to us to own beneficially more than 5% of our shares.

See “—B. Compensation” for more details on options and restricted shares granted to our directors and

executive officers.

Directors and Executive Officers:

. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robin Yanhong Li(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jennifer Xinzhe Li(4)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William Decker(5)
James Ding(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nobuyuki Idei(7)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Greg Penner(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Directors and Executive Officers as a Group(9)
. . . .
Principal Shareholders:
Handsome Reward Limited(10)
. . . . . . . . . . . . . . . . . . . .
Baillie Gifford & Co (Scottish partnership)(11) . . . . . . . .
. . . . . . . . . . . . . . . . .
T. Rowe Price Associates, Inc. (12)

Shares Beneficially Owned

Number(1)

%(2)

5,581,324
*
*
*
*
*
5,889,609

5,490,000
2,824,785
1,892,572

16.0%
*
*
*
*
*
16.8%

15.7%
8.1%
5.4%

Less than 1% of our total outstanding Class A ordinary shares and Class B ordinary shares.

*
(1) The number of shares beneficially owned by each named director and executive officer includes the shares beneficially owned by such
person, the shares underlying all options held by such person that have vested or will vest within 60 days after December 31, 2012, and
restricted shares held by such person that will vest within 60 days after December 31, 2012. The options and restricted shares were
granted under our 2000 option plan or 2008 share incentive plan.

100

(3)

(2) Percentage of beneficial ownership of each named director and executive officer is based on 34,965,710 ordinary shares (consisting of
27,202,710 Class A ordinary shares and 7,763,000 Class B ordinary shares) of our company outstanding as of December 31, 2012, the
number of ordinary shares underlying options that have vested or will vest within 60 days after December 31, 2012, and the number of
restricted shares that will vest within 60 days after December 31, 2012, each as held by such person as of that date.
Includes (i) 37,665 Class A Ordinary Shares directly held by Mr. Li on record; (ii) 35,249 Class A Ordinary Shares in the form of ADSs
held in the brokerage account of the administrator of the issuer’s employee stock option program; (iii) 2,209 restricted Class A Ordinary
Shares that have vested as of December 31, 2012; (iv) 15,841 Class A Ordinary Shares issuable upon exercise of options within 60 days
after the date of December 31, 2012; (v) 360 Class A Ordinary Shares issuable upon vesting of restricted shares within 60 days after the
date of December 31, 2012 and (vi) 5,490,000 Class B Ordinary Shares held by Handsome Reward Limited, a British Virgin Islands
company wholly owned and controlled by Mr. Li, and excludes 1,676,667 Class B Ordinary Shares held by Melissa Ma, Mr. Li’s wife,
of which Mr. Li disclaims beneficial ownership. The business address of Mr. Li is c/o Baidu, Inc., Baidu Campus, No. 10 Shangdi 10th
Street, Haidian District, Beijing 100085, PRC.

(4) The business address of Ms. Li is c/o Baidu, Inc., Baidu Campus, No. 10 Shangdi 10th Street, Haidian District, Beijing 100085, PRC.
(5) The address of Mr. Decker is 24 Nordic Way, Saranac Lake, New York 12983, U.S.A.
(6) The business address of Mr. Ding is 4/F, Zhongdian Information Tower No. 6 Zhongguancun South Street, Haidian District, Beijing

100086, PRC.

(7) The business address of Mr. Idei’s address is Tokyo Ginko Kyoukai Building 16F,1-3-1, Marunouchi, Chiyoda-ku, Tokyo, 100-0005,

Japan.

(8) The business address of Mr. Penner is 3000 Sand Hill Road, Building 1, Suite 150, Menlo Park, California 94025, U.S.A.
(9)

Includes ordinary shares, ordinary shares issuable upon exercise of options and restricted shares, held by all of our directors and
executive officers as a group.

(10) Represents 5,490,000 Class B ordinary shares held by Handsome Reward Limited, a British Virgin Island company wholly owned and
controlled by Mr. Robin Yanhong Li. The business address of Handsome Reward Limited is c/o Robin Yanhong Li, Baidu, Inc., Baidu
Campus, No. 10 Shangdi 10th Street, Haidian District, Beijing 100085, PRC.

(11) Represents 2,824,785 Class A ordinary shares in the form of ADSs held by Baillie Gifford & Co (Scottish partnership), as reported on
Schedule 13G filed by Baillie Gifford & Co (Scottish partnership) on February 7, 2013. The percentage of beneficial ownership was
calculated based on the total number of our ordinary shares outstanding as of December 31, 2012. The address of Baillie Gifford & Co
(Scottish partnership) is Calton Square, 1 Greenside Row, Edinburgh EH1 3AN, Scotland, UK.

(12) Represents 1,892,572 Class A ordinary shares in the form of ADSs held by T. Rowe Price Associates, Inc., as reported on Schedule 13G
filed by T. Rowe Price Associates, Inc. on February 11, 2013. The percentage of beneficial ownership was calculated based on the total
number of our ordinary shares outstanding as of December 31, 2012. The address of T. Rowe Price Associates, Inc. is 100 E. Pratt Street,
Baltimore, Maryland 21202, U.S.A.

Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of
Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to
ten votes per share. We issued Class A ordinary shares represented by our ADSs in our initial public offering in
2005. Holders of our Class B ordinary shares may choose to convert their Class B ordinary shares into the same
number of Class A ordinary shares at any time. We are not aware of any arrangement that may, at a subsequent
date, result in a change of control of our company. See “Item 3.D. Key Information—Risk Factors—Risks
Related to Our ADSs—Our dual-class ordinary share structure with different voting rights could discourage
others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs
may view as beneficial.”

As of December 31, 2012, 34,965,710 of our ordinary shares were issued and outstanding. To our
knowledge, approximately 78.6% of our total outstanding ordinary shares were held by six record shareholders in
the United States, including approximately 77.7% held by The Bank of New York Mellon, the depositary of our
ADS program. The number of beneficial owners of our ADSs in the United States is likely to be much larger than
the number of record holders of our ordinary shares in the United States.

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

Please refer to “Item 6.E. Directors, Senior Management and Employees—Share Ownership.”

B. Related Party Transactions

See “Item 4.C. Information on the Company—Organizational Structure—Contractual Arrangements with

Our Consolidated Affiliated Entities and the Nominee Shareholders.”

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Our subsidiaries, consolidated affiliated entities, and the subsidiaries of the consolidated affiliated entities
have engaged, during the ordinary course of business, in a number of customary transactions with each other. All
of these inter-company balances have been eliminated in consolidation.

As of December 31, 2010, 2011 and 2012, we had RMB98.7 million, RMB249.7 million and nil due from
related parties. The amounts due from related parties primarily represent amounts in connection with advertising
services provided and borrowings provided by us to our equity investees. The amounts due from our equity
investees are unsecured and repayable on contract terms, which arose in the ordinary course of business. The
amount due from related parties dropped to nil as of December 31, 2012, mainly because we increased our equity
interests in Qiyi.com, Inc. in November 2012 to obtain the controlling interests and Qiyi.com, Inc. has since then
become our consolidated subsidiary rather than equity method investee. The amount outstanding as of March 27,
2013 was nil.

As of December 31, 2010, 2011 and 2012, we had RMB95.7 million, RMB148.9 million and nil due to
related parties. The amounts due to related parties represent unsecured and interest free loans provided by our
equity investees, which arose in the ordinary course of business. The amount due to related parties dropped to nil
as of December 31, 2012, mainly because we increased our equity interests in Qiyi.com, Inc. in November 2012
to obtain the controlling interests and Qiyi.com, Inc. has since then become our consolidated subsidiary rather
than equity method investee. The amount outstanding as of March 27, 2013 was nil.

Share Options and Restricted Shares Grants

Please refer to “Item 6.B. Directors, Senior Management and Employees—Compensation.”

C. Interests of Experts and Counsel

Not applicable.

Item 8. Financial Information

A. Consolidated Statements and Other Financial Information

We have appended consolidated financial statements filed as part of this annual report.

Legal Proceedings

From time to time, we have been involved in litigation or other disputes regarding, among other things,
copyright and trademark infringement, defamation, unfair competition and labor disputes. Our search results
provide links to materials, and our Baidu WenKu, Baidu Post Bar, Baidu Media Player and other Baidu products
may contain materials, in which others may allege to own copyrights, trademarks or image rights or which others
may claim to be defamatory or objectionable. We have received notice letters from third parties asserting
copyright infringement, unfair competition, defamation, breach of contract and labor-related claims against us.

In September 2011, three Chinese writers filed 16 complaints against us before the Haidian District People’s
Court in Beijing, alleging that our Baidu WenKu had infringed upon their copyrights to certain literary works. In
December 2011, the plaintiffs withdrew their complaints. However, in January 2012, the writers re-filed their
complaints for the same claims with the Haidian District People’s Court in Beijing, seeking compensation in an
aggregate amount of RMB1.9 million (US$0.3 million). The Haidian District People’s Court in Beijing issued
rulings for these cases in September 2012. The court held in seven of these cases that we “should have known”
the files uploaded by users to Baidu WenKu infringed upon the plaintiffs’ copyrights and failed to take necessary
actions to remove the infringing content immediately despite the plaintiffs’ notification of the infringement and
request to remove the infringing content, and ordered us to pay for the plaintiffs’ damages in an aggregate
amount of approximately RMB0.2 million (US$32,102). The court held in these seven cases that we would have

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been exempted from liabilities if we had removed the infringing content immediately upon the receipt of the
warning and removal request from the copyright holders. The court dismissed all plaintiffs’ claims in the other
cases. None of the parties has filed any appeals.

As of December 31, 2012, we were involved in 126 cases pending in various PRC and US courts. The
is approximately RMB122.3 million

these cases

aggregate amount of compensation sought under
(US$19.6 million).

For many of these legal proceedings, we are currently unable to estimate the reasonably possible loss or a
range of reasonably possible loss as the proceedings are in the early stages, or there is a lack of clear or consistent
interpretation of laws specific to the industry-specific complaints among different jurisdictions. As a result, there
is considerable uncertainty regarding the timing or ultimate resolution of such proceedings, which includes
eventual loss, fine, penalty or business impact, if any, and therefore, an estimate for the reasonably possible loss
or a range of reasonably possible loss cannot be made. With respect to the limited number of proceedings for
which we are able to estimate the reasonably possible loss or the range of reasonably possible loss, such
estimates are immaterial. However, we believe that such proceedings, individually and in the aggregate, when
finally resolved, are not reasonably likely to have a material and adverse effect on our results of operations,
financial position and cash flows.

Dividend Policy

Baidu, Inc, our holding company in the Cayman Islands, has never declared or paid any dividends on our
ordinary shares, nor do we have any present plan to pay any cash dividends on our ordinary shares in the
foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to
operate and expand our business.

Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of
directors decides to pay dividends, the form, frequency and amount of our dividends will depend upon our future
operations and earnings, capital requirements and surplus, financial condition, contractual restrictions and other
factors that our board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to
the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the
fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

B. Significant Changes

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since

the date of our audited consolidated financial statements included in this annual report.

Item 9. The Offer and Listing

A. Offering and Listing Details

Our ADSs have been listed on The NASDAQ Global Market since August 5, 2005. Our ADSs currently
trade on The NASDAQ Global Select Market under the symbol “BIDU.” Prior to May 12, 2010, one ADS
represented one Class A ordinary share. On May 12, 2010, we effected a change of the ADS to Class A ordinary
share ratio from 1 ADS representing 1 Class A ordinary share to 10 ADSs representing 1 Class A ordinary share.
The ratio change has the same effect as a 10-for-1 ADS split.

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The following table provides the high and low trading prices for our ADSs on NASDAQ for (i) the years
2008, 2009, 2010, 2011 and 2012, (ii) each of the four quarters of 2011 and 2012, and (iii) each of the past six
full months. For ease of comparison, the ADS prices before May 12, 2010 have been retroactively adjusted to
reflect the ADS to Class A ordinary share ratio change that took effect on May 12, 2010.

Annual Highs and Lows
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarterly Highs and Lows
First Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monthly Highs and Lows
September 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
October 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
February 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 2013 (through March 26, 2013) . . . . . . . . . . . . . . . . . . .

Trading Price

High

Low

39.77
44.33
115.04
165.96
154.15

138.53
156.04
165.96
147.68
154.15
152.85
134.71
116.80

117.20
116.80
108.08
102.50
114.88
109.03
93.21

10.05
10.50
38.47
97.58
85.96

97.58
114.14
100.95
102.00
117.17
107.50
99.71
85.96

106.60
105.94
90.55
85.96
99.32
87.54
83.31

B. Plan of Distribution

Not applicable.

C. Markets

Our ADSs have been listed on NASDAQ since August 5, 2005 under the symbol “BIDU.”

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

Item 10. Additional Information

A. Share Capital

Not applicable.

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B. Memorandum and Articles of Association

The following are summaries of material provisions of our third amended and restated memorandum and
articles of association, as well as the Companies Law (2012 Revision) insofar as they relate to the material terms
of our ordinary shares.

Registered Office and Objects

The Registered Office of our company is at the offices of Maples Corporate Services Limited, PO Box 309,
Ugland House, Grand Cayman, KY1-1104, Cayman Islands or at such other place as our board of directors may
from time to time decide. The objects for which our company is established are unrestricted and we have full
power and authority to carry out any object not prohibited by the Companies Law (2012 Revision), as amended
from time to time, or any other law of the Cayman Islands.

Board of Directors

See “Item 6.C. Board Practices—Board of Directors.”

Ordinary Shares

General. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders
of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion
rights. All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing the
ordinary shares are issued in registered form. Our shareholders who are nonresidents of the Cayman Islands may
freely hold and vote their shares.

Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our

board of directors subject to the Companies Law.

Conversion. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the
holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.
Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate
of such holder (as defined in our articles of incorporation), such Class B ordinary shares shall be automatically
and immediately converted into the equal number of Class A ordinary shares. In addition, if at any time our
chairman and chief executive officer, Robin Yanhong Li, and his affiliates collectively own less than 5% of the
total number of the issued and outstanding Class B ordinary shares, each issued and outstanding Class B ordinary
share shall be automatically and immediately converted into one share of Class A ordinary share, and we shall
not issue any Class B ordinary shares thereafter.

Voting Rights. All of our shareholders have the right to receive notice of shareholders’ meetings and to
attend, speak and vote at such meetings. In respect of matters requiring shareholders’ vote, each Class A ordinary
share is entitled to one vote, and each Class B ordinary share is entitled to 10 votes. A shareholder may
participate at a shareholders’ meeting in person, by proxy or by telephone conference or other communications
equipment by means of which all the shareholders participating in the meeting can communicate with each other.
At any shareholders’ meeting, a resolution put to the vote of the meeting shall be decided on a poll conducted by
the chairman of the meeting.

A quorum for a shareholders’ meeting consists of one or more shareholders holding at least one third of the
paid up voting share capital present in person or by proxy or, if a corporation or other non-natural person, by its
if required by the Companies Law, hold a general meeting of
duly authorized representative. We shall,
shareholders as our annual general meeting and shall specify the meeting as such in the notices calling it. Our
board of directors may call extraordinary general meetings, and they must on shareholders’ requisition convene
an extraordinary general meeting. A shareholder requisition is a requisition of shareholders holding at the date of

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deposit of the requisition not less than a majority of the voting power represented by the issued shares of our
company as at that date carries the right of voting at general meetings of our company. Advance notice of at least
five days is required for the convening of our annual general meeting and other shareholders’ meetings.

An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of
the votes attaching to the ordinary shares cast in a general meeting, while a special resolution requires the
affirmative vote of no less than two-thirds of the votes cast attaching to the ordinary shares cast in a general
meeting. A special resolution is required for matters such as a change of name. Holders of the ordinary shares
may effect certain changes by ordinary resolution, including consolidating and dividing all or any of our share
capital into shares of larger amount than our existing share capital and canceling any shares.

Transfer of Shares. Subject to the restrictions of our memorandum and articles of association, as applicable,
any of our shareholders may transfer any or all of his or her ordinary shares by an instrument of transfer in the
usual or common form or any other form approved by our board of directors.

Our board of directors may, in their absolute discretion (except with respect to a transfer from a shareholder
to its affiliate(s)), decline to register any transfer of shares without assigning any reason thereof. If our board of
directors refuses to register a transfer they shall notify the transferee within two months of such refusal.
Notwithstanding the foregoing, if a transfer complies with the holder’s transfer obligations and restrictions set
forth under applicable law (including but not limited to U.S. securities law provisions related to insider trading)
and our articles of association, our board of directors shall promptly register such transfer. Further, any director is
authorized to confirm in writing addressed to the registered office to authorize a share transfer and to instruct that
the register of members be updated accordingly, provided that the transfer complies with the holder’s transfer
obligations and restrictions set forth under applicable law and our articles of association and such holder is not
the director who authorizes the transfer or an entity affiliated with such director. Any director is authorized to
execute a share certificate in respect of such shares for and on behalf of our company.

The registration of transfers may be suspended at such time and for such periods as our board of directors
may from time to time determine, provided, however, that the registration of transfers shall not be suspended for
more than 45 days in any year.

Liquidation. On a return of capital on winding up or otherwise (other than on conversion, redemption or
purchase of shares), assets available for distribution among the holders of ordinary shares may be distributed
among the holders of the ordinary shares as determined by the liquidator, subject to sanction of a special
resolution of our company. If our assets available for distribution are insufficient to repay all of the paid-up
capital, the assets will be distributed so that the losses are borne by our shareholders proportionately to the capital
paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by such
shareholders respectively.

Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls upon
shareholders for any amounts unpaid on their shares in a notice served to such shareholders at least 14 days prior
to the specified time and place of payment. The shares that have been called upon and remain unpaid on the
specified time are subject to forfeiture.

Redemption of Shares. Subject to the provisions of the Companies Law and our articles of association, we
may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such
terms and in such manner as our board of directors may determine.

Repurchase of Shares. Subject to the provisions of the Companies Law and our articles of association, our
board of directors may authorize repurchase of our shares in accordance with the manner of purchase specified in
our articles of association without seeking shareholder approval.

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Variations of Rights of Shares. All or any of the special rights attached to any class of shares may, subject
to the provisions of the Companies Law, be varied either with the written consent of the holders of a majority of
the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the
holders of the shares of that class.

Inspection of Books and Records. No holders of our ordinary shares who is not a director shall have any
right of inspecting any of our accounts, books or documents except as conferred by the Companies Law or
authorized by the directors or by us in general meeting. However, we will make this annual report, which
contains our audited financial statements, available to shareholders and ADS holders. See “Item 10.H. Additional
Information—Documents on Display.”

Preferred Shares

Our board of directors has the authority, without shareholder approval,

to issue up to a total of
10,000,000 shares of preferred shares in one or more series. Our board of directors may establish the number of
shares to be included in each such series and may set the designations, preferences, powers and other rights of the
shares of a series of preferred shares. While the issuance of preferred shares provides us with flexibility in
connection with possible acquisitions or other corporate purposes, it could, among other things, have the effect of
delaying, deferring or preventing a change of control transaction and could adversely affect the market price of
our ADSs. We have no current plan to issue any preferred shares.

C. Material Contracts

We have not entered into any material contracts other than in the ordinary course of business and other than

those described in “Item 4. Information on the Company” or elsewhere in this annual report on Form 20-F.

D. Exchange Controls

See “Item 4.B. Information on the Company—Business Overview—Regulation—Regulations on Foreign

Exchange.”

E. Taxation

The following summary of the material Cayman Islands, People’s Republic of China and United States
federal income tax consequences of an investment in our ADSs or ordinary shares is based upon laws and
relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change.
This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary
shares, such as the tax consequences under state, local and other tax laws.

Cayman Islands Taxation

According to Maples and Calder, our Cayman Islands counsel, the Cayman Islands currently levies no taxes
on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the
nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the
Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in,
or brought within, the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax
treaties that are applicable to any payments made to or by our company. There are no exchange control
regulations or currency restrictions in the Cayman Islands.

People’s Republic of China Taxation

If we are considered a PRC resident enterprise under the EIT Law, our shareholders and ADS holders who
are deemed non-resident enterprises may be subject to the 10% EIT on the dividends payable by us or any gains
realized from the transfer of our shares or ADSs, if such income is deemed derived from China, provided that

107

(i) such foreign enterprise investor has no establishment or premises in China, or (ii) it has establishment or
premises in China but its income derived from China has no real connection with such establishment or premises.
Furthermore, if we are considered a PRC resident enterprise and relevant PRC tax authorities consider the
dividends we pay with respect to our shares or ADSs and the gains realized from the transfer of our shares or
ADSs to be income derived from sources within the PRC, it is also possible that such dividends and gains earned
by non-resident individuals may be subject to the 20% PRC individual income tax. It is uncertain whether, if we
are considered a PRC resident enterprise, holders of our shares or ADSs would be able to claim the benefit of tax
treaties or arrangements entered into between China and other jurisdictions.

If we are required under the PRC tax law to withhold PRC income tax on our dividends payable to our non-
PRC resident shareholders and ADS holders, or if any gains realized from the transfer of our shares or ADSs by
our non-PRC resident shareholders and ADS holders are subject to the EIT or the individual income tax, your
investment in our shares or ADSs could be materially and adversely affected.

United States Federal Income Taxation

The following discussion describes certain United States federal income tax considerations under present
law of the purchase, ownership and disposition of the ADSs or ordinary shares. This summary applies only to
investors that are U.S. Holders (as defined below) and that hold the ADSs or ordinary shares as capital assets.
This discussion is based on the tax laws of the United States as in effect on the date of this annual report on
Form 20-F and on United States Treasury regulations in effect or, in some cases, proposed, as of the date of this
annual report on Form 20-F, as well as judicial and administrative interpretations thereof available on or before
such date. All of the foregoing authorities are subject to change, which change could apply retroactively and
could affect the tax considerations described below.

The following discussion does not deal with the tax consequences to any particular investor or to persons in

special tax situations such as:

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

banks;

financial institutions;

insurance companies;

broker dealers;

traders that elect to mark to market;

tax-exempt entities;

persons liable for alternative minimum tax;

regulated investment companies;

certain expatriates or former long-term residents of the United States;

governments or agencies or instrumentalities thereof;

persons holding an ADS or ordinary share as part of a straddle, hedging, conversion or integrated
transaction;

persons that actually or constructively own 10% or more of our voting shares;

persons whose functional currency is other than the U.S. dollar;

persons holding ADSs or ordinary shares through partnerships (including certain entities treated as
partnerships for U.S. federal income tax purposes) or other pass-through entities; or

persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee share option
or otherwise as consideration.

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U.S. Holders are urged to consult their tax advisors about the application of the U.S. federal tax rules to
their particular circumstances as well as the state and local and foreign tax consequences to them of the
purchase, ownership and disposition of ADSs or ordinary shares.

The discussion below of the U.S. federal income tax consequences will apply if you are a “U.S. Holder.”
You are a “U.S. Holder” if you are the beneficial owner of ADSs or ordinary shares and you are, for U.S. federal
income tax purposes,

•

•

•

•

a citizen or individual resident of the United States;

a corporation (or other entity subject to tax as a corporation for U.S. federal income tax purposes) that
is created or organized in or under the laws of the United States, any State or the District of Columbia;

an estate whose income is subject to U.S. federal income taxation regardless of its source; or

a trust that (i) is subject to the supervision of a court within the United States and the control of one or
more United States persons or (ii) has a valid election in effect under applicable United States Treasury
regulations to be treated as a United States person.

This discussion does not consider the tax treatment of partnerships or other pass-through entities that hold
the ADSs or ordinary shares, or of persons who hold the ADSs or ordinary shares through such entities. If a
partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial
owner of the ADSs or ordinary shares, the U.S. federal income tax treatment of a partner in the partnership will
generally depend on the status of the partner and the activities of the partnership.

The discussion below assumes that the representations contained in the deposit agreement are true and that
the obligations in the deposit agreement and any related agreement will be complied with in accordance with
their terms. If you hold ADSs, you will be treated as the holder of the underlying ordinary shares represented by
those ADSs for U.S. federal income tax purposes.

This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax
laws, or state, local or non-U.S. tax laws. We have not sought, and will not seek, a ruling from the Internal
Revenue Service, or the IRS, or an opinion as to any U.S. federal income tax consequence described herein. The
IRS may disagree with the discussion herein, and its determination may be upheld by a court.

Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares

Subject to the passive foreign investment company rules discussed below, the gross amount of all our
distributions to you with respect to the ADSs or ordinary shares will be included in your gross income as
dividend income on the date of receipt by the depositary, in the case of ADSs, or by you, in the case of ordinary
shares, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits
(computed under U.S.
the
dividends-received deduction allowed to corporations in respect of dividends received from U.S. corporations.

income tax principles). The dividends will not be eligible for

federal

With respect to non-corporate U.S. Holders (including individual U.S. Holders), dividends may be taxed at
the lower applicable capital gains rate provided that (i) the ADSs or ordinary shares are readily tradable on an
established securities market in the United States or we are eligible for the benefit of the income tax treaty
between the United States and the PRC, (ii) we are not a passive foreign investment company (as discussed
below) for either our taxable year in which the dividend was paid or the preceding taxable year, (iii) certain
holding period requirements are met, and (iv) such non-corporate U.S. Holders are not under an obligation to
make related payments with respect to positions in substantially similar or related property. For this purpose,
ADSs listed on the NASDAQ Global Market will generally be considered to be readily tradable on an established
securities market in the United States. You should consult your tax advisor regarding the availability of the lower
rate for dividends paid with respect to our ADSs or ordinary shares.

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Dividends will constitute foreign source income for foreign tax credit

limitation purposes. If PRC
withholding taxes apply to dividends paid to you with respect to the ADSs or ordinary shares, you may be able to
obtain a reduced rate of PRC withholding taxes under the income tax treaty between the United States and the
PRC if certain requirements are met. In addition, subject to certain conditions and limitations, PRC withholding
taxes on dividends may be treated as foreign taxes eligible for credit against your U.S. federal income tax
liability. U.S. Holders should consult their own tax advisors regarding the creditability of any PRC tax. The
limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income.
For this purpose, dividends distributed by us with respect to ADSs or ordinary shares will generally constitute
“passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”

To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits, it
will be treated first as a tax-free return of your tax basis in your ADSs or ordinary shares, and to the extent the
amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to
calculate our earnings and profits for U.S. federal income tax purposes. Therefore, a U.S. Holder should expect
that a distribution will be reported as a dividend.

Taxation of Disposition of Shares

Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or
loss on any sale, exchange or other taxable disposition of an ADS or ordinary share equal to the difference
between the amount realized for the ADS or ordinary share and your tax basis in the ADS or ordinary share. The
gain or loss will generally be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual
U.S. Holder, who has held the ADS or ordinary share for more than one year, you will generally be eligible for
reduced tax rates. The deductibility of capital losses is subject to limitations. Any such gain or loss that you
recognize will generally be treated as United States source income or loss (in the case of losses, subject to certain
limitations). However, in the event we are deemed to be a PRC “resident enterprise” under PRC tax law, we may
be eligible for the benefits of the income tax treaty between the United States and the PRC. In such event, if PRC
tax were to be imposed on any gain from the disposition of the ADSs or ordinary shares, a U.S. Holder that is
eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat such
gain as PRC source income. U.S. Holders should consult their own tax advisors regarding the creditability of any
PRC tax.

Passive Foreign Investment Company

Based on the market value of the ADSs and ordinary shares, the composition of our assets and income and
our operations, we believe that for our taxable year ended December 31, 2012, we were not a “passive foreign
investment company,” or “PFIC,” for U.S. federal income tax purposes. However, our PFIC status for the current
taxable year ending December 31, 2013 will not be determinable until its close, and, accordingly, there is no
guarantee that we will not be a PFIC for the current
taxable year (or any future taxable year). A
non-U.S. corporation is considered a PFIC for any taxable year if either:

•

•

at least 75% of its gross income is passive income, which is referred to as the “income test”, or

at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a
taxable year) is attributable to assets that produce or are held for the production of passive income,
which is referred to as the “asset test”.

We will be treated as owning our proportionate share of the assets and earning our proportionate share of the
income of any other corporation in which we own, directly or indirectly, more than 25% (by value) of the shares.

We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status
may change. In particular, because the total value of our assets for purposes of the asset test will generally be
calculated using the market price of the ADSs and ordinary shares, our PFIC status will depend in large part on

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the market price of the ADSs and ordinary shares, which may fluctuate considerably. Accordingly, fluctuations
in the market price of the ADSs and ordinary shares may result in our being a PFIC for any year. If we are a
PFIC for any year during which you hold the ADS or ordinary shares, we will generally continue to be treated as
a PFIC for all succeeding years during which you hold such ADS or ordinary shares. However, if we cease to be
a PFIC, provided that you have not made a mark-to-market election, as described below, you may avoid some of
the adverse effects of the PFIC regime by making a deemed sale election with respect to the ADSs or ordinary
shares, as applicable.

If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, you will be subject to
special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or
other disposition (including a pledge) of the ADSs or ordinary shares, unless you make a “mark-to-market”
election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average
annual distributions you received during the shorter of the three preceding taxable years or your holding period
for the ADSs or ordinary shares will be treated as an excess distribution. Under these special tax rules:

•

•

•

the excess distribution or gain will be allocated ratably over your holding period for the ADSs or
ordinary shares,

the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in
which we became a PFIC, will be treated as ordinary income, and

the amount allocated to each other taxable year will be subject to the highest tax rate in effect for that
taxable year and the interest charge generally applicable to underpayments of tax will be imposed on
the resulting tax attributable to each such taxable year.

The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution”
cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the
ADSs or ordinary shares cannot be treated as capital, even if you hold the ADSs or ordinary shares as capital
assets.

Alternatively, a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-
market election for such stock of a PFIC to elect out of the tax treatment discussed in the two preceding
paragraphs. If you make a valid mark-to-market election for the ADSs or ordinary shares, you will include in
income each year an amount equal to the excess, if any, of the fair market value of the ADSs or ordinary shares
as of the close of your taxable year over your adjusted basis in such ADSs or ordinary shares. You are allowed a
deduction for the excess, if any, of the adjusted basis of the ADSs or ordinary shares over their fair market value
as of the close of the taxable year. Such deductions, however, are allowable only to the extent of any net mark-to-
market gains on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included
in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the
ADSs or ordinary shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible
portion of any mark-to-market loss on the ADSs or ordinary shares, as well as to any loss realized on the actual
sale or disposition of the ADSs or ordinary shares, to the extent that the amount of such loss does not exceed the
net mark-to-market gains previously included for such ADSs or ordinary shares. Your basis in the ADSs or
ordinary shares will be adjusted to reflect any such income or loss amounts. If you make such a mark-to-market
election, tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by
us (except that the lower applicable capital gains rate would not apply).

The mark-to-market election is available only for “marketable stock” which is stock that is traded in other
than de minimis quantities on at least 15 days during each calendar quarter, or “regularly traded,” on a qualified
exchange or other market, as defined in applicable Treasury regulations. We expect that the ADSs will continue
to be listed on the NASDAQ Global Market, which is a qualified exchange for these purposes, and, consequently,
assuming that the ADSs are regularly traded, if you are a holder of ADSs, it is expected that the mark-to-market
election would be available to you were we to become a PFIC.

111

Alternatively, a U.S. Holder may avoid the PFIC tax consequences described above in respect to its ADSs
and ordinary shares by making a timely “qualified electing fund,” or QEF, election. In order to comply with the
requirements of a QEF election, a U.S. Holder must receive certain information from us. Because we do not
intend to provide such information, however, such election will not be available to U.S. Holders of the ADSs or
ordinary shares.

If you hold ADSs or ordinary shares in any year in which we are a PFIC, you will be required to file an

annual information report containing such information as the U.S. Treasury may require.

You are urged to consult your tax advisor regarding the application of the PFIC rules to your investment in

ADSs or ordinary shares.

Information Reporting and Backup Withholding

Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or
redemption of ADSs or ordinary shares may be subject to information reporting to the IRS and possible
U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder that furnishes a correct
taxpayer identification number and makes any other required certification or that is otherwise exempt from
backup withholding. U.S. Holders that are required to establish their exempt status generally must provide such
certification on IRS Form W-9. U.S. Holders should consult their tax advisors regarding the application of the
U.S. information reporting and backup withholding rules.

Backup withholding is not an additional tax. Amounts withheld as backup withholding can be credited
against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under
the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any
required information in a timely manner.

Pursuant to the Hiring Incentives to Restore Employment Act of 2010 and final regulations thereunder,
individual U.S. Holders and certain entities may be required to submit to the IRS certain information with respect
to his or her beneficial ownership of the ADSs or ordinary shares, if such ADSs or ordinary shares are not held
on his or her behalf by a financial institution. This new law also imposes penalties if an individual U.S. Holder is
required to submit such information to the IRS and fails to do so.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We previously filed with the SEC our registration statement on Form F-1, as amended and prospectus under
the Securities Act of 1933, with respect to our ordinary shares. We have also previously filed with the SEC our
registration statement on Form F-3 with respect to the sale of debt securities by our company on a continuous
basis and a prospectus under the Securities Act, and have issued US$1.5 billion senior unsecured notes in two
equal tranches, due in 2017 and 2022, with stated interest rates of 2.25% and 3.50%, respectively.

We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act.
Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are
required to file annually a Form 20-F within four months after the end of each fiscal year, which is December 31.
Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at

112

prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference
Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that
contains reports, proxy and information statements, and other information regarding registrants that make electronic
filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the
Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers,
directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act.

We will furnish The Bank of New York Mellon, the depositary of our ADSs, with our annual reports, which
will include a review of operations and annual audited consolidated financial statements prepared in conformity
with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made
generally available to our shareholders. The depositary will make such notices, reports and communications
available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information
contained in any notice of a shareholders’ meeting received by the depositary from us.

In accordance with NASDAQ Stock Market Rule 5250(d), we will post this annual report on Form 20-F on
our website at http://ir.baidu.com. In addition, we will provide hardcopies of our annual report free of charge to
shareholders and ADS holders upon request.

I. Subsidiary Information

Not applicable.

Item 11. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our exposure to interest rate risk primarily relates to excess cash invested in short-term instruments with
original maturities of less than a year and long-term held-to-maturity securities with maturities of greater than a
year. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate
risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest rates fall. Due in part to these
factors, our future investment income may fall short of expectations due to changes in interest rates, or we may
suffer losses in principal if we have to sell securities which have declined in market value due to changes in
interest rates. We have not been, and do not expect to be, exposed to material interest rate risks, and therefore
have not used any derivative financial instruments to manage our interest risk exposure.

We had RMB20.6 billion (US$3.3 billion) short-term investments as of December 31, 2012, with a
weighted average duration of approximately 0.45 years. A hypothetical one percentage point (100 basis-point)
increase in interest rates would have resulted in a decrease of approximately RMB90.7 million (US$14.6 million)
in the fair value of these short-term investments as of December 31, 2012.

We had RMB513.7 million (US$82.5 million) long-term held-to-maturity investments as of December 31,
2012, with a weighted average duration of approximately 1.48 years. A hypothetical one percentage point
(100 basis-point) increase in interest rates would have resulted in a decrease of approximately RMB7.4 million
(US$1.2 million) in the fair value of these long-term held-to-maturity investments as of December 31, 2012.

Foreign Exchange Risk

Most of our revenues and costs are denominated in RMB, while a portion of our cash and cash equivalents
and short-term financial assets are denominated in U.S. dollars and held by our Cayman Islands holding
company. Our exposure to foreign exchange risk primarily relates to those financial assets denominated in
U.S. dollars. Any significant revaluation of RMB against the U.S. dollar may materially affect our earnings and
financial position, and the value of, and any dividends payable on, our ADS in U.S. dollars. See “Item 3.D. Key

113

Information—Risk Factors—Risks Related to Doing Business in China—Fluctuation in the value of the RMB
may have a material and adverse effect on your investment.” In addition, we commenced operation in Japan in
late 2007. To the extent we need to make capital injections into our Japan operation by converting U.S. dollars
into Japanese Yen, we will be exposed to the fluctuations in the exchange rate between the U.S. dollar and the
Japanese Yen. We have not hedged exposures denominated in foreign currencies using any derivative financial
instruments.

The RMB appreciated by 1.0% against the U.S. dollar in 2012. A hypothetical 10% decrease in the
exchange rate of the U.S. dollar against the RMB would have resulted in a decrease of RMB931.0 million
(US$149.4 million) in the value of our U.S. dollar-denominated financial assets at December 31, 2012.

Item 12. Description of Securities Other than Equity Securities

A. Debt Securities

Not applicable.

B. Warrants and Rights

Not applicable.

C. Other Securities

Not applicable.

D. American Depositary Shares

Fees and Charges Our ADS holders May Have to Pay

The Bank of New York Mellon, the depositary of our ADS program, collects its fees for delivery and
surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal
or from intermediaries acting for them. The depositary collects fees for making distributions to investors by
deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees.
The depositary may collect its annual fee for depositary services by deductions from cash distributions or by
directly billing investors or by charging the book-entry system accounts of participants acting for them. The
depositary may generally refuse to provide fee-attracting services until its fees for those services are paid. The
depositary’s corporate trust office at which the ADSs will be administered is located at 101 Barclay Street, New
York, New York 10286. The depositary’s principal executive office is located at One Wall Street, New York,
New York 10286.

Persons depositing or withdrawing shares must pay:

For:

US$5.00 (or less) per 1,000 ADSs (or portion of

1,000 ADSs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

US$0.02 (or less) per ADS . . . . . . . . . . . . . . . . . . . . . . .

A fee equivalent to the fee that would be payable if

securities distributed had been shares and the shares
had been deposited for issuance of ADSs . . . . . . . . . .

114

•

•

•

•

Issuance of ADSs, including issuances resulting
from a distribution of shares or rights or other
property

the purpose of
Cancellation of ADSs
withdrawal, including if the deposit agreement
terminates

for

Any cash distribution to registered ADS holders

Distribution of securities distributed to holders
of deposited securities which are distributed by
the depositary to registered ADS holders

Persons depositing or withdrawing shares must pay:

For:

US$0.02 (or less) per ADS per calendar year (if the

depositary has not collected any cash distribution fee
during that year) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expenses of the depositary . . . . . . . . . . . . . . . . . . . . . . . .

Registration or transfer fees . . . . . . . . . . . . . . . . . . . . . . .

Taxes and other governmental charges the depositary or

the custodian have to pay on any ADS or share
underlying an ADS, for example, stock transfer taxes,
stamp duty or withholding taxes . . . . . . . . . . . . . . . . .

Any charges incurred by the depositary or its agents for

servicing the deposited securities . . . . . . . . . . . . . . . . .

Fees and Other Payments Made by the Depositary to Us

•

•

•

•

•

•

Depositary services

Cable, telex and facsimile transmissions (when
expressly provided in the deposit agreement)

Converting foreign currency to U.S. dollars

Transfer and registration of shares on our share
register to or from the name of the depositary or
its agent when you deposit or withdraw shares

As necessary

As necessary

The depositary has agreed to reimburse us annually for our expenses incurred in connection with investor
relationship programs and any other program related to our ADS facility and the travel expense of our key
personnel in connection with such programs. The depositary has also agreed to provide additional payments to us
based on the applicable performance indicators relating to our ADS facility. There are limits on the amount of
expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not
necessarily tied to the amount of fees the depositary collects from investors. In February 2013, we received
US$4.0 million (after tax) reimbursement from the depositary for our expenses incurred in connection with
investor relationship programs related to the ADS facility and the travel expense of our key personnel in
connection with such programs.

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PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

None.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

Item 15. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, has
performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by
Rule 13a-15(b) under the Exchange Act.

Based upon that evaluation, our management has concluded that, as of December 31, 2012, our disclosure
controls and procedures were effective in ensuring that the information required to be disclosed by us in the
reports that we file and furnish under the Exchange Act was recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our
management, including our chief executive officer and chief financial officer, to allow timely decisions regarding
required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our management evaluated the effectiveness of
our internal control over financial reporting, as required by Rule 13a-15(c) of the Exchange Act, based on criteria
established in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our
internal control over financial reporting was effective as of December 31, 2012.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. In addition, projections of any evaluation of effectiveness of our internal control over financial
reporting to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Our independent registered public accounting firm, Ernst & Young Hua Ming LLP, has audited the
effectiveness of our internal control over financial reporting as of December 31, 2012, as stated in its report,
which appears on page F-3 of this annual report on Form 20-F.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the period
covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

116

Item 16A. Audit Committee Financial Expert

Our board of directors has determined that Mr. William Decker, an independent director (under the
standards set forth in NASDAQ Stock Market Rule 5605(a)(2) and Rule 10A-3 under the Exchange Act) and
member of our audit committee, is an audit committee financial expert.

Item 16B. Code of Ethics

Our board of directors adopted a code of business conduct and ethics that applies to our directors, officers,
employees and advisors in July 2005. We have posted a copy of our code of business conduct and ethics on our
website at http://ir.baidu.com.

Item 16C. Principal Accountant Fees and Services

The following table sets forth the aggregate fees by categories specified below in connection with certain
professional services rendered by Ernst & Young Hua Ming LLP, our principal external auditors, for the periods
indicated.

Audit fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit-related fees(2) . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax fees(3)

US$1,241,361

—
10,327

US$

US$1,874,270
85,688
11,139

US$

2011

2012

(1) “Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors
for the audit of our annual financial statements and assistance with and review of documents filed with the SEC. In 2011 and 2012, the
audit refers to financial audit and audit pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.

(2) “Audit-related fees” means fees billed in year 2012 for professional services rendered by our principal auditors associated with certain

due diligence projects.

(3) “Tax fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors
for tax compliance, tax advice, and tax planning. In 2011 and 2012, the tax fees refer to fees paid to our principal auditors to review the
compliance of our tax documentation.

All audit and non-audit services provided by our independent auditors must be pre-approved by our audit
committee. Our audit committee has adopted a combination of two approaches in pre-approving proposed
services: general pre-approval and specific pre-approval. With general approval, proposed services are pre-
approved without consideration of specific case-by-case services; with specific approval, proposed services
require the specific pre-approval of the audit committee. Unless a type of service has received general pre-
approval, it will require specific pre-approval by our audit committee. Any proposed services exceeding pre-
approved cost levels or budgeted amounts will also require specific pre-approval by our audit committee.

All requests or applications for services to be provided by our independent auditors that do not require
specific approval by our audit committee will be submitted to our chief financial officer and must include a
detailed description of the services to be rendered. The chief financial officer will determine whether such
services are included within the list of services that have received the general pre-approval of the audit
committee. The audit committee will be informed on a timely basis of any such services. Requests or
applications to provide services that require specific approval by our audit committee will be submitted to the
audit committee by both our independent auditors and our chief financial officer and must include a joint
statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor
independence.

117

Item 16D. Exemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 16F. Change in Registrant’s Certifying Accountant

Not applicable.

Item 16G. Corporate Governance

NASDAQ Stock Market Rule 5620 requires each issuer to hold an annual meeting of shareholders no later
than one year after the end of the issuer’s fiscal year-end. However, NASDAQ Stock Market Rule 5615(a)(3)
permits foreign private issuers like us to follow “home country practice” in certain corporate governance matters.
Maples and Calder, our Cayman Islands counsel, has provided a letter to the NASDAQ Stock Market certifying
that under Cayman Islands law, we are not required to hold annual shareholder meetings every year. We follow
home country practice with respect to annual meetings and did not hold an annual meeting of shareholders in
2012. We may, however, hold annual shareholder meetings in the future if there are significant issues that require
shareholders’ approvals.

Other than the annual meeting practice described above, there are no significant differences between our
corporate governance practices and those followed by U.S. domestic companies under NASDAQ Stock Market
Rules.

Item 16H. Mine Safety Disclosure

Not applicable.

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PART III

Item 17. Financial Statements

We have elected to provide financial statements pursuant to Item 18.

Item 18. Financial Statements

The consolidated financial statements of Baidu, Inc., its subsidiaries and its consolidated affiliated entities

are included at the end of this annual report.

Item 19. Exhibits

Exhibit
Number

1.1

2.1

2.2

2.3

2.4

2.5

2.6

2.7

4.1

4.2

4.3

4.4

Description of Document

the Registrant
Third Amended and Restated Memorandum and Articles of Association of
(incorporated by reference to Exhibit 99.2 of Form 6-K furnished with the Securities and Exchange
Commission on December 17, 2008)

Registrant’s Specimen American Depositary Receipt (incorporated by reference to Exhibit 1 of the
prospectus filed with the Securities and Exchange Commission on January 5, 2009 pursuant to
Rule 424(b)(3) under the Securities Act)

Registrant’s Specimen Certificate for Class A Ordinary Shares (incorporated by reference to Exhibit
4.2 of Amendment No. 5 to our Registration Statement on Form F-1 (file no. 333-126534) filed with
the Securities and Exchange Commission on August 2, 2005)

Form of Deposit Agreement among the Registrant, the depositary and holder of the American
Depositary Receipts (incorporated by reference to Exhibit 4.3 to our Registration Statement on Form
F-1 (file no. 333-126534) filed with the Securities and Exchange Commission on July 12, 2005)

Indenture, dated November 28, 2012 between the Registrant and The Bank of New York Mellon, as
trustee (incorporated by reference to Exhibit 4.1 to Form 6-K furnished with the Securities and
Exchange Commission on November 28, 2012)

First Supplemental Indenture dated November 28, 2012 between the Registrant and The Bank of
New York Mellon, as trustee (incorporated by reference to Exhibit 4.2 to Form 6-K furnished with
the Securities and Exchange Commission on November 28, 2012)

Form of 2.250% Notes due 2017 (incorporated by reference to Exhibit 4.2 to Form 6-K furnished
with the Securities and Exchange Commission on November 28, 2012)

Form of 3.500% Notes due 2022 (incorporated by reference to Exhibit 4.2 to Form 6-K furnished
with the Securities and Exchange Commission on November 28, 2012)

2000 Option Plan (amended and restated effective December 16, 2008) (incorporated by reference to
Exhibit 99.3 of Form 6-K furnished with the Securities and Exchange Commission on December 17,
2008)

2008 Share Incentive Plan (incorporated by reference to Exhibit 99.4 of Form 6-K furnished with the
Securities and Exchange Commission on December 17, 2008)

Form of
Indemnification Agreement between the Registrant and the Registrant’s directors
(incorporated by reference to Exhibit 10.3 of our Registration Statement on Form F-1
(file no. 333-126534) filed with the Securities and Exchange Commission on July 12, 2005)

Form of Employment Agreement between the Registrant and an Executive Officer of the Registrant
(incorporated by reference to Exhibit 10.4 of our Registration Statement on Form F-1
(file no. 333-126534) filed with the Securities and Exchange Commission on July 12, 2005)

119

Exhibit
Number

4.5

4.6

4.7

4.8

4.9

4.10

4.11

4.12

4.13

4.14

4.15

4.16

Description of Document

Translation of Exclusive Technology Consulting and Services Agreement dated March 22, 2005
between Baidu Online and Baidu Netcom and the supplementary agreement dated April 22, 2010
(incorporated by reference to Exhibit 4.6 of our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on March 29, 2012)

Translation of Operating Agreement dated March 22, 2005 between Baidu Online and Baidu Netcom
(incorporated by reference to Exhibit 99.4 of our Registration Statement on Form F-1
(file no. 333-126534) filed with the Securities and Exchange Commission on July 12, 2005)

Translation of Software License Agreement dated March 22, 2005 between Baidu Online and Baidu
Netcom (incorporated by reference to Exhibit 99.5 of our Registration Statement on Form F-1
(file no. 333-126534) filed with the Securities and Exchange Commission on July 12, 2005)

Translation of Trademark License Agreement dated March 1, 2004 between Baidu Online and Baidu
Netcom and the supplementary agreement dated January 18, 2005 (incorporated by reference to
Exhibit 99.6 of our Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005)

Translation of Web Layout Copyright License Agreement dated March 1, 2004 between Baidu
Online and Baidu Netcom and the supplementary agreement dated August 9, 2004 (incorporated by
reference to Exhibit 99.8 of our Registration Statement on Form F-1 (file no. 333-126534) filed with
the Securities and Exchange Commission on July 12, 2005)

Translation of Proxy Agreement dated August 9, 2004 among Baidu Online, Baidu Netcom, Robin
Yanhong Li and Eric Yong Xu (incorporated by reference to Exhibit 99.9 of our Registration
Statement on Form F-1 (file no. 333-126534) filed with the Securities and Exchange Commission on
July 12, 2005)

Translation of Equity Pledge Agreement dated March 22, 2005 among Baidu Online, Robin Yanhong
Li and Eric Yong Xu (incorporated by reference to Exhibit 99.10 of our Registration Statement on
Form F-1 (file no. 333-126534) filed with the Securities and Exchange Commission on July 12,
2005)

Translation of Exclusive Equity Purchase and Transfer Option Agreement dated March 22, 2005
among Baidu Online, Robin Yanhong Li and Eric Yong Xu (incorporated by reference to Exhibit
99.11 of our Registration Statement on Form F-1 (file no. 333-126534) filed with the Securities and
Exchange Commission on July 12, 2005)

Translation of Loan Agreement dated as of March 22, 2005 among Baidu Online, Robin Yanhong Li
and Eric Yong Xu (incorporated by reference to Exhibit 99.12 of our Registration Statement on
Form F-1 (file no. 333-126534) filed with the Securities and Exchange Commission on July 12,
2005) and the Supplementary Agreement among Baidu Online, Baidu Netcom, Robin Yanhong Li,
Eric Yong Xu and Haoyu Shen dated January 11, 2011 (incorporated by reference to Exhibit 4.16 of
our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 29,
2012)

Translation of Form of Irrevocable Powers of Attorney issued by the shareholders of Baidu Netcom
(incorporated by reference to Exhibit 99.13 of our Registration Statement on Form F-1
(file no. 333-126534) filed with the Securities and Exchange Commission on July 12, 2005)

Translation of the form of Technology Consulting and Services Agreement between Baidu Online
and a consolidated affiliated PRC entity (incorporated by reference to Exhibit 4.19 of our Annual
Report on Form 20-F filed with the Securities and Exchange Commission on June 5, 2008)

Translation of the form of Operating Agreement between Baidu Online and a consolidated affiliated
PRC entity (incorporated by reference to Exhibit 4.20 of our Annual Report on Form 20-F filed with
the Securities and Exchange Commission on June 5, 2008)

120

Exhibit
Number

4.17

4.18

4.19

4.20

4.21

4.22

4.23

4.24

4.25

4.26

4.27

4.28

Description of Document

Translation of the form of Web Layout Copyright License Agreement between Baidu Online and a
consolidated affiliated PRC entity (incorporated by reference to Exhibit 4.21 of our Annual Report
on Form 20-F filed with the Securities and Exchange Commission on June 5, 2008)

Translation of the form of Proxy Agreement among Baidu Online, a consolidated affiliated PRC
entity and the shareholders of the consolidated affiliated PRC entity (incorporated by reference to
Exhibit 4.22 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission
on June 5, 2008)

Translation of the form of Equity Pledge Agreement between Baidu Online and the shareholder of a
consolidated affiliated PRC entity (incorporated by reference to Exhibit 4.23 of our Annual Report
on Form 20-F filed with the Securities and Exchange Commission on June 5, 2008)

Translation of the form of Exclusive Equity Purchase and Transfer Option Agreement between Baidu
Online and the shareholder of a consolidated affiliated PRC entity (incorporated by reference to
Exhibit 4.24 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission
on June 5, 2008)

Translation of the form of Loan Agreement between Baidu Online and the shareholder of a
consolidated affiliated PRC entity (incorporated by reference to Exhibit 4.25 of our Annual Report
on Form 20-F filed with the Securities and Exchange Commission on June 5, 2008)

Translation of the Supplementary Agreement to Exclusive Technology Consulting and Services
Agreement dated June 23, 2006 between Baidu Online and Beijing Perusal, dated as of April 22,
2010 (incorporated by reference to Exhibit 4.25 of our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on March 29, 2012)

Translation of the Operating Agreement dated June 23, 2006 between Baidu Online, Beijing Perusal,
Jiping Liu and Yazhu Zhang and the supplementary agreement dated April 22, 2010 (incorporated by
reference to Exhibit 4.26 of our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on March 29, 2011)

Translation of the Web Layout Copyright License Agreement dated June 23, 2006 between Baidu
Online and Beijing Perusal (incorporated by reference to Exhibit 4.27 of our Annual Report on Form
20-F filed with the Securities and Exchange Commission on March 29, 2011)

Translation of the Proxy Agreement dated June 23, 2006 among Jiping Liu, Yazhu Zhang and Baidu
Online (incorporated by reference to Exhibit 4.28 of our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on March 29, 2011)

Translation of the Amended and Restated Equity Pledge Agreements between Baidu Online and
Yazhu Zhang, and between Baidu Online and Jiping Liu, both dated January 16, 2012 (incorporated
by reference to Exhibit 4.29 of our Annual Report on Form 20-F filed with the Securities and
Exchange Commission on March 29, 2012)

Translation of the Amended and Restated Equity Purchase and Transfer Option Agreements between
Baidu Online, Jiping Liu and Beijing Perusal, and between Baidu Online, Yazhu Zhang and Beijing
Perusal, both dated January 16, 2012 (incorporated by reference to Exhibit 4.30 of our Annual Report
on Form 20-F filed with the Securities and Exchange Commission on March 29, 2012)

the
Translation of Irrevocable Powers of Attorney issued by Jiping Liu and Yazhu Zhang,
shareholders of Beijing Perusal, both dated June 23, 2006 (incorporated by reference to Exhibit 4.31
of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on
March 29, 2011)

121

Exhibit
Number

4.29

4.30

4.31

4.32

4.33*

4.34*

4.35*

4.36*

Description of Document

Translation of the Amended and Restated Loan Agreements between Baidu Online and Jiping Liu
and between Baidu Online and Yazhu Zhang, both dated January 16, 2012 (incorporated by reference
to Exhibit 4.32 of our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on March 29, 2012)

Translation of the Technology Consulting and Services Agreement dated February 28, 2008 between
Baidu Online and BaiduPay and the supplementary agreement dated April 22, 2010 (incorporated by
reference to Exhibit 4.33 of our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on March 29, 2011)

Translation of the Operating Agreement dated February 28, 2008 between Baidu Online, BaiduPay,
Jun Yu and Beijing Netcom and the supplementary agreement dated April 22, 2010 (incorporated by
reference to Exhibit 4.34 of our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on March 29, 2011)

Translation of the Web Layout Copyright License Agreement dated February 28, 2008 between
Baidu Online and BaiduPay (incorporated by reference to Exhibit 4.35 of our Annual Report on
Form 20-F filed with the Securities and Exchange Commission on March 29, 2011)

Translation of the Proxy Agreement between Zhixiang Liang and Baidu Online, dated April 23, 2012

Translation of the Equity Pledge Agreement between Baidu Online and Zhixiang Liang, dated
April 23, 2012

Translation of the Exclusive Equity Purchase and Transfer Option Agreement between Baidu Online,
Zhixiang Liang and BaiduPay, dated April 23, 2012

Translation of Irrevocable Power of Attorney issued by Zhixiang Liang, the individual shareholder of
BaiduPay, dated April 23, 2012

4.37*

Translation of the Loan Agreement between Baidu Online and Zhixiang Liang, dated April 23, 2012

4.38

4.39

4.40

4.41

4.42

4.43

Translation of the Technology Consulting and Services Agreement dated December 28, 2010
between Baidu HR and Baidu Online (incorporated by reference to Exhibit 4.41 of our Annual
Report on Form 20-F filed with the Securities and Exchange Commission on March 29, 2011)

Translation of the Operating Agreement dated December 28, 2010 between Baidu HR, Baidu Online
and Robin Yanhong Li (incorporated by reference to Exhibit 4.42 of our Annual Report on
Form 20-F filed with the Securities and Exchange Commission on March 29, 2011)

Translation of the Proxy Agreement between Robin Yanhong Li and Baidu Online, dated December
28, 2010 (incorporated by reference to Exhibit 4.43 of our Annual Report on Form 20-F filed with
the Securities and Exchange Commission on March 29, 2011)

Translation of the Equity Pledge Agreement between Robin Yanhong Li and Baidu Online, dated
December 28, 2010 (incorporated by reference to Exhibit 4.44 of our Annual Report on Form 20-F
filed with the Securities and Exchange Commission on March 29, 2011)

Translation of the Exclusive Equity Purchase and Transfer Option Agreement between Baidu HR,
Baidu Online and Robin Yanhong Li, dated December 28, 2010 (incorporated by reference to Exhibit
4.45 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on
March 29, 2011)

Translation of the Loan Agreement between Baidu Online and Robin Yanhong Li, dated December
28, 2010 (incorporated by reference to Exhibit 4.46 of our Annual Report on Form 20-F filed with
the Securities and Exchange Commission on March 29, 2011)

122

Exhibit
Number

4.44

4.45

4.46

4.47

4.48

4.49

4.50

4.51

4.52

4.53

4.54

Description of Document

Translation of the Trademark Transfer Agreement between Baidu Online and Baidu Netcom, dated
March 1, 2010 (incorporated by reference to Exhibit 4.47 of our Annual Report on Form 20-F filed
with the Securities and Exchange Commission on March 29, 2011)

Translation of the supplementary agreements, dated March 11, 2010 and April 22, 2010 to the
Software License Agreement dated March 22, 2005 between Baidu Online and Baidu Netcom
(incorporated by reference to Exhibit 4.48 of our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on March 29, 2011)

Translation of the supplementary agreements, dated March 1, 2010 and April 22, 2010 to the
Trademark License Agreement dated March 1, 2004 between Baidu Online and Baidu Netcom and
the supplementary agreement dated January 18, 2005 (incorporated by reference to Exhibit 4.49 of
our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 29,
2011)

Translation of the supplementary agreement dated March 1, 2010 to the Web Layout Copyright
License Agreement dated March 1, 2004 between Baidu Online and Baidu Netcom and the
supplementary agreement dated August 9, 2004 (incorporated by reference to Exhibit 4.50 of our
Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 29,
2011)

Translation of the supplementary agreement dated April 22, 2010 to the Operating Agreement dated
March 22, 2005 between Baidu Online and Baidu Netcom (incorporated by reference to Exhibit 4.51
of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on
March 29, 2011)

Translations of the supplementary agreement dated April 22, 2010 to the Exclusive Equity Purchase
and Transfer Option Agreement dated March 22, 2005 among Baidu Online, Robin Yanhong Li and
Eric Yong Xu (incorporated by reference to Exhibit 4.53 of our Annual Report on Form 20-F filed
with the Securities and Exchange Commission on March 29, 2011)

Translation of the supplementary agreement by and among Baidu Online, Beijing Perusal, Jiping Liu
and Yazhu Zhang dated September 6, 2011 (incorporated by reference to Exhibit 4.55 of our Annual
Report on Form 20-F filed with the Securities and Exchange Commission on March 29, 2012)

Translation of the supplementary agreement to the Exclusive Technology Consulting and Services
Agreement between Baidu HR and Baidu Online dated September 6, 2011 (incorporated by reference
to Exhibit 4.56 of our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on March 29, 2012)

Translation of the supplementary agreement to the Operating Agreement by and among Baidu
Online, Robin Yanhong Li, Badu HR and Baidu Netcom dated September 6, 2011 (incorporated by
reference to Exhibit 4.57 of our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on March 29, 2012)

Translation of the Termination Agreement to the Proxy Agreement between Robin Yanhong Li and
Baidu Online dated September 6, 2011 (incorporated by reference to Exhibit 4.58 of our Amendment
No. 1 to Annual Report on Form 20-F filed with the Securities and Exchange Commission on
September 6, 2012)

Translation of the Proxy Agreement among Baidu Netcom, Baidu Online and Baidu HR dated
September 6, 2011 (incorporated by reference to Exhibit 4.59 of our Annual Report on Form 20-F
filed with the Securities and Exchange Commission on March 29, 2012)

123

Exhibit
Number

4.55

4.56

4.57

4.58

4.59

4.60

4.61

4.62

4.63

4.64

4.65

4.66

Description of Document

Translation of the supplementary agreement to the Equity Pledge Agreement by and among Robin
Yanhong Li, Baidu Netcom and Baidu Online dated September 6, 2011 (incorporated by reference to
Exhibit 4.60 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission
on March 29, 2012)

Translation of the supplementary agreement to the Equity Pledge Agreement between Baidu Netcom
and Baidu Online dated September 6, 2011 (incorporated by reference to Exhibit 4.61 of our Annual
Report on Form 20-F filed with the Securities and Exchange Commission on March 29, 2012)

Translation of the supplementary agreement to the Exclusive Equity Purchase and Transfer Option
Agreement by and among Baidu Online, Robin Yanhong Li, Baidu HR and Baidu Netcom dated
September 6, 2011 (incorporated by reference to Exhibit 4.62 of our Annual Report on Form 20-F
filed with the Securities and Exchange Commission on March 29, 2012)

Translation of Loan Agreement dated February 10, 2006 between Baidu Online and Robin Yanhong
Li (incorporated by reference to Exhibit 4.63 of our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on March 29, 2012)

Translation of Loan Agreement dated March 6, 2008 between Baidu Online and Robin Yanhong Li
(incorporated by reference to Exhibit 4.64 of our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on March 29, 2012)

Translation of the supplementary agreement to the Loan Agreement by and among Robin Yanhong
Li, Baidu Netcom and Baidu Online dated September 6, 2011 (incorporated by reference to Exhibit
4.65 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on
March 29, 2012)

Translation of the supplementary agreement by and among Baidu Online, Baidu HR and Baidu
Netcom dated September 6, 2011 (incorporated by reference to Exhibit 4.66 of our Annual Report on
Form 20-F filed with the Securities and Exchange Commission on March 29, 2012)

Translation of the supplementary agreement to the Trademark License Agreement between Baidu
Online and Baidu Netcom dated January 30, 2011 (incorporated by reference to Exhibit 4.67 of our
Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 29,
2012)

Translation of the supplementary agreement to the Software License Agreement between Baidu
Online and Baidu Netcom dated January 30, 2011 (incorporated by reference to Exhibit 4.68 of our
Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 29,
2012)

Translation of the supplementary agreement to the Web Layout Copyright License Agreement
between Baidu Online and Baidu Netcom dated January 30, 2011 (incorporated by reference to
Exhibit 4.69 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission
on March 29, 2012)

Translation of the Supplementary Agreement to the Amended and Restated Loan Agreement by and
among Baidu Online, Robin Yanhong Li, Haoyu Shen and Zhan Wang dated August 26, 2011
(incorporated by reference to Exhibit 4.72 of our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on March 29, 2012)

the Supplementary Agreement

Translation of
to the Amended and Restated Equity Pledge
Agreement by and among Baidu Online, Robin Yanhong Li, Haoyu Shen and Zhan Wang dated
August 26, 2011 (incorporated by reference to Exhibit 4.73 of our Annual Report on Form 20-F filed
with the Securities and Exchange Commission on March 29, 2012)

124

Exhibit
Number

4.67

4.68

4.69

4.70

4.71

4.72

4.73

4.74*

4.75

4.76

4.77*

4.78*

4.79*

4.80*

4.81*

Description of Document

Translation of the Equity Pledge Agreement between Baidu Online and Robin Yanhong Li dated
December 1, 2011 (incorporated by reference to Exhibit 4.74 of our Annual Report on Form 20-F
filed with the Securities and Exchange Commission on March 29, 2012)

Translation of the Supplementary Agreement by and among Baidu Online, Baidu Netcom, Robin
Yanhong Li and Zhan Wang dated September 6, 2011 (incorporated by reference to Exhibit 4.75 of
our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 29,
2012)

Translation of the Supplementary Agreement to the Amended and Restated Equity Purchase and
Transfer Option Agreement and its Supplementary Agreement among Baidu Online, Robin Yanhong
Li, Haoyu Shen, Baidu Netcom and Zhan Wang dated August 26, 2011 (incorporated by reference to
Exhibit 4.76 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission
on March 29, 2012)

Translation of the Supplementary Agreement to the Operating Agreement and its Supplementary
Agreement among Baidu Online, Baidu Netcom, Robin Yanhong Li, Haoyu Shen and Zhan Wang
dated August 26, 2011 (incorporated by reference to Exhibit 4.77 of our Annual Report on
Form 20-F filed with the Securities and Exchange Commission on March 29, 2012)

Translation of the Proxy Agreement among Robin Yanhong Li, Zhan Wang and Baidu Online dated
August 26, 2011 (incorporated by reference to Exhibit 4.78 of our Annual Report on Form 20-F filed
with the Securities and Exchange Commission on March 29, 2012)

Translation of Supplementary Agreement among Baidu Online, BaiduPay, Baidu Netcom and Hu
Cai dated September 6, 2011 (incorporated by reference to Exhibit 4.79 of our Annual Report on
Form 20-F filed with the Securities and Exchange Commission on March 29, 2012)

Translation of the Supplementary Agreement to Exclusive Technology Consulting and Services
Agreement between Baidu Online and BaiduPay dated September 6, 2011 (incorporated by reference
to Exhibit 4.80 of our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on March 29, 2012)

Translation of the Supplementary Agreement to Web Layout Copyright License Agreement between
Baidu Online and BaiduPay dated September 6, 2011

Ordinary Shares Purchase Agreement between Qunar Cayman Islands Limited and Baidu Holdings
Limited dated June 24, 2011 (incorporated by reference to Exhibit 4.81 of our Annual Report on
Form 20-F filed with the Securities and Exchange Commission on March 29, 2012)

Credit Facility Agreement by and among Baidu, Inc., Goldman Sachs (Asia) L.L.C. and The Bank of
New York Mellon, Hong Kong Branch dated July 14, 2011 (incorporated by reference to Exhibit
4.82 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on
March 29, 2012)

Term Loan Facility Agreement between Baidu, Inc. and Australia and New Zealand Banking Group
Limited (Hong Kong Branch) dated September 18, 2012

Translation of Domain Name License Termination Agreement between Baidu Online and Baidu
Netcom dated December 31, 2012

Translation of Domain Name License Termination Confirmation between Baidu Online and Beijing
Perusal dated December 31, 2012

Translation of Trademark License Termination Agreement between Baidu Online and Baidu Netcom
dated February 1, 2013

Translation of Trademark License Termination Agreement between Baidu Online and Beijing
Perusal dated February 1, 2013

125

Exhibit
Number

4.82*

4.83*

8.1*

11.1

12.1*

12.2*

13.1**

13.2**

15.1*

15.2*

15.3*

Description of Document

Translation of Trademark License Termination Agreement between Baidu Online and BaiduPay
dated February 1, 2013

Translation of Domain Name License Termination Agreement between Baidu Online and
BaiduPay dated December 31, 2012

List of Principal Subsidiaries and Consolidated Affiliated Entities

Code of Business Conduct and Ethics (incorporated by reference to Exhibit 99.14 of our
Registration Statement on Form F-1 (file no. 333-126534) filed with the Securities and Exchange
Commission on July 12, 2005)

Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002

Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002

Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

Consent of Maples and Calder

Consent of Han Kun Law Offices

Consent of Ernst & Young Hua Ming LLP

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith
*
** Furnished herewith

126

The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F

and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

SIGNATURES

Baidu, Inc.

By: /s/ Robin Yanhong Li

Name: Robin Yanhong Li
Title: Chairman and Chief Executive Officer

Date: March 27, 2013

127

BAIDU, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page(s)

Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-2- F-3

Consolidated Balance Sheets as of December 31, 2011 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2010, 2011

and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-4

F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2011 and 2012 . . .

F-6- F-7

Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2010, 2011 and
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-8

Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9- F-57

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Baidu, Inc.

We have audited the accompanying consolidated balance sheets of Baidu, Inc. (the “Company”) as of
December 31, 2012 and 2011, and the related consolidated statements of comprehensive income, shareholders’
equity and cash flows for each of the three years in the period ended December 31, 2012. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Baidu, Inc. at December 31, 2012 and 2011, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S.
generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Baidu, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 27, 2013 expressed an unqualified opinion thereon.

/s/ Ernst & Young Hua Ming LLP

Beijing, The People’s Republic of China
March 27, 2013

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Baidu, Inc.

We have audited Baidu, Inc.’s internal control over financial reporting as of December 31, 2012, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Baidu, Inc.’s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

Because of its inherent
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

limitations,

In our opinion, Baidu, Inc. maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2012, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Baidu, Inc. as of December 31, 2012 and 2011, and the related
consolidated statements of comprehensive income, shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2012 of Baidu, Inc., and our report dated March 27, 2013 expressed an
unqualified opinion thereon.

/s/ Ernst & Young Hua Ming LLP

Beijing, The People’s Republic of China
March 27, 2013

F-3

BAIDU, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of Renminbi (“RMB”), and in thousands of U.S. Dollars (“US$”), except for number of
shares and per share data)

December 31,

Notes

2011
RMB

2012
RMB

2012
US$

ASSETS
Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance of RMB5,806 for 2011 and RMB5,768 (US$926) for 2012 . . . . .
Amounts due from related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net
Other assets, current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Non-current assets:

Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts due from related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2
2
4
5
19
12
6

7
8
8
4
19
12

4,127,482
483,387
10,051,578
599,558
149,728
121,411
315,012

11,880,632
395,029
20,604,223
1,253,483
—
160,315
380,407

1,906,973
63,407
3,307,206
201,198
—
25,732
61,059

15,848,156

34,674,089

5,565,575

2,694,000
978,752
2,419,542
734,360
100,000
52,125
513,606

3,887,877
1,587,665
3,877,564
803,499
—
53,303
784,893

624,047
254,838
622,392
128,970
—
8,556
125,982

Total non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,492,385

10,994,801

1,764,785

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,340,541

45,668,890

7,330,360

LIABILITIES AND EQUITY
Current liabilities (including amounts of the consolidated VIEs without recourse to the primary

beneficiaries of RMB1,342,268 and RMB1,914,531(US$307,303) as of December 31, 2011 and 2012,
respectively. Note 1):

Short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer advances and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term loans, current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

10

125,878
2,545,445
1,573,967
62,705
34,779
46,000
17,773

—
3,806,836
2,067,586
94,121
64,506
2,170,978
32,502

—
611,039
331,870
15,107
10,354
348,466
5,217

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,406,547

8,236,529

1,322,053

Non-current liabilities (including amounts of the consolidated VIEs without recourse to the primary
beneficiaries of RMB114,060 and RMB258,319(US$41,463) as of December 31, 2011 and 2012,
respectively. Note 1):

Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts due to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity

Class A Ordinary Shares, par value US$0.00005 per share, 825,000,000 shares authorized, and

27,111,117 shares and 27,202,710 shares issued and outstanding as at December 31, 2011 and
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B Ordinary Shares, par value US$0.00005 per share, 35,400,000 shares authorized, and 7,803,000
shares and 7,763,000 shares issued and outstanding as at December 31, 2011 and 2012 . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Baidu, Inc. shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10
11
19
12

14
15

16

16

16
16

19,942
2,277,925
—
148,873
131,629
30,112

190,000
356,589
9,336,686

—
289,482
44,479

30,497
57,236
1,498,641
—
46,465
7,139

2,608,481

10,217,236

1,639,978

7,015,028

18,453,765

2,962,031

935,978

1,033,283

165,853

12

12

2

3
1,771,770
13,604,334
(84,403)

3
2,095,273
24,038,219
(78,278)

—
336,315
3,858,400
(12,564)

15,291,716
97,819

26,055,229
126,613

4,182,153
20,323

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,389,535

26,181,842

4,202,476

Total liabilities, redeemable noncontrolling interests, and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,340,541

45,668,890

7,330,360

The accompanying notes are an integral part of the consolidated financial statements.

F-4

BAIDU, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands of Renminbi (“RMB”), and in thousands of U.S. Dollars (“US$”), except for number of
shares and per share (or ADS) data)

For the Years Ended December 31,

Notes

2010

RMB

2011

RMB

2012

RMB

2012

US$

Revenues:

Online marketing services . . . . . . . . . . . . . . . . . . . . .
Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,912,869 14,489,767 22,245,643
60,383
11,019
7,915,074 14,500,786 22,306,026

2,205

3,570,672
9,692
3,580,364

Operating costs and expenses:

Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . .
Total operating costs and expenses . . . . . . . . . . . . . . . . .
Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income:

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange gain (loss), net . . . . . . . . . . . . . . . .
Loss from equity method investments . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . .

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss attributable to noncontrolling interests . . . . . .
Net income attributable to Baidu, Inc. . . . . . . . . . . . . . .
Earnings per share for Class A and Class B ordinary

shares: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Earnings per ADS (1 Class A ordinary share equals 10

ADSs):

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average number of Class A and Class B

ordinary shares outstanding . . . . . . . . . . . . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other comprehensive (loss) income, net of tax

Foreign currency translation adjustment
. . . . . . . . . .
Unrealized gains on available-for-sale securities . . .
Other comprehensive (loss) income, net of tax . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive loss attributable to noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . .

Comprehensive income attributable to Baidu, Inc.

12

17

17

(2,149,288) (3,896,883)
(1,088,980) (1,692,810)
(718,038) (1,334,434)

(6,448,545) (1,035,063)
(401,492)
(2,501,336)
(369,950)
(2,304,825)
(3,956,306) (6,924,127) (11,254,706) (1,806,505)
1,773,859
7,576,659 11,051,320
3,958,768

103,096
(35,975)
6
(8,965)
44,233
102,395
4,061,163

418,201
(82,551)
(1,959)
(179,408)
78,237
232,520

866,465
(107,857)
(4,533)
(294,229)
454,271
914,117
7,809,179 11,965,437

(535,995) (1,188,861)
3,525,168
—
3,525,168

(1,574,159)
6,620,318 10,391,278
(64,750)
6,638,637 10,456,028

(18,319)

101.28
100.96

190.27
189.88

298.62
298.29

10.13
10.10

19.03
18.99

29.86
29.83

139,077
(17,312)
(728)
(47,227)
72,916
146,726
1,920,585

(252,670)
1,667,915
(10,393)
1,678,308

47.93
47.88

4.79
4.79

34,805,362 34,890,050 34,939,838 34,939,838
34,917,835 34,962,831 34,979,459 34,979,459

(3,611)
—
(3,611)
3,521,557

32,930
45
32,975

(6,100)
11,391
5,291
6,653,293 10,396,569

(979)
1,828
849
1,668,764

—
3,521,557

(19,314)

(65,584)
6,672,607 10,462,153

(10,527)
1,679,291

The accompanying notes are an integral part of the consolidated financial statements.

F-5

BAIDU, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of Renminbi (“RMB”), and in thousands of U.S. Dollars (“US$”))

For the Years Ended December 31,

2010

RMB

2011

RMB

2012

RMB

2012

US$

Cash flows from operating activities:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash generated from operating

3,525,168

6,620,318

10,391,278

1,667,915

activities:

Depreciation of fixed assets and computer parts . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Reversal of) provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain from step-acquisition and settlement of pre-existing relationship
(Note3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment on long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from equity method investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on disposal of a subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncash income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in operating assets and liabilities, net of effects of acquisition:

Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts due from related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer advances and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts due to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

431,099
7,679
10,252
(74,374)
93,736
(6,940)
(41,193)

—
—
8,965
—
—

(18,765)
(128,307)
(28,560)
(98,660)
421,516
431,168
66,997
5,000
95,700

819,239
31
65,673
(64,701)
152,028
3,500
(200,209)

—
47,886
179,408

—
(36,813)

(156,219)
(282,467)
(211,719)
(151,068)
519,716
817,649
(46,327)
49,721
53,173

1,281,336
(2,783)
234,001
(59,030)
212,309
(847)
(745,526)

(486,339)
169,180
294,229
(15,238)
(57,544)

85,429
(338,602)
(10,664)
(794,508)
489,769
778,003
31,416
199,785
340,340

205,669
(447)
37,560
(9,475)
34,078
(136)
(119,665)

(78,063)
27,155
47,227
(2,446)
(9,236)

13,712
(54,349)
(1,710)
(127,527)
78,613
124,878
5,043
32,068
54,628

Net cash generated from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,700,481

8,178,819

11,995,994

1,925,492

Cash flows from investing activities:

Acquisition of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of computer parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . .
Acquisition of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalization of software costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and maturities of short-term investments . . . . . . . . . . . . . . . . . . . . . .
Purchases of long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposal of long-term investments . . . . . . . . . . . . . . . . . . . .
Cash distribution of long-term investments . . . . . . . . . . . . . . . . . . . . . . . . .
Payments to acquire a subsidiary’s shares from noncontrolling

(2,452)
(10,179)

(2,310,860)
(28,901)
6,785
(820,526)
(190,303)
(36,315)

(1,762,114)
(895,309)
(104,064)
(68,179)
—
2,461
— (1,945,870)
(433,591)
(42,687)

(370,919)
(4,639)
1,089
(131,704)
(30,546)
(5,829)
(2,620,265) (10,972,774) (32,642,517) (5,239,485)
3,664,373
2,661,794
(89,672)
(282,932)
—
451

1,484,968
(488,905)
12,047
—

22,829,412
(558,666)

—
2,811

—
—

interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

(1,020)

(164)

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,217,522) (14,250,529) (13,750,100) (2,207,045)

F-6

BAIDU, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”), and in thousands of U.S. Dollars (“US$”))

For the Years Ended December 31,

2010

RMB

2011

RMB

2012

RMB

2012

US$

Cash flows from financing activities:

Proceeds from issuance of a subsidiary’s shares . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of capital lease obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of share options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
—
86,000
—
—
—
38,751

2,232,778

—

—

43,970
125,878

100,460

16,125
—
(20,000)
57,062
(22,472)
—
— 9,297,678 1,492,380
(4,354)
(27,124)
—
9,145
56,974
23,184

(124,602)
355,499
(140,000)

Net cash generated from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

124,751

2,425,810

9,518,885 1,527,886

Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .

(6,110)

(8,594)

(11,629)

(1,867)

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,601,600 (3,654,494) 7,753,150 1,244,466

Cash and cash equivalents at beginning of the year

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,180,376

7,781,976

4,127,482

662,507

Cash and cash equivalents at end of the year

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,781,976

4,127,482 11,880,632 1,906,973

Supplemental disclosures:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

709
436,632

17,521
1,165,218

38,027
1,641,853

6,104
263,536

Non-cash investing and financing activities:
Capital lease obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of fixed assets included in accounts payable and accrued liabilities . . . . . . . . . . .
Acquisition of other non-current assets included in accounts payable and accrued

—

248,540

47,885
245,794

56,220
332,473

9,024
53,366

liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash acquisitions of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash acquisitions of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,130
3,982
—

30,938
194,286

—

39,165
705,281
338,447

6,286
113,205
54,324

The accompanying notes are an integral part of the consolidated financial statements.

F-7

BAIDU, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in thousands of Renminbi (“RMB”), and in thousands of U.S. Dollars (“US$”), except for number of
shares)

Attributable to Baidu, Inc.

Ordinary shares

Number of
shares

Amount

Additional
paid-in
capital

Retained
earnings

Accumulated
other
comprehensive
loss

Noncontrolling
interests

Total
shareholders’
equity

RMB

RMB

RMB

RMB

RMB

RMB

Balances at December 31,

2009 . . . . . . . . . . . . . . . . . . . . . . 34,753,292

Net income . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . .
Exercise of share-based awards . .
Share-based compensation . . . . . .
Balances at December 31,

15
— —
— —
96,380 —
— —

1,426,070

3,440,529
— 3,525,168
—
254
—
36,819
—
94,115

(113,513)

—
(3,865)
—
—

2010 . . . . . . . . . . . . . . . . . . . . . . 34,849,672

15

1,557,258

6,965,697

(117,378)

—
—
—
—
—

—

Net income . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . .
Exercise of share-based awards . .
Share-based compensation . . . . . .
Business combination . . . . . . . . . .
Equity issuance of subsidiaries . . .
Balances at December 31,

— —
— —
64,445 —
— —

— —

— 6,638,637
—
—
—
25,553
—
148,575
—
—
—
40,384

—
32,975
—
—
—
—

(8,035)
—
—
—

104,832
1,022

4,753,101
3,525,168
(3,611)
36,819
94,115

8,405,592

6,630,602
32,975
25,553
148,575
104,832
41,406

2011 . . . . . . . . . . . . . . . . . . . . . . 34,914,117

15

1,771,770 13,604,334

(84,403)

97,819

15,389,535

Net income . . . . . . . . . . . . . . . . . .

Other comprehensive income . . . .
Business combination . . . . . . . . . .
Change of a subsidiary’s

noncontrolling interests . . . . . . .

Acquisition of a subsidiary’s
shares from noncontrolling
interests . . . . . . . . . . . . . . . . . . .
Disposal of a subsidiary . . . . . . . .
Accretion of redeemable

noncontrolling interests . . . . . . .
Exercise of share-based awards . .
Share-based compensation . . . . . .
Equity issuance of subsidiaries . . .

Balances at December 31,

— —
— —
— —

— 10,456,028
—
—
—
—

— —

—

— —
— —

(1,499)
—

—

—
—

— —
51,593 —
— —
— —

—
54,171
196,360
74,471

(22,143)
—
—
—

—

6,125
—

—

—
—

—
—
—
—

(8,946)
(144)
32,507

10,447,082
5,981
32,507

(1,259)

(1,259)

478
5,253

—
—
905
—

(1,021)
5,253

(22,143)
54,171
197,265
74,471

2012 . . . . . . . . . . . . . . . . . . . . . . 34,965,710

15

2,095,273 24,038,219

(78,278)

126,613

26,181,842

Balances at December 31, 2012,

in US$ . . . . . . . . . . . . . . . . . . . .

2

336,315

3,858,400

(12,564)

20,323

4,202,476

The accompanying notes are an integral part of the consolidated financial statements.

F-8

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

1. ORGANIZATION, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS

Baidu, Inc. (“Baidu” or the “Company”) was incorporated under the laws of the Cayman Islands on
January 18, 2000.

As of December 31, 2012, the Company has wholly-owned and majority-owned subsidiaries incorporated in
countries and jurisdictions including the People’s Republic of China (“PRC”), Hong Kong, Japan, the
United States of America (“USA”), Cayman Islands and British Virgin Islands.

As of December 31, 2012, the Company also effectively controls a number of variable interest entities
(“VIE”) through the Primary Beneficiaries, as defined below. The VIEs include:

• Beijing Baidu Netcom Science Technology Co., Ltd. (“Baidu Netcom”), controlled through Baidu Online
Network Technology (Beijing) Co., Ltd. (“Baidu Online”), one of the Company’s wholly-owned
subsidiaries;

• Beijing Perusal Technology Co., Ltd. (“Beijing Perusal”) , controlled through Baidu Online;

• Beijing BaiduPay Science and Technology Co., Ltd. (“BaiduPay”) , controlled through Baidu Online;

• Baidu HR Consulting (Shanghai) Co., Ltd. (“Baidu HR”) , controlled through Baidu Online; and

• Other VIEs controlled through Primary Beneficiaries other than Baidu Online.

The Company, its wholly-owned and majority-owned subsidiaries, VIEs and wholly-owned subsidiaries of
the VIEs are hereinafter collectively referred to as the “Group.” The Group offers Internet search solutions
and online marketing solutions, operates an online payment platform which enables customers to make
payments online, develops and markets scalable web application software and provides related services,
conducts online advertising business in connection with online video contents broadcasting, as well as
provides human resource related services including employment agency services. The Group’s principal
geographic market is in the PRC. The Company does not conduct any substantive operations of its own but
conducts its primary business operations through its wholly-owned and majority-owned subsidiaries and
VIEs in the PRC.

PRC laws and regulations prohibit or restrict foreign ownership of internet content, advertising, audio and
video services and employment agency businesses. To comply with these foreign ownership restrictions, the
Group operates its websites and primarily provides services subject to such restriction in the PRC through
the VIEs, the PRC legal entities that were established by the individuals authorized by the Group. The
paid-in capital of the VIEs was mainly funded by the Group through loans extended to the authorized
individuals, who were the shareholders of the VIEs then. The Group has entered into certain exclusive
agreements with the VIEs through Baidu Online and certain other subsidiaries (collectively the “Primary
Beneficiaries”), which obligate the Primary Beneficiaries to absorb a majority of the risk of loss from the
VIEs’ activities and entitle the Primary Beneficiaries to receive a majority of their residual returns. In
addition, the Group has entered into certain agreements with the shareholders of the VIEs through the
Primary Beneficiaries, including loan agreements for the paid-in capital of the VIEs, proxy agreements or
power of attorney to direct the activities that most significantly affect the economic performance of the
VIEs, option agreements to acquire the equity interests in the VIEs when permitted by the PRC laws, and
share pledge agreements for the equity interests in the VIEs held by the shareholders of the VIEs.

Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between the
Primary Beneficiaries and the VIEs through the aforementioned agreements with the shareholders of the
VIEs. The shareholders of the VIEs effectively assigned all of their voting rights underlying their equity
interest in the VIEs to the Primary Beneficiaries. In addition, through the other exclusive agreements, which

F-9

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

1. ORGANIZATION, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS

(CONTINUED)

consist of operating agreements, technology consulting and services agreements and license agreements, the
Primary Beneficiaries demonstrate their ability and intention to continue to exercise the ability to absorb
substantially all of the profits and all of the expected losses of the VIEs. The VIEs are subject to operating
risks, which determine the variability of the Company’s interest in those entities. Based on these contractual
the Company consolidates the VIEs as required by SEC Regulation SX-3A-02 and
arrangements,
Accounting Standards Codification (“ASC”) subtopic 810-10 (“ASC 810-10”), Consolidation: Overall,
because the Company holds all the variable interests of the VIEs through the Primary Beneficiaries.

The principal terms of the agreements entered into between Primary Beneficiaries, VIEs and their respective
shareholders are further described below:

Loan Agreements

Pursuant to loan agreements amongst the shareholders of Baidu Netcom and Baidu Online, Baidu Online
provided interest-free loans with an aggregate amount of RMB100.0 million to the shareholders of Baidu
Netcom solely for the latter to fund the capitalization of Baidu Netcom. The loans can be repaid only with
the proceeds from sale of the shareholders’ equity interest in Baidu Netcom to Baidu Online or its
designated person. The terms of the loan agreements will expire on April 26, 2014 at the earliest and can be
extended with the written consent of both parties before its expiration.

Each of the loan agreements amongst Baidu Online and the respective shareholders of Beijing Perusal,
BaiduPay and Baidu HR contains the same terms as those described above, except that the amount of the
loans extended to the respective shareholders is RMB10.0 million, RMB9.0 million, and RMB50.0 million,
respectively. The term of the loan agreements will expire on January 15, 2022, April 22, 2022, and
December 27, 2020, respectively, and can be extended with the written consent of both parties before its
expiration.

Exclusive Equity Purchase and Transfer Option Agreement

Pursuant to the exclusive equity purchase option agreement amongst the shareholders of Baidu Netcom,
Baidu Netcom and Baidu Online, the shareholders of Baidu Netcom irrevocably granted Baidu Online or its
designated person(s) an exclusive option to purchase, to the extent permitted under PRC law, all or part of
the equity interests in Baidu Netcom for the cost of the initial contributions to the registered capital or the
minimum amount of consideration permitted by applicable PRC law. The shareholders should remit to
Baidu Online any amount that is paid by Baidu Online or its designated person(s) in connection with the
purchased equity interest. Baidu Online or its designated person(s) have sole discretion to decide when to
exercise the option, whether in part or in full. Any and all dividends and other capital distributions from
Baidu Netcom to its shareholders should be paid to Baidu Online in full amount. Baidu Online would
provide unlimited financial support to Baidu Netcom, if in the normal operation of business, Baidu Netcom
would become in need of any form of reasonable financial support. If Baidu Netcom were to incur any loss
and as a result cannot repay any loans from Baidu Online, Baidu Online should unconditionally forgive any
such loans to Baidu Netcom given that Baidu Netcom provides sufficient proof for its loss and incapacity to
repay. The agreement will terminate when the shareholders of Baidu Netcom have transferred all their
equity interests in Baidu Netcom to Baidu Online or its designated person(s) or upon expiration of the term
of business of Baidu Online or Baidu Netcom.

Each of the exclusive equity purchase option agreements amongst Baidu Online and Beijing Perusal,
BaiduPay and Baidu HR and their respective shareholders contains the same terms as those described above.

F-10

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

1. ORGANIZATION, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS

(CONTINUED)

Each of the agreements will terminate upon the shareholders of Beijing Perusal, BaiduPay or Baidu HR
have transferred all their equity interests in Beijing Perusal, BaiduPay or Baidu HR, as the case may be, to
Baidu Online or its designated person(s) or upon expiration of the term of business of Baidu Online or
Beijing Perusal, BaiduPay or Baidu HR.

Proxy Agreement/Power of Attorney

Pursuant to the proxy agreement between Baidu Online and the shareholders of Baidu Netcom, the
shareholders of Baidu Netcom agreed to entrust all the rights to exercise their voting power to the person(s)
designated by Baidu Online. The shareholders of Baidu Netcom have each executed an irrevocable power of
attorney to appoint the person(s) designated by Baidu Online as their attorney-in-fact to vote on their behalf
on all matters requiring shareholder approval. The proxy agreement would be in effect for an unlimited term
unless terminated in writing by Baidu Online earlier. The power of attorney would be in effect for as long as
the shareholders of Baidu Netcom hold any equity interests in Baidu Netcom.

Each of the proxy agreements amongst Baidu Online and the shareholders of Beijing Perusal, BaiduPay, and
Baidu HR contains the same terms as those described above. Each of the proxy agreements will be in effect
for an unlimited term unless terminated in writing by Baidu Online. Each of the powers of attorney will be
in effect for as long as the shareholder of Beijing Perusal, BaiduPay or Baidu HR holds any equity interests
in Beijing Perusal, BaiduPay or Baidu HR, as the case may be.

Operating Agreement

Pursuant to the operating agreement amongst Baidu Online, Baidu Netcom and the shareholders of Baidu
Netcom, Baidu Online provides guidance and instructions on Baidu Netcom’s daily operations and financial
affairs. Baidu Online has the right to appoint senior executives of Baidu Netcom. The shareholders of Baidu
Netcom must appoint the candidates recommended by Baidu Online as their representatives on Baidu
Netcom’s board of directors. In addition, Baidu Online agrees to guarantee Baidu Netcom’s performance
under any agreements or arrangements relating to Baidu Netcom’s business arrangements with any third
party. Baidu Netcom, in return, agrees to pledge its accounts receivable and all of its assets to Baidu Online.
Moreover, Baidu Netcom agrees that without the prior consent of Baidu Online, Baidu Netcom will not
engage in any transactions that could materially affect the assets, liabilities, rights or operations of Baidu
Netcom, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of
any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in
favor of a third party or transfer of any agreements relating to its business operation to any third party. The
agreement will be in effect for an unlimited term, until the term of business of Baidu Online or Baidu
Netcom expires and is denied extension by the relevant approval authorities.

Each of the operating agreements amongst Baidu Online and Beijing Perusal, BaiduPay, and Baidu HR and
their respective shareholders contains the same terms as those described above. Each of the agreements will
be in effect for an unlimited term, until the term of business of Baidu Online or Beijing Perusal, BaiduPay
or Baidu HR expires and is denied extension by the relevant approval authorities.

Exclusive Technology Consulting and Services Agreement

Pursuant to the exclusive technology consulting and services agreement between Baidu Online and Baidu
Netcom, Baidu Online has the exclusive right to provide to Baidu Netcom technology consulting and
services related to, among other things, the maintenance of servers, software development, design of

F-11

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

1. ORGANIZATION, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS

(CONTINUED)

advertisements, and e-commerce technical services. Baidu Online owns the intellectual property rights
resulting from the performance of this agreement. Baidu Netcom pays a monthly service fee to Baidu Online
based upon a pre-agreed formula as defined in the agreement. Baidu Online has the right to adjust the
service fees at its sole discretion without the consent of Baidu Netcom. The agreement will be in effect for
an unlimited term, until the term of business of one party expires and is denied extension by the relevant
approval authorities.

Each of the exclusive technology consulting and services agreements between Baidu Online and Beijing
Perusal, BaiduPay, and Baidu HR contains the same terms as those described above, except for the formula
calculating the service fees. Baidu Netcom and Beijing Perusal should pay Baidu Online a monthly service
fee equal to the product of the standard monthly fee for page view per thousand times multiplied by the
actual times of page view for the month divided by 1,000; Baidu HR should pay its entire net income as
technology consulting and service fee to Baidu Online; and the agreement between Baidu Online and
BaiduPay does not provide a formula to calculate the quarterly fee, as BaiduPay has yet to achieve
profitability. Each of the agreements will be in effect for an unlimited term, until the term of business of one
party expires and is denied extension by the relevant approval authorities.

License Agreements

Baidu Online and Baidu Netcom entered into a software license agreement, a trademark license agreement,
a domain name license agreement and a web layout copyright license agreement (collectively, the “License
Agreements”). Pursuant to the License Agreements between Baidu Online and Baidu Netcom, Baidu Online
has granted to Baidu Netcom the right to use (including but not limited to) a software license, a webpage
copyright license, a trademark license and a domain name license. Baidu Netcom may only use the licenses
in their own business operations. Baidu Online has the right to adjust the service fees at its sole discretion.
The original term of the software license agreement expired in March 2010 and was renewed on March 11,
2010. The renewed agreement will expire on March 10, 2015. The software license agreement may be
extended by both parties in writing upon the expiration. The original term of the trademark license
agreement, domain name license agreement and web layout copyright
license agreement expired on
March 1, 2009 and was renewed then. The renewed term will expire on February 28, 2014. As Baidu Online
finished transferring the relevant domain names to Baidu Netcom, the domain name license agreement was
terminated in 2012.

Baidu Online entered into a trademark license agreement, a domain name license agreement and a web
layout copyright license agreement with both Beijing Perusal and BaiduPay. Each of the license agreements
between Baidu Online and Beijing Perusal and between Baidu Online and BaiduPay contains the same
terms as those described above. The term of each agreement is 5 years from the execution date of the
agreement on June 23, 2006 and February 28, 2008, respectively, and would be extended for one year
automatically at its expiration unless Baidu Online provides written notice not to extend the agreements
prior to their expiration. The agreements that were originally executed on June 23, 2006 were automatically
extended and will expire on June 22, 2013. As Baidu Online finished transferring the relevant domain
names to Beijing Perusal and BaiduPay, each of the domain name license agreements was terminated in
2012.

Baidu Online and Baidu HR have not entered into any license agreements as of December 31, 2012.

F-12

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

1. ORGANIZATION, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS

(CONTINUED)

Equity Pledge Agreement

Pursuant to the equity pledge agreement between Baidu Online and the shareholders of Baidu Netcom, the
shareholders of Baidu Netcom pledged all of their equity interests in Baidu Netcom to Baidu Online to
guarantee their obligations under the loan agreement and Baidu Netcom’s performance of its obligations
under the exclusive technology consulting and services agreement. If Baidu Netcom or its shareholders
breach their respective contractual obligations, Baidu Online, as the pledgee, will be entitled to certain
rights, including the right to sell the pledged equity interests. The shareholders of Baidu Netcom agreed not
to dispose of the pledged equity interests or take any actions that would prejudice Baidu Online’s interest.
The equity pledge agreement will expire two years after expiration of the term or the fulfillment by Baidu
Netcom and its shareholders of their respective obligations under the exclusive technology consulting and
services agreement and the loan agreement.

Each of the equity pledge agreements amongst Baidu Online and the respective shareholders of Beijing
Perusal, BaiduPay, and Baidu HR contains the same terms, including term period, as those described above.
Each equity pledge is perfected by registration with relevant local administration for industry and commerce
which is required for a property right under the PRC Property Rights Law.

Through the design of the aforementioned agreements, the shareholders of the VIEs effectively assigned
their full voting rights to Baidu Online, which gives Baidu Online the power to direct the activities that most
significantly impact the VIEs’ economic performance. Baidu Online obtains the ability to approve decisions
made by the VIEs and the ability to acquire the equity interests in the VIEs when permitted by PRC law.
Baidu Online is obligated to absorb a majority of the expected losses from the VIEs’ activities through
providing unlimited financial support to the VIEs and is entitled to receive a majority of residual returns
from the VIEs through the exclusive technology consulting and service fees. As a result of these contractual
agreements, Baidu Online is determined to be the primary beneficiary of the VIEs. Despite the lack of
technical majority ownership, there exists a parent-subsidiary relationship between the Company and VIEs
through these contractual agreements, and the Company consolidates the VIEs through Baidu Online.

There are similar agreements entered into by Primary Beneficiaries other than Baidu Online with their VIEs
and the respective shareholders, which results in a parent-subsidiary relationship between the Company and
VIEs through these contractual agreements. The assets, liabilities and results of operations of these VIEs are
insignificant.

In the opinion of the Company’s legal counsel, (i) the ownership structure of the Company and its VIEs is in
compliance with existing PRC laws and regulations; (ii) the contractual arrangements with the VIEs and
their shareholders are valid, binding and enforceable, and will not result in any violation of PRC laws or
regulations currently in effect; and (iii) the Group’s business operations are in compliance with existing
PRC laws and regulations in all material respects.

However, uncertainties in the PRC legal system could cause the Company’s current ownership structure to
be found in violation of existing and/or future PRC laws or regulations and could limit the Company’s
ability, through the Primary Beneficiaries, to enforce its rights under these contractual arrangements.
Furthermore, shareholders of the VIEs may have interests that are different than those of the Company,
they would seek to act contrary to the terms of the
which could potentially increase the risk that
aforementioned agreements.

In addition, if the current structure or any of the contractual arrangements were found to be in violation of
any existing or future PRC law, the Company may be subject to penalties, which may include but not be

F-13

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

1. ORGANIZATION, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS

(CONTINUED)

limited to, the cancellation or revocation of the Company’s business and operating licenses, being required
to restructure the Company’s operations or discontinue the Company’s operating activities. The imposition
of any of these or other penalties may result in a material and adverse effect on the Company’s ability to
conduct its operations. In such case, the Company may not be able to operate or control the VIEs, which
may result in deconsolidation of the VIEs.

The following tables set forth the assets, liabilities and results of operations of the VIEs and their
subsidiaries included in the Company’s consolidated balance sheets and statements of comprehensive
income:

Total assets . . . . . . . . . . . . . . . . . .
current . . . . . . . . . . . . . . . . . .
non-current . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . .
current . . . . . . . . . . . . . . . . . .
non-current . . . . . . . . . . . . . .

1,808,784
1,008,640
800,144
1,456,328
1,342,268
114,060

As of December 31,

2012

2011

RMB

RMB
(In thousands)
2,785,190
1,269,283
1,515,907
2,172,850
1,914,531
258,319

US$

447,054
203,734
243,320
348,766
307,303
41,463

For the years ended December 31,

2010

RMB

2011

RMB

2012

RMB

US$

(In thousands)

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,832,629
46,234

4,205,327
119,294

6,429,099
143,626

1,031,942
23,054

As of December 31, 2012, there was no pledge or collateralization of their assets. The amount of the net
assets of VIEs, which are restricted under PRC laws and regulations (Note 16), was RMB612.34 million
(US$98.29 million) as of December 31, 2012. The creditors of the VIEs’ liabilities do not have recourse to
the general credit of the Primary Beneficiaries in normal course of business.

Basis of Accounting

The consolidated financial statements have been prepared in accordance with United States generally
accepted accounting principles (“U.S. GAAP”).

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company, its wholly-owned
and majority-owned subsidiaries, VIEs and subsidiaries of the VIEs. All inter-company transactions and
balances between the Company, its wholly-owned and majority-owned subsidiaries, VIEs and subsidiaries
of the VIEs are eliminated upon consolidation. The Company has included the results of operations of
acquired businesses from the respective dates of acquisition.

F-14

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

1. ORGANIZATION, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS

(CONTINUED)

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the period. Management evaluates estimates, including those related to the accounts
receivable allowances, fair values of options to purchase the Company’s or its subsidiaries’ ordinary shares,
fair values of certain equity investments, the purchase price allocation and fair value of noncontrolling
interests with respect to business combinations, and deferred tax valuation allowance, among others.
Management bases the estimates on historical experience and on various other assumptions that are believed
to be reasonable, the results of which form the basis for making judgments about the carrying values of
assets and liabilities. Actual results could differ from these estimates.

Comparative Information

Certain items in the consolidated financial statements have been reclassified to conform to the current year’s
presentation to facilitate comparison.

Currency Translation for Financial Statements Presentation

Translations of amounts from RMB into US$ for the convenience of the reader have been calculated at the
exchange rate of RMB6.2301 per US$1.00 on December 31, 2012, the last business day in fiscal year 2012,
as published on the website of the United States Federal Reserve Board. No representation is made that the
RMB amounts could have been, or could be, converted into U.S. dollars at such rate.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Foreign Currency

The Company’s functional currency is the US$. The Company’s wholly-owned and majority-owned
subsidiaries, VIEs and subsidiaries of the VIEs determine their functional currencies based on the criteria of
ASC subtopic 830-10 (“ASC 830-10”), Foreign Currency Matters: Overall, and have determined their
functional currency to be their respective local currency. The Company uses the RMB as its reporting
currency. The Company uses the average exchange rate for the year and the exchange rate at the balance
sheet date to translate its operating results and financial position, respectively. Any translation gains (losses)
are recorded in other comprehensive income (loss). Transactions denominated in foreign currencies are
translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and
liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates
prevailing at the balance sheet date. Exchange gains and losses are included in earnings as a component of
other income.

Segment Reporting

In accordance with ASC subtopic 280-10 (“ASC 280-10”), Segment Reporting: Overall, the Company’s
chief operating decision makers rely upon consolidated results of operations when making decisions about
allocating resources and assessing performance of the Company; hence, the Company has only one single
operating segment. The Company does not distinguish between markets or segments for the purpose of
internal reporting.

F-15

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Business Combinations

The Company accounts for its business combinations using the purchase method of accounting in
accordance with ASC topic 805 (“ASC 805”): Business Combinations. The purchase method of accounting
requires that the consideration transferred to be allocated to the assets, including separately identifiable
assets and liabilities the Company acquired, based on their estimated fair values. The consideration
transferred of an acquisition is measured as the aggregate of the fair values at the date of exchange of the
assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and
all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are
expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are
irrespective of the extent of any
measured separately at
noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling
interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the
fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is
less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in
earnings.

their fair value as of the acquisition date,

In a business combination achieved in stages, the Company remeasures its previously held equity interest in
the acquiree immediately before obtaining control at its acquisition-date fair value and the re-measurement
gain or loss, if any, is recognized in earnings.

is based on various assumptions and valuation methodologies

The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and
noncontrolling interests
requiring
considerable judgment from management. The most significant variables in these valuations are discount
rates, terminal values, the number of years on which to base the cash flow projections, as well as the
assumptions and estimates used to determine the cash inflows and outflows. The Company determines
discount rates to be used based on the risk inherent in the related activity’s current business model and
industry comparisons. Terminal values are based on the expected life of assets, forecasted life cycle and
forecasted cash flows over that period.

Cash and Cash Equivalents

Cash and Cash Equivalents

Cash and cash equivalents are stated at cost, which approximates fair value, and primarily consist of cash
and investments in interest bearing demand deposit accounts, time deposits, highly liquid investments and
money market funds. All time deposits, money market funds and other highly liquid investments with
original maturities of three months or less from the date of purchase are classified as cash equivalents.

Restricted Cash

Restricted cash consists of the cash reserved in an escrow account to pay for the remaining consideration in
relation to the acquisition of Qunar Cayman Islands Limited (“Qunar”) (Note 3) and the cash balances
deposited by users or customers of the Group that were held for designated purposes.

The cash balances deposited by users or customers of the Group are considered restricted because they
cannot be used for the operations of the Group or any other purposes not designated by the users or
customers. The deposited balance is included in the Group’s bank account until being used for the
designated purpose or withdrawn by the users or customers.

F-16

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Accounts Receivable

Accounts receivable are recognized and carried at original invoiced amount less an allowance for any
potential uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount
is no longer probable. Bad debts are written off as incurred. The Company generally does not require
collateral from its customers.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of
customers to make payments on time. The Company reviews the accounts receivable on a periodic basis and
makes general and specific allowances when there is doubt as to the collectability of individual balances. In
the Company considers many factors,
evaluating the collectability of individual receivable balances,
including the age of the balance, the customer’s payment history, its current credit-worthiness and current
economic trends.

Investments

Short-Term Investments

All highly liquid investments with original maturities of greater than three months, but less than 12 months,
are classified as short-term investments. Investments that are expected to be realized in cash during the next
12 months are also included in short-term investments. The Company accounts for short-term investments
in accordance with ASC subtopic 320-10 (“ASC 320-10”), Investments—Debt and Equity Securities:
Overall. The Company classifies the short-term investments in debt and equity securities as “held-to-
maturity”, “trading” or “available-for-sale”, whose classification determines the respective accounting
methods stipulated by ASC 320-10. Dividend and interest income, including amortization of the premium
and discount arising at acquisition, for all categories of investments in securities are included in earnings.
Any realized gains or losses on the sale of the short-term investments are determined on a specific
identification method, and such gains and losses are reflected in earnings during the period in which gains or
losses are realized.

The securities that the Company has positive intent and ability to hold to maturity are classified as held-to-
maturity securities and stated at amortized cost. For individual securities classified as held-to-maturity
securities, the Company evaluates whether a decline in fair value below the amortized cost basis is other-
than-temporary in accordance with the Company’s policy and ASC 320-10. When the Company intends to
sell an impaired debt security or it is more likely than not that it will be required to sell prior to recovery of
its amortized cost basis, an other-than-temporary impairment is deemed to have occurred. In these instances,
the other-than-temporary impairment loss is recognized in earnings equal to the entire excess of the debt
security’s amortized cost basis over its fair value at the balance sheet date of the reporting period for which
the assessment is made. When the Company does not intend to sell an impaired debt security and it is more-
likely-than-not that it will not be required to sell prior to recovery of its amortized cost basis, the Company
must determine whether or not it will recover its amortized cost basis. If the Company concludes that it will
not, an other-than-temporary impairment exists and that portion of the credit loss is recognized in earnings,
while the portion of loss related to all other factors is recognized in other comprehensive income.

The securities that are bought and held principally for the purpose of selling them in the near term are
classified as trading securities. Unrealized holding gains and losses for trading securities are included in
earnings.

F-17

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Investments (continued)

Investments not classified as trading or as held-to-maturity are classified as available-for-sale securities.
Available-for-sale investment
is reported at fair value, with unrealized gains and losses recorded in
accumulated other comprehensive income (loss). Realized gains or losses are charged to earnings during the
period in which the gain or loss is realized. An impairment loss on the available-for-sale debt securities
would be recognized in the consolidated statements of comprehensive income when the decline in value is
determined to be other-than-temporary.

Long-term Investments

The Company’s long-term investments consist of cost method investments, equity method investments and
held-to-maturity investments with original maturities of greater than 12 months.

In accordance with ASC subtopic 325-20 (“ASC 325-20”), Investments-Other: Cost Method Investments,
for investments in an investee over which the Company does not have significant influence and which do
not have readily determinable fair value, the Company carries the investment at cost and only adjusts for
other-than-temporary declines in fair value and distributions of earnings that exceeds the Company’s share
of earnings since its investment. Management regularly evaluates the impairment of the cost method
investments based on performance and financial position of the investee as well as other evidence of market
value. Such evaluation includes, but is not limited to, reviewing the investee’s cash position, recent
financing, projected and historical financial performance, cash flow forecasts and financing needs. An
impairment loss is recognized in earnings equal to the excess of the investment’s cost over its fair value at
the balance sheet date of the reporting period for which the assessment is made. The fair value would then
become the new cost basis of investment.

Investments in entities in which the Company can exercise significant influence but does not own a majority
equity interest or control are accounted for using the equity method of accounting in accordance with ASC
subtopic 323-10 (“ASC 323-10”), Investments-Equity Method and Joint Ventures: Overall. Under the equity
method, the Company initially records its investment at cost and the difference between the cost of the
equity investee and the fair value of the underlying equity in the net assets of the equity investee is
recognized as equity method goodwill, which is included in the equity method investment on the
consolidated balance sheets. The Company subsequently adjusts the carrying amount of the investment to
recognize the Company’s proportionate share of each equity investee’s net income or loss into earnings after
the date of investment. The Company will discontinue applying equity method if an investment (and
additional financial supports to the investee, if any) has been reduced to zero. Under the conditions that the
Company is not required to advance additional funds to an investee and the equity-method investment in
ordinary shares is reduced to zero, if further investments are made that have a higher liquidation preference
than ordinary shares, the Company would recognize the loss based on its percentage of the investment with
the same liquidation preference, and the loss would be applied to those investments of a lower liquidation
preference first before being further applied to the investments of a higher liquidation preference. The
Company evaluates the equity method investments for impairment under ASC 323-10. An impairment loss
on the equity method investments is recognized in earnings when the decline in value is determined to be
other-than-temporary.

Long-term held-to-maturity investments are measured in the same manner as short-term held-to-maturity
investments.

F-18

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value Measurements of Financial Instruments

for

Financial instruments are in the form of cash and cash equivalents, restricted cash, short-term investments,
accounts receivable, amounts due from related parties and amounts due to related parties, long-term held-to-
maturity investments, accounts payable and accrued liabilities, customer advances and deposits, long-term
notes payable and short-term and long-term loans. The carrying amounts of these financial instruments
except
long-term notes payable and long-term loans,
approximate fair value because of their generally short maturities. The carrying amount of long-term held-
to-maturity investments and long-term loans approximates their fair value due to the fact that the related
interest rates approximate rates currently offered by financial institutions for similar debt instruments of
comparable maturities. Based on the quoted market price as of December 31, 2012, the fair value of the
long-term notes payable is RMB9.42 billion (US$1.51 billion) (Note 21).

long-term held-to-maturity investments,

Research, Development and Computer Software

Capitalization of Software Developed for Internal Use

The Company has capitalized certain internal use software development costs in accordance with ASC
subtopic 350-40 (“ASC 350-40”), Intangibles-Goodwill and Other: Internal-Use Software, amounting to
RMB10.38 million, RMB44.26 million and RMB38.13 million (US$6.12 million) for the years ended
December 31, 2010, 2011 and 2012, respectively. The Company capitalizes certain costs relating to
software acquired, developed, or modified solely to meet the Company’s internal requirements and for
which there are no substantive plans to market the software. These costs mainly include payroll and payroll-
related costs for employees who are directly associated with and who devote time to the internal-use
software projects during the application development stage. Capitalized internal-use software costs are
included in “intangible assets, net”. The amortization expense for capitalized software costs amounted to
RMB8.86 million, RMB7.51 million and RMB19.72 million (US$3.17 million) for the years ended
December 31, 2010, 2011 and 2012, respectively. The unamortized amount of capitalized internal use
software development costs was RMB52.04 million and RMB70.45 million (US$11.31 million) as of
December 31, 2011 and 2012, respectively.

Research and Development Expenses

Research and development expenses consist primarily of personnel-related costs. The Company has
expensed substantially all development costs incurred in the research and development of new products and
new functionality added to the existing products, except for certain internal-use software.

F-19

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fixed Assets

Fixed assets are stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line
basis over the shorter of the estimated useful lives of the assets or the term of the related lease, as follows:

Office building
Office building related facility, machinery and

- 45 years

equipment

Computer equipment
Office equipment
Vehicles
Leasehold improvements

- 15 years
- 3 or 5 years
- 3 or 5 years
- 5 years
- over the shorter of lease terms or estimated useful
lives of the assets

Fixed assets have no estimated residual value except for the office building and its related facility,
machinery and equipment, which have an estimated residual value of 4% of the cost.

Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and
betterments that extend the useful life of fixed assets are capitalized as additions to the related assets.
Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation
from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in earnings.

All direct and indirect costs that are related to the construction of fixed assets and incurred before the assets
are ready for their intended use are capitalized as construction in progress. Construction in progress is
transferred to specific fixed assets items and depreciation of these assets commences when they are ready
for their intended use.

Goodwill and Intangible Assets

Goodwill

The Company assesses goodwill for impairment in accordance with ASC subtopic 350-20 (“ASC 350-20”),
Intangibles - Goodwill and Other: Goodwill, which requires that goodwill be tested for impairment at the
reporting unit level at least annually and more frequently upon the occurrence of certain events, as defined
by ASC 350-20.

Prior to 2011, the Company had one reporting unit because no discrete financial information was available
below the consolidation level. Subsequent to the acquisitions in 2011 and thereafter, there were segment
managers who regularly review operating results of certain acquired entities and the rest of the Group,
which constitute two and three separate reporting units as of December 31, 2011 and 2012, respectively.

Goodwill was tested for impairment in the annual impairment tests on December 31 in each year using the
two-step process required by ASC 350-20. First, the Company reviewed the carrying amount of the
reporting unit compared to the fair value of the reporting unit based on either quoted market prices of the
ordinary shares or estimated fair value using a combination of the income approach and the market
approach. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is
not impaired and the Company is not required to perform further testing. If the carrying value of the
reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step

F-20

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Goodwill and Intangible Assets (Continued)

of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. That is,
the Company would then prepare the discounted cash flow analyses. Such analyses are based on cash flow
assumptions that are consistent with the plans and estimates being used to manage the business. An excess
of carrying value compared to fair value would indicate that goodwill may be impaired. Finally, if the
Company determined that goodwill may be impaired, the implied fair value of the goodwill, as defined by
ASC 350-20, would be compared to its carrying amount to determine the impairment loss, if any. The
Company early adopted ASU No. 2011-08, Intangibles—Goodwill and Other, in 2011, pursuant to which
the Company can elect to perform a qualitative assessment to determine whether the two-step impairment
testing on goodwill is necessary.

In 2012, the Company elected to assess goodwill for impairment at the two reporting units, representing
entities acquired in 2011 and 2012 using the two-step process. The fair value of these two reporting units
exceeded their respective carrying amount, and therefore goodwill related to these two reporting units were
not impaired and the Company was not required to perform further testing. The Company performed a
qualitative assessment for the remaining reporting unit. Based on the requirements of ASU No. 2011-08, the
Company evaluated all relevant factors, weighed all factors in their totality and concluded that it was not
more-likely-than-not the fair value was less than the carrying amount of the third reporting unit, and further
impairment testing on goodwill was unnecessary as of December 31, 2012.

Intangible Assets

Intangible assets with finite lives are carried at cost less accumulated amortization. Land use rights are
amortized using a straight-line method over the shorter of their estimated economic lives or the terms of
related land use right contracts. Licensed copyrights of video contents are amortized using an accelerated
method, which results in a pattern of amortization that is more reflective of the consumption of the assets.
All other intangible assets with finite lives are amortized using the straight-line method over the estimated
economic lives.

Intangible assets have weighted average economic lives from the date of purchase as follows:

Land use rights
Customer relationships
Software
Trademarks
User list
Licensed copyrights of video contents
Others
Total

- 50 years
- 8.2 years
- 3.6 years
- 10 years
- 3.0 years
- 2.4 years
- 9.6 years
- 12.7 years

Intangible assets with an indefinite useful life are not amortized and are tested for impairment annually or
more frequently if events or changes in circumstances indicate that they might be impaired in accordance
with ASC subtopic 350-30 (“ASC 350-30”), Intangibles-Goodwill and Other: General Intangibles Other
than Goodwill.

F-21

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Impairment of Long-Lived Assets Other Than Goodwill

The Company evaluates long-lived assets, such as fixed assets and purchased or internally developed
intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable in accordance with ASC subtopic 360-10 (“ASC 360-
10”), Property, Plant and Equipment: Overall. When such events occur,
the Company assesses the
recoverability of the assets group based on the undiscounted future cash flow the assets group is expected to
generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to
result from the use of the assets group plus net proceeds expected from disposition of the assets group, if
any, is less than the carrying value of the assets group. If the Company identifies an impairment, the
Company reduces the carrying amount of the assets group to its estimated fair value based on a discounted
cash flow approach or, when available and appropriate, to comparable market values. The Company uses
estimates and judgments in its impairment tests and if different estimates or judgments had been utilized, the
timing or the amount of any impairment charges could be different. Asset groups to be disposed of would be
reported at the lower of the carrying amount or fair value less costs to sell, and no longer depreciated. The
assets and liabilities of a disposal group classified as held for sale would be presented separately in the
appropriate asset and liability sections of the consolidated balance sheets.

Revenue Recognition

The Company recognizes revenue based on the following principles:

(1) Auction-based pay-for-performance service

The Company’s auction-based pay-for-performance (“P4P”) platform enables a customer to place its
website link and related description on the Company’s search result list. Customers make bids on keywords
based on how much they are willing to pay for each click to their listings in the search results listed on the
Company’s website and the relevance between the keywords and the customer’s businesses. Internet users’
search of the keyword will trigger the display of the listings. The ranking of the customer’s listing depends
on both the bidding price and the listing’s relevance to the keyword searched. Customer pays the Company
only when a user clicks on one of its website links. Other than the auction-based P4P platform, the
Company has certain vertical P4P platforms from which it generates revenue through pre-determined prices
per click. Revenue is recognized when a user clicks on one of the customer-sponsored website links, as there
is persuasive evidence of an arrangement, the fee is fixed or determinable and collection is reasonably
assured, as prescribed by ASC subtopic 605-10 (“ASC 605-10”), Revenue Recognition: Overall.

For certain P4P customers engaged through direct sales, the Company may provide certain value-added
consultative support services to help its customers to better utilize its P4P online marketing system. Fees for
such services are recognized as revenue on a pro-rata basis over the contracted service period.

(2) Other performance-based online marketing services

To the extent the Company provides online marketing services based on performance criteria other than
click-throughs, such as the number of telephone calls brought to its customers, the number of users
registered with its customers, the number of minimum click-throughs, and the number of successful
reservation of hotels or issuance of air tickets, revenue is recognized when the specified performance criteria
are met
together with satisfaction of other applicable revenue recognition criteria as prescribed by
ASC 605-10.

F-22

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition (Continued)

(3) Time-based online advertising services

For time-based online advertising services such as text
links, banners, or other forms of graphical
advertisements, the Company recognizes revenue, in accordance with ASC 605-10, on a pro-rata basis over
the contractual term commencing on the date the customer’s advertisement is displayed on a specified
webpage. For certain time-based contractual agreements,
the Company may also provide certain
performance guarantees, in which cases revenue is recognized at the later of the completion of the time
commitment or performance guarantee.

(4) Online marketing services involving Baidu Union

Baidu Union is the program through which the Company expands distribution of its customers’ sponsored
links or advertisements by leveraging traffic of the Baidu Union members’ Internet properties. The
Company makes payments to Baidu Union members for acquisition of traffic. The Company recognizes
gross revenue for the amount of fees it receives from its customers. Payments made to Baidu Union
members are included in cost of revenues as traffic acquisition costs.

(5) Barter transactions

The Company engages in barter transactions from time to time and in such situations follows the guidance
forth in ASC subtopic 845-10 (“ASC 845-10”), Nonmonetary Transactions: Overall. While
set
nonmonetary transactions are generally recorded at fair value, if such value is not determinable within
reasonable limits, the transaction is recognized based on the carrying value of the product or services
provided. The amount of revenues recognized for barter transactions was insignificant for each of the years
presented.

In certain instances, the Company is granted equity instruments in exchange for services. In accordance with
ASC subtopic 505-50 (“ASC 505-50”), Equity: Equity-based Payments to Non-Employees, if the Company
provides services in exchange for equity instruments, the Company measures the fair value of those equity
instruments for revenue recognition purposes as of the earlier of either of the following dates:

• The date the parties come to a mutual understanding of the terms of the equity-based compensation
arrangement and a commitment for performance by the Company to earn the equity instruments is
reached;

• The date at which the Company’s performance necessary to earn the equity instruments is completed.

If, as of the measurement date, the fair value of the equity instruments received is not determinable within
reasonable limits, the transaction is recognized based on the fair value of the services provided. If the fair
value of both the equity instruments received and the services provided cannot be determined, no revenue is
recognized for the services provided and the equity instrument received is recorded at zero carrying value.
The amount of revenues recognized for such transactions was insignificant in each of the years presented.

(6) Other revenue recognition related policies

The Company prospectively adopted Accounting Standards Update (“ASU”) No. 2009-13 (“ASU 2009-
13”), Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force
(“EITF”) that amends ASC 605-25, on January 1, 2011.

F-23

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition (Continued)

Prior to the adoption of ASU 2009-13, if a sales arrangement involves multiple deliverables, which are
considered separate units of accounting in accordance with ASC subtopic 605-25 (“ASC 605-25”), Revenue
Recognition: Multiple-Element Arrangements, the total revenue on such arrangement is allocated to the
individual deliverables based on their relative fair values. If sufficient vendor-specific objective evidence of
fair value (“VSOE”) does not exist for the allocation of revenue, the fee for the entire arrangement is
recognized ratably over the term of the arrangement or upon the delivery of the last deliverable, when other
revenue recognition criteria have been met.

In accordance with ASU 2009-13, certain delivered items in multiple-element arrangements, which
previously would not qualify for separate units of accounting due to the lack of VSOE or Third-Party
Evidence (“TPE”) of selling price, are accounted for as separate units of accounting, to which the total
consideration of the arrangements is allocated based on management’s best estimate of the selling price
(“BESP”). The Company considers all reasonably available information in determining the BESP, including
both market and entity-specific factors. The adoption of ASU 2009-13 did not have a material effect on the
Company’s consolidated financial statements, as the pattern and timing of revenue recognition was not
changed materially.

The Company delivers some of its online marketing services to end customers through engaging third-party
distributors. In this context, the Company may provide cash incentives to distributors. The cash incentives
are accounted for as reduction of revenue in accordance with ASC subtopic 605-50 (“ASC 605-50”),
Revenue Recognition: Customer Payments and Incentives.

The Company provides sales incentives to customers to entitle customers to receive reductions in the price
of the online marketing services by meeting certain cumulative consumption requirements. The Company
accounts for these award credits granted to members in conjunction with a current sale of products or
services as a multiple-element arrangement by analogizing to ASC 605-25. The consideration allocated to
the award credits, as deferred revenue is based on an assumption that the customer will purchase the
minimum amount of future service necessary to obtain the maximum award credits available. The deferred
revenue is recognized as revenue proportionately as the future services are delivered to the customer or
when the award credits expire.

Cash received in advance from customers is recorded as customer advances and deposits. The unused cash
balances remaining in the customers’ accounts are included as liabilities of the Company. Deferred revenue
is recorded when services are provided before the other revenue recognition criteria set forth in ASC 605-10
are fulfilled.

The Company operates an online game platform, on which registered users could access games provided by
online game developers. The rights and obligations of each party to the arrangement indicate that the
Company is acting as an agent whereas the online game developer is the principal as a result of being the
primary obligor in the arrangement. The Company recognizes the shared revenue, on a net basis, based on
the ratios pre-determined with the online game developers when all the revenue recognition criteria set forth
in ASC 605-10 are met, which is generally when the user purchases virtual currencies issued by the game
developers through the Company’s payment channel. The amount of revenues recognized was insignificant
in each of the years presented.

F-24

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cost of Revenues

Cost of revenues consists primarily of sales taxes (including business tax and output value-added tax) and
surcharges, traffic acquisition costs, bandwidth costs, depreciation, amortization of video content costs,
payroll and related costs of operations.

The Company incurs sales taxes and surcharges in connection with the provision of online marketing
services, technical and consultative service fees charged by its subsidiaries to VIEs and other taxable
services in the PRC. In accordance with ASC subtopic 605-45 (“ASC 605-45”), Revenue Recognition:
Principal Agent Considerations, the Company includes the sales tax and surcharges incurred on its online
marketing revenues in cost of revenues. The sales tax and surcharges in cost of revenues for the years ended
December 31, 2010, 2011 and 2012 were RMB504.85 million, RMB1.02 billion and RMB1.57 billion
(US$0.25 billion), respectively. Traffic acquisition costs represent the amounts paid or payable to Baidu
Union members who direct search queries to the Company’s websites or distribute the Company’s
customers’ paid links through their properties. These payments are primarily based on revenue sharing
arrangements under which the Company pays its Baidu Union members a percentage of the fees it earns
from its online marketing customers.

Advertising Expenses

Advertising expenses, primarily advertisements through various forms of media, are included in “Selling,
general and administrative expense” in the consolidated statements of comprehensive income and are
expensed when incurred. Advertising expenses for the years ended December 31, 2010, 2011 and 2012 were
RMB74.76 million, RMB157.10 million and RMB326.83 million (US$52.46 million), respectively.

Government Subsidies

Government subsidies primarily consist of
financial subsidies received from provincial and local
governments for operating a business in their jurisdictions and compliance with specific policies promoted
by the local governments. There are no defined rules and regulations to govern the criteria necessary for
companies to receive such benefits, and the amount of financial subsidy is determined at the discretion of
the relevant government authorities. For the government subsidies with non-operating nature and with no
further conditions to be met, the amounts are recorded as a non-operating income in “Other income, net”
when received; whereas for the government subsidies with certain operating conditions, the amounts are
recorded as liabilities when received and will be recorded as an operating income when the conditions are
met.

Leases

Leases have been classified as either capital or operating leases. Leases that transfer substantially all the
benefits and risks incidental to the ownership of assets are accounted for as capital leases as if there was an
acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases are
accounted for as operating leases wherein rental payments are expensed as incurred.

Income Taxes

The Company recognizes income taxes under the liability method. Deferred income taxes are recognized for
differences between the financial reporting and tax bases of assets and liabilities at enacted tax rates in
effect for the years in which the differences are expected to reverse. The Company records a valuation

F-25

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes (Continued)

allowance against the amount of deferred tax assets that it determines is not more-likely-than-not to be
realized. The effect on deferred taxes of a change in tax rates is recognized in earnings in the period that
includes the enactment date.

The Company applies the provisions of ASC subtopic 740-10 (“ASC 740-10”), Income Taxes: Overall, in
accounting for uncertainty in income taxes. ASC 740-10 clarified the accounting for uncertainty in income
taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in
the financial statements. The Company has elected to classify interest and penalties related to an uncertain
tax position (if and when required) as part of income tax expense in the consolidated statements of
comprehensive income. As of and for the years ended December 31, 2010, 2011 and 2012, no unrecognized
tax benefits or interest and penalties associated with uncertainty in income taxes have been recognized.

Share-based Compensation

The Company accounts for share-based compensation in accordance with ASC subtopic 718-10
(“ASC 718-10”), Compensation-Stock Compensation: Overall. The Company has elected to recognize
share-based compensation using the straight-line method for all share-based awards issued with no
performance conditions. For awards with performance conditions, compensation cost is recognized on an
accelerated basis if it is probable that the performance condition will be achieved.

Forfeitures have been estimated based on historical experience and are periodically reviewed. Cancellation
of an award accompanied by the concurrent grant of a replacement award is accounted for as a modification
of the terms of the cancelled award (“modification awards”). The compensation costs associated with the
modification awards are recognized if either the original vesting condition or the new vesting condition has
been achieved. Such compensation costs cannot be less than the grant-date fair value of the original award.
The incremental compensation cost is measured as the excess of the fair value of the replacement award
over the fair value of the cancelled award at the cancellation date. Therefore, in relation to the modification
awards, the Company recognizes share-based compensation over the vesting periods of the new options,
which comprises, (i) the amortization of the incremental portion of share-based compensation over the
remaining vesting term and (ii) any unrecognized compensation cost of original award, using either the
original term or the new term, whichever results in higher expenses for each reporting period.

The Company accounts for share awards issued to non-employees in accordance with the provisions of
ASC 505-50. Under ASC 505-50, the Company uses the Black-Scholes-Merton option pricing model
method to measure the value of options granted to non-employees at each vesting date to determine the
appropriate charge to share-based compensation. ASC 718-10 also requires share-based compensation to be
presented in the same manner as cash compensation rather than as a separate line item.

Earnings Per Share (“EPS”)

The Company computes earnings per Class A and Class B ordinary shares in accordance with ASC subtopic
260-10 (“ASC 260-10”), Earnings Per Share: Overall, using the two class method. Under the provisions of
ASC 260-10, basic net income per share is computed using the weighted average number of ordinary shares
outstanding during the period except that it does not include unvested ordinary shares subject to repurchase
or cancellation. Diluted net income per share is computed using the weighted average number of ordinary
shares and, if dilutive, potential ordinary shares outstanding during the period. Potentially dilutive securities

F-26

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Earnings Per Share (“EPS”) (Continued)

have been excluded from the computation of diluted net income per share if their inclusion is anti-dilutive.
Potential ordinary shares consist of the incremental ordinary shares issuable upon the exercise of stock
options, restricted shares subject to forfeiture, and contracts that may be settled in the Company’s stock or
cash. The dilutive effect of outstanding stock options and restricted shares is reflected in diluted earnings
per share by application of the treasury stock method. The computation of the diluted net income per share
of Class A ordinary shares assumes the conversion of Class B ordinary shares, while the diluted net income
per share of Class B ordinary shares does not assume the conversion of those shares.

The liquidation and dividend rights of the holders of the Company’s Class A and Class B ordinary shares
are identical, except with respect
the
undistributed earnings for each year are allocated based on the contractual participation rights of the Class A
and Class B ordinary shares as if the earnings for the year had been distributed. As the liquidation and
dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as the
conversion of Class B ordinary shares is assumed in the computation of the diluted net income per share of
Class A ordinary shares, the undistributed earnings are equal to net income for that computation.

to voting. As a result, and in accordance with ASC 260-10,

The Company chooses to consider the impact of accretion of the redeemable noncontrolling interests in the
calculation of income available to ordinary shareholders of the Company used in the earnings per share
calculation, without adjusting net
income attributable to the Company presented in the consolidated
statements of comprehensive income.

For the purposes of calculating the Company’s basic and diluted earnings per Class A and Class B ordinary
shares, the ordinary shares relating to the options that were exercised are assumed to have been outstanding
from the date of exercise of such options.

Contingencies

The Company records accruals for certain of its outstanding legal proceedings or claims when it is probable
that a liability will be incurred and the amount of loss can be reasonably estimated. The Company evaluates,
on a quarterly basis, developments in legal proceedings or claims that could affect the amount of any
accrual, as well as any developments that would make a loss contingency both probable and reasonably
estimable. The Company discloses the amount of the accrual if it is material.

When a loss contingency is not both probable and estimable, the Company does not record an accrued
liability but discloses the nature and the amount of the claim, if material. However, if the loss (or an
additional loss in excess of the accrual) is at least reasonably possible, then the Company discloses an
estimate of the loss or range of loss, if such estimate can be made and material, or states that such estimate
is immaterial if it can be estimated but immaterial, or discloses that an estimate cannot be made. The
assessments of whether a loss is probable or reasonably possible, and whether the loss or a range of loss is
estimable, often involve complex judgments about future events. Management is often unable to estimate
the loss or a range of loss, particularly where (i) the damages sought are indeterminate, (ii) the proceedings
are in the early stages, or (iii) there is a lack of clear or consistent interpretation of laws specific to the
industry-specific complaints among different jurisdictions. In such cases, there is considerable uncertainty
regarding the timing or ultimate resolution of such matters, including eventual loss, fine, penalty or business
impact, if any.

F-27

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Concentration of Risks

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentration of credit risk
primarily consist of cash and cash equivalents, restricted cash, short-term investments and accounts
receivable. As of December 31, 2012, the Company has RMB32.88 billion (US$5.28 billion) in cash and
cash equivalents, restricted cash and short-term investments, 72.98% and 27.02% of which are held by
financial institutions in the PRC and international financial institutions outside of the PRC, respectively. The
Company’s total cash and cash equivalents, restricted cash and short-term investments held at Bank of
institution and
China and Morgan Stanley,
international financial institution, represent 14.71% and 13.32% of the Company’s total cash and cash
equivalents, restricted cash and short-term investments as of December 31, 2012, respectively.

the largest percentage held at one single PRC financial

PRC state-owned banks, such as Bank of China, are subject to a series of risk control regulatory standards,
and PRC bank regulatory authorities are empowered to take over the operation and management when any
of those faces a material credit crisis. The Company does not foresee substantial credit risk with respect to
cash and cash equivalents, restricted cash and short-term investments held at the PRC state-owned banks.
Meanwhile, China does not have an official deposit insurance program, nor does it have an agency similar to
what was The Federal Deposit Insurance Corporation (FDIC) in the U.S. In the event of bankruptcy of one
of the financial institutions in which the Company has deposits or investments, it may be unlikely to claim
its deposits or investments back in full. The Company selected reputable international financial institutions
with high rating rates to place its foreign currencies. The Company regularly monitors the rating of the
international financial institutions in case of any defaults. There has been no recent history of default in
relation to these financial institutions.

Accounts receivable are typically unsecured and derived from revenue earned from customers and agents in
China, which are exposed to credit risk. The risk is mitigated by credit evaluations the Company performs
on its customers and its ongoing monitoring process of outstanding balances. The Company maintains
reserves for estimated credit losses and these losses have generally been within its expectations.

Business and economic risks

The Company participates in a dynamic high technology industry and believes that changes in any of the
following areas could have a material adverse effect on the Company’s future financial position, results of
operations or cash flows: changes in the overall demand for services and products; changes in business
offerings; competitive pressures due to new entrants; advances and new trends in new technologies and
industry standards; changes in bandwidth suppliers; changes in certain strategic relationships or customer
relationships; regulatory considerations; copyright regulations; and risks associated with the Company’s
ability to attract and retain employees necessary to support its growth.

No customer or any Baidu Union member generated greater than 10% of total revenues in any of the periods
presented.

The Company’s operations could be adversely affected by significant political, economic and social
uncertainties in the PRC.

F-28

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Concentration of Risks (Continued)

Currency convertibility risk

Substantially all of the Company’s businesses are transacted in RMB, which is not freely convertible into
foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China
or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s
Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory
institutions requires submitting a payment application form together with suppliers’ invoices, shipping
documents and signed contracts.

Foreign currency exchange rate risk

The functional currency and the reporting currency of the Company are the US$ and RMB, respectively.
The Company’s exposure to foreign currency exchange rate risk primarily relates to cash and cash
equivalents, short-term investments and notes payable denominated in the US$. On June 19, 2010, the
People’s Bank of China announced the end of the RMB’s de facto peg to the US$, a policy which was
instituted in late 2008 in the face of the global financial crisis, to further reform the RMB exchange rate
regime and to enhance the RMB’s exchange rate flexibility. The exchange rate floating bands will remain
the same as previously announced in the inter-bank foreign exchange market. The depreciation of the US$
against RMB was approximately 1.01% in 2012. Any significant revaluation of RMB may materially and
adversely affect the Company’s cash flows, revenues, earnings and financial position, and the value of, and
any dividends payable on, the ADS in US$. As a result, an appreciation of RMB against the US$ would
result in foreign currency translation losses when translating the net assets of the Company from the US$
into RMB.

The functional currency and the reporting currency of the subsidiaries in Japan are Japanese Yen (“JPY”)
and RMB, respectively. During 2012, JPY depreciated by approximately 12.10% against RMB. The
depreciation of JPY against RMB results in foreign currency translation loss when translating the net assets
of the subsidiaries in Japan from JPY into RMB.

For the years ended December 31, 2010, 2011 and 2012, the net foreign currency translation gain or loss
resulting from the translation from the respective functional currencies to the RMB reporting currency
recorded in the Company’s accumulated other comprehensive loss was RMB3.87 million of loss,
RMB32.93 million of gain and RMB5.27 million (US$0.85 million) of loss, respectively.

Derivative Instruments

ASC topic 815 (“ASC 815”), Derivatives and Hedging, requires all contracts which meet the definition of a
derivative to be recognized on the balance sheet as either assets or liabilities and recorded at fair value.
Changes in the fair value of derivative financial instruments are either recognized periodically in earnings or
in other comprehensive income depending on the use of the derivative and whether it qualifies for hedge
accounting. Changes in fair values of derivatives not qualified as hedges are reported in earnings. The
estimated fair values of derivative instruments are determined at discrete points in time based on the
relevant market information. These estimates are calculated with reference to the market rates using industry
standard valuation techniques. The fair value of the derivative instruments held by the Company was
insignificant for any of the years presented.

F-29

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements

In July 2012, the FASB issued ASU No. 2012-02 (“ASU 2012-02”), Testing Indefinite-Lived Intangible
Assets for Impairment, which is intended to reduce the cost and complexity of performing the impairment
test for indefinite-lived intangible assets other than goodwill by providing entities an option to perform a
qualitative assessment to determine whether further quantitative impairment testing is necessary. If an entity
believes, as a result of its qualitative assessment, that it is more-likely-than-not that an indefinite lived
intangible asset is impaired, the quantitative impairment test is required. Otherwise, no further testing is
required. This standard is effective for annual and interim impairment tests performed for fiscal years
beginning after September 15, 2012, with early adoption permitted. The Company early adopted ASU 2012-
02 in the third quarter of 2012 and elected to perform a qualitative assessment on certain indefinite-lived
intangible assets to determine whether further impairment testing was necessary. The adoption of ASU
2012-02 did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU No. 2013-02 (“ASU 2013-02”), Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income, which is intended to improve the reporting of
reclassifications out of accumulated other comprehensive income.
It does not change the current
requirements for reporting net income or other comprehensive income in financial statements. However, the
standard requires an entity to provide information about the amounts reclassified out of accumulated other
comprehensive income by component. For public entities, the amendments are effective prospectively for
reporting periods beginning after December 15, 2012, with early adoption permitted. The Company will
adopt ASU 2013-02 beginning January 1, 2013 and does not expect the adoption to have a material impact
on its consolidated financial statements.

3. BUSINESS COMBINATIONS

Business combinations in 2012:

During the year ended December 31, 2012, the Company completed several business combinations, which
the Company expects to complement its existing business and achieve significant synergies. The acquired
entities were considered immaterial, both individually and in aggregate. The results of the acquired entities’
operations have been included in the Company’s consolidated financial statements since their respective
date of acquisition.

The Company has completed the valuations necessary to assess the fair values of the tangible and intangible
assets acquired and liabilities assumed and the fair value of noncontrolling interests, resulting from which
the amount of goodwill was determined and recognized as of the acquisition date. The following table
summarizes the estimated aggregate fair values of the assets acquired,
liabilities assumed and the
noncontrolling interests as of the respective date of acquisition:

Purchase consideration . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired, excluding intangible assets and the

related deferred tax liabilities . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities, noncurrent . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable noncontrolling interests . . . . . . . . . . . . . . . .
Pre-existing equity method investments . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-30

RMB

US$

(In thousands)

1,190,717

191,123

91,095
664,380
(72,222)
(32,507)
(100,101)
(817,951)
1,458,023

14,621
106,640
(11,592)
(5,218)
(16,067)
(131,290)
234,029

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

3. BUSINESS COMBINATIONS (CONTINUED)

Business combinations in 2012: (Continued)

The aggregate purchase price allocation included the acquisitions of Qiyi.com, Inc. (“Qiyi”) and certain
other acquirees, which were all equity method investees of the Company prior to their respective
acquisitions. The Company applied the equity method of accounting by recognizing its share of the profit or
loss in these equity method investees up to their respective date of acquisition.

In November 2012, the Company purchased all of the series A and series B preferred shares of Qiyi held by
Providence Equity Partners, obtaining the controlling financial
interests in Qiyi. The contingent
consideration related to the acquisition of Qiyi, which would be paid upon a change in control of Qiyi, was
fair valued at nil because of the remote probability of the occurrence of the contingent event.

The acquisition-date fair value of the equity interest in these equity method investees held immediately
before the respective acquisition date amounted to RMB817.95 million (US$131.29 million). The net gain
arising from the re-measurement of the existing equity method investment in these investees and the
settlement of the pre-existing contractual relationship relating to the equity method investments amounted to
RMB486.34 million (US$78.06 million) and was included in “Other income, net” in the consolidated
statements of comprehensive income. Out of the total purchase consideration, RMB338.45 million
(US$54.32 million) represented the effective settlement of the pre-existing relationship from the prior equity
method investees, and the remaining was paid in cash.

The valuations used in the purchase price allocation described above were determined by the Company with
the assistance of independent third party valuation firms. The valuation reports considered generally
accepted valuation methodologies such as the income, market and cost approaches. As the acquirees are all
private companies, the fair value estimates of pre-existing equity method investments or noncontrolling
interests are based on significant inputs that market participants would consider, which mainly include
(a) discount rates, (b) a projected terminal values based on EBITDA, (c) financial multiples of companies in
the same industries and (d) adjustments for lack of control or lack of marketability.

Goodwill, which is not tax deductible, is primarily attributable to the synergies expected to be achieved
from the acquisitions.

Neither the results of operations since the acquisition dates nor pro forma results of operations of the
acquirees were presented because the effects of these business combinations, individually and in the
aggregate, were not material to the Company’s consolidated results of operations.

Business combinations in 2011:

Acquisition of Qunar

On July 20, 2011, the Company acquired 62.01% of the equity interest of Qunar, a leading provider of travel
search products in China, with which the Company expects to achieve significant synergies. The results of
Qunar’s operations have been included in the Company’s consolidated financial statements since July 20,
2011.

The total purchase consideration of US$300.28 million is payable in cash, of which US$260.10 million was
paid upon acquisition. The remaining US$40.18 million was deposited in an escrow account to pay for
liabilities resulting from any breach of the representations and warranties made upon the acquisition or
indemnifiable loss incurred, if any, such as claims, damages or penalties. The escrowed amount was

F-31

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

3. BUSINESS COMBINATIONS (CONTINUED)

Business combinations in 2011: (Continued)

reserved and included in restricted cash and will be used to pay for the liabilities or the indemnifiable loss, if
any, in 18 months from the acquisition date, after which period any remaining amount will be released and
transferred to Qunar’s original selling shareholders.

The Company has completed the valuations necessary to assess the fair values of the tangible and intangible
assets acquired and liabilities assumed and the fair value of noncontrolling interests, resulting from which
the amount of goodwill was determined and recognized as of the acquisition date. The following table
summarizes the estimated fair values of the assets acquired, liabilities assumed and the noncontrolling
interests as of July 20, 2011, the date of acquisition:

Purchase consideration . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired, excluding intangible assets and the

related deferred tax liabilities . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net
. . . . . . . . . . . . . . . . . .
Deferred tax liabilities, noncurrent
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable noncontrolling interests . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill

RMB

(in thousands)
1,939,569

115,515
711,570
(136,856)
(102,922)
(942,004)
2,294,266

The valuations used in the purchase price allocation described above were determined by the Company with
the assistance of an independent third party valuation firm. The valuation report utilizes and considers
generally accepted valuation methodologies such as the income, market and cost approaches.

The redeemable noncontrolling interests were initially recorded at fair value on the acquisition date in
accordance with ASC 805-20-30-7, which approximated the fixed redemption amount because the
noncontrolling interests were immediately redeemable and the redemption amount to be paid to the holders
of noncontrolling interests as of the acquisition date is expected to represent
the fair value of the
noncontrolling interests. The fair value of the redeemable noncontrolling interests is estimated using the
income approach. As Qunar is a private company, the fair value measurement is based on significant inputs
that are not observable in the market. The fair value estimates are based on significant inputs that market
participants would consider when estimating equity fair value of the same industry, which include (a) a
discount rate, (b) a projected terminal value based on EBITDA, (c) financial multiples of companies in the
same industry as Qunar and (d) adjustments for lack of control or lack of marketability. The adjustment of
accreting the carrying amount of the noncontrolling interests to the fixed redemption amount is recorded at
each reporting date.

Other acquisitions

The Company also completed other acquisitions during 2011, including an acquisition of a subsidiary and
acquisitions of groups of operating assets, each of which met the definition of a business combination in
accordance with ASC subtopic 805-10 (“ASC 805-10”), Business Combinations: Overall. These
acquisitions were insignificant both individually and in aggregate.

F-32

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

4.

INVESTMENTS

Short-term investments

As of December 31, 2012, all of the held-to-maturity securities were time deposits in commercial banks
with a maturity of less than one year. The available-for-sale securities are debt securities with a maturity of
less than one year purchased from commercial banks and other financial institutions.

During the years ended December 31, 2010, 2011 and 2012, the Company recorded interest income,
including short-term investment gains, of RMB37.21 million, RMB149.35 million and RMB726.40 million
(US$116.60 million) in the consolidated statements of comprehensive income, respectively.

Long-term investments

The Company’s long-term investments consist of cost method investments, equity method investments and
held-to-maturity securities with maturities of greater than 12 months.

Cost method investments

The carrying amount of Company’s cost method investments was RMB389.63 million and RMB269.42
million (US$43.24 million) as of December 31, 2011 and 2012, respectively. The decrease is primarily due
to the impairment provision made to certain investments.

Equity method investments

As of December 31, 2012, the Company, through Baidu Holdings Limited (“Baidu Holdings”), holds 100%
of the ordinary shares of Youa.com, Inc. (“Youa”). The Company has three out of the total seven seats on
the board of directors of Youa and accounted for the investment in Youa under the equity method due to the
lack of control of its board of directors and certain substantive participating rights provided to the
convertible redeemable preferred shares holders.

As of December 31, 2012, the Company also holds equity investments in the following investees through its
subsidiaries or VIEs, all of which were accounted for under the equity method:

Investee

Percentage of ownership of
common stock

Beijing Paibo Times Technology Co., Ltd.
. . . . .
Chongqing Rongdu Technology Co., Ltd. . . . . . .
. .
Henan Feidian Network Technology Co., Ltd.
. . . . . . . . . . . . . . . . .
OPDA Appublish Co., Ltd.

32.56%
40.00%
40.00%
15.33%

F-33

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

4.

INVESTMENTS (CONTINUED)

Long-term investments (Continued)

The total impairment charges on long-term investments were nil, RMB47.89 million and RMB169.18
million (US$27.16 million) for the years ended December 31, 2010, 2011 and 2012, respectively.

Investments classified as held-to-maturity securities and available-for-sale securities as of December 31,
2011 and 2012 were as follows:

As of December 31, 2011

Amortized
cost

Gross un-
recognized
holding gains

Gross
unrecognized
holding losses

Gross
unrealized
gains

Fair value

RMB

RMB

RMB

(In thousands)

RMB

RMB

Short-term investments:

Held-to-maturity securities

Fixed-rate investments . . . . . . . . . . . . .
Adjustable-rate investments . . . . . . . . .

9,848,848
100,048

10,504
—

(25,077)
(21)

9,834,275
100,027

Available-for-sale securities

Adjustable-rate investments . . . . . . . . .

102,637

45

102,682

Amortized
cost

RMB

As of December 31, 2012

Gross un-
recognized
holding gains

Gross
unrecognized
holding losses

Gross
unrealized
gains

Fair value

Fair value

RMB

RMB

RMB

RMB

US$

(In thousands)

Short-term investments:

Held-to-maturity securities

Fixed-rate

investments . . . . . . .

17,072,751

30,886

(17,385)

17,086,252

2,742,533

Available-for-sale

securities

Fixed-rate

investments . . . . . . .

3,500,945

13,454

3,514,399

564,100

Adjustable-rate

investments . . . . . . .

17,073

Long-term investments:

Fixed-rate held-to-maturity

—

17,073

2,740

investments . . . . . . . . . . .

513,728

886

—

514,614

82,601

Held-to-maturity securities are stated at amortized cost. The long-term held-to-maturity investments will
mature between May 2014 and August 2014 in accordance with their contractual terms. The methodology
used in the determination of fair values for held-to-maturity securities and available-for-sale securities were
summarized in Note 21.

F-34

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

5. ACCOUNTS RECEIVABLE

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . .

605,364
(5,806)

2011

RMB

2012

RMB
(In thousands)
1,259,251
(5,768)

2012

US$

202,124
(926)

As of December 31,

599,558

1,253,483

201,198

The movements in the allowance for doubtful accounts were as follows:

Balance as of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts (credited against) charged to costs and

2010

RMB

9,015

2011

2012

RMB

RMB
(In thousands)
2,223

5,806

2012

US$

932

expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6,792)

3,583

(38)

(6)

Balance as of December 31 . . . . . . . . . . . . . . . . . . . . . . .

2,223

5,806

5,768

926

6. OTHER ASSETS, CURRENT

Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances to suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables from financial institutions . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

As of December 31,

2011

RMB

31,838
24,452
200,494
58,228

2012

RMB
(In thousands)
143,180
107,024
—
130,203

2012

US$

22,982
17,179
—
20,898

315,012

380,407

61,059

Receivables from financial institution represent entrusted loans to certain financial institutions, secured by
bank notes endorsed to the trusted agency. In an entrusted loan arrangement, the lender makes deposits into
a trust account of a bank and authorizes the bank to release the funds to the borrower. The bank collects
interest and principal payments from the borrower and remits to the lender as they become due.

F-35

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

7.

FIXED ASSETS

Computer equipment
. . . . . . . . . . . . . . . . . . . . . . .
Office building . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office building related facility, machinery and

equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Office equipment
Leasehold improvements . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . .

Accumulated depreciation . . . . . . . . . . . . . . . . . . .

As of December 31,

2011

RMB

3,450,160
393,865

2012

RMB
(In thousands)
4,973,104
911,482

137,209
6,943
177,509
178,932
2,982

156,240
7,519
212,368
193,751
148,717

2012

US$

798,238
146,303

25,078
1,207
34,087
31,099
23,871

4,347,600
(1,653,600)

6,603,181
(2,715,304)

1,059,883
(435,836)

2,694,000

3,887,877

624,047

The Company obtained certain computer servers and equipment by entering into capital leases. The gross
amount and the accumulated depreciation of these servers and equipment are RMB47.89 million and
RMB1.33 million, respectively, as of December 31, 2011 and RMB104.11 million (US$16.71 million) and
RMB23.54 million (US$3.78 million), respectively, as of December 31, 2012. Future minimum lease
payments of RMB83.51 million are payable in the amount of RMB36.79 million, RMB32.67 million,
RMB13.91 million, RMB0.10 million and RMB0.04 million in 2013, 2014, 2015, 2016 and 2017,
respectively.

Depreciation expense of the fixed assets, including assets under capital leases, was RMB380.89 million,
RMB747.74 million and RMB1.20 billion (US$192.39 million) for the years ended December 31, 2010,
2011 and 2012, respectively.

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill are as follows:

2011

RMB

Balance as of January 1 . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
Foreign currency translation adjustment

63,686
2,468,874
(113,011)
(7)

2012

RMB
(In thousands)
2,419,542
1,458,023
—

(1)

2012

US$

388,363
234,029
—
—

Balance as of December 31 . . . . . . . . . . . . . . . . . . . . .

2,419,542

3,877,564

622,392

F-36

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

8. GOODWILL AND INTANGIBLE ASSETS (CONTINUED)

Intangible assets

Finite-lived intangible assets

As of December 31, 2011

Gross carrying
value

Accumulated
amortization

Impairment
loss

Net carrying
value

RMB

RMB

RMB

RMB

(In thousands)

Land use right . . . . . . . . . . . . . . .
Customer relationships . . . . . . . .
Software . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . .
User list . . . . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . .

223,309
254,169
132,414
320,527
158,070
37,183

(11,252)
(40,168)
(45,288)
(14,567)
(23,418)
(19,097)

1,125,672

(153,790)

—
(1,031)
(3,424)
—
—
(1,085)

(5,540)

212,057
212,970
83,702
305,960
134,652
17,001

966,342

Land use right
. . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . .
User list
. . . . . . . . . . . . . . . . . . . . . .
Licensed copyrights of video

contents . . . . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . . . . .

As of December 31, 2012

Gross
carrying
value

RMB

298,600
307,104
215,195
320,527
233,570

Accumulated
amortization

Impairment
loss

RMB

RMB

(In thousands)

(16,498)
(64,420)
(75,131)
(46,639)
(78,205)

—
—
(2,347)
—
—

Net
carrying
value

RMB

282,102
242,684
137,717
273,888
155,365

Net
carrying
value

US$

45,281
38,953
22,105
43,962
24,938

411,666
181,250

(79,842)
(27,575)

—
—

331,824
153,675

53,261
24,667

1,967,912

(388,310)

(2,347)

1,577,255

253,167

Amortization expense of intangible assets for the years ended December 31, 2010, 2011 and 2012 was
RMB10.25 million, RMB65.67 million and RMB234.00 million (US$37.56 million),
respectively.
Estimated amortization expense relating to the existing intangible assets with finite lives for each of next
five years is as follows:

For the years ending December 31,
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

RMB

US$

(In thousands)

474,571
244,701
121,525
84,749
79,185

76,174
39,277
19,506
13,603
12,710

F-37

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

8. GOODWILL AND INTANGIBLE ASSETS (CONTINUED)

Intangible assets (Continued)

Indefinite-lived intangible assets

As of December 31,

Domain names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2012

2011

RMB

RMB
(In thousands)
9,360
1,050
—

9,360
3,550
2,000

Impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,910
10,410
(2,500) —

2012

US$

1,502
169
—

1,671
—

9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accrued payroll and welfare . . . . . . . . . . . . . . . . . . . .
Accrued operating expenses . . . . . . . . . . . . . . . . . . . . .
Tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributors’ and customers’ deposits . . . . . . . . . . . . .
Purchase of fixed assets . . . . . . . . . . . . . . . . . . . . . . . .
Traffic acquisition costs . . . . . . . . . . . . . . . . . . . . . . . .
Bandwidth costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Content acquisition costs . . . . . . . . . . . . . . . . . . . . . . .
Professional expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits on online payment platform . . . . . . . . . . . . .
Payable for business acquisitions . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,410

10,410

1,671

As of December 31,

2011

RMB

261,273
547,176
452,441
6,655
61,589
276,731
208,980
77,061
36,643
39,803
37,067
439,488
100,538

2012

RMB
(In thousands)
407,681
908,392
425,320
32,273
78,131
429,520
366,993
180,053
236,232
64,647
132,320
318,050
227,224

2012

US$

65,437
145,807
68,268
5,180
12,541
68,943
58,906
28,900
37,918
10,377
21,239
51,051
36,472

2,545,445

3,806,836

611,039

Payable for business acquisitions mainly represents the amount to be paid to the original shareholders of
Qunar at the end of the escrow period of eighteen months after acquisition and considerations to be paid for
other acquisitions based on their respective payment schedules.

F-38

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

10. LOANS PAYABLE

Short-term loans

On January 11, 2011, Baidu Holdings entered into a short-term loan arrangement with the Bank of China
(Macau Branch) for the working capital of Baidu Japan and its subsidiaries in Japan and in the USA. The
commitment of the loan amounts to RMB186.90 million (US$30 million), with a floating interest rate of
LIBOR plus 1.5% per annum and a maturity term of twelve months. The total amount of RMB124.60
million (US$20 million) drawn down by Baidu Holdings has been fully repaid in cash upon maturity in
January 2012.

Long-term loans

On October 27, 2010, Baidu Netcom borrowed a loan from the Export-Import Bank of China, which is due
according to a quarterly installment schedule between July 30, 2012 and October 30, 2013. Baidu Netcom
has the right to repay and may terminate the loan upon an advanced notice. The Company early repaid all
the remaining loan balance in 2012, with no penalty incurred.

On July 19, 2011, the Company borrowed a two-year unsecured loan from Goldman Sachs Lending Partners
LLC of RMB2.18 billion (US$350.00 million), at an annual interest rate of 1.30%. The loan was used to
finance the acquisition of Qunar and is due on July 14, 2013.

On September 18, 2012, the Company entered into a loan agreement with Australia and New Zealand
Banking Group Limited (Hong Kong Branch), pursuant to which the Company is committed to borrow an
unsecured Australian Dollars (AU$) denominated loan with a floating interest rate. The loan commitment
amounting to RMB679.86 million (AU$105 million) is intended for the general working capital of the
Company and can be drawn down from time to time within two years. On October 17, 2012, the Company
drew down RMB355.50 million (AU$55.00 million) with a term of two years under the loan commitment.
In connection with the drawn down of the loan commitment, the Company entered into a currency swap
agreement, pursuant to which the loan will be settled in a fixed US$ amount of US$56.76 million with a
fixed annual interest rate of 2.75% during the term of the loan. The currency swap agreement met the
definition of a derivative in accordance with ASC 815. The fair value of the derivative related to the
currency swap agreement was insignificant for the year ended December 31, 2012.

The following table summarizes the aggregate required repayments of the principal amounts of the
long-term borrowings, excluding the notes payable (Note 11), in the succeeding five years:

RMB

US$

(In thousands)

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015, 2016 and 2017 . . . . . . . . . . . . . . . . . . . . .

2,180,535
353,620
—

350,000
56,760
—

2,534,155

406,760

11. NOTES PAYABLE

On November 28, 2012, the Company issued and sold publicly two tranches of unsecured senior notes: (i)
an aggregate principal amount of US$750 million which will mature on November 28, 2017 (the “2017
Notes”), and (ii) an aggregate principal amount of US$750 million which will mature on November 28,
2022 (the “2022 Notes”). The 2017 Notes and the 2022 Notes are collectively referred to as the “Notes”.

F-39

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

11. NOTES PAYABLE (CONTINUED)

The 2017 Notes bear interest at the rate of 2.25% per annum and the 2022 Notes bear interest at the rate of
3.50% per annum. Interests are payable semi-annually in arrears on and of each year, beginning on May 28,
2013. At maturity, the Notes are payable at their principal amount plus accrued and unpaid interest thereon.

The net proceeds from the Notes, after deducting offering expenses, were RMB9.30 billion (US$1.49
billion), which will be used for general corporate purposes.

The Notes do not contain any financial covenants or other significant restrictions. In addition, the Notes are
unsecured and rank lower than any secured obligation of the Group and have the same liquidation priority as
any other unsecured liabilities of the Group, but senior to those expressly subordinated obligations, if any.
The Company may, at its discretion, redeem all or any portion of the Notes at any time, at the principal
amount plus any unpaid interest. As of December 31, 2012, the Company does not intend to redeem any
portion of the Notes prior to the stated maturity dates. The Company has the obligation to redeem the Notes
if a change in control occurs as defined in the indenture of the Notes.

The Notes were issued at a discount amounting to RMB10.37 million (US$1.67 million). The issuance costs
of RMB50.19 million (US$8.06 million) incurred at the time of the issuance of the Notes were capitalized.
Both the discount and the issuance costs are amortized as interest expense using the effective interest rate
method through the maturity dates of the Notes. The effective interest rate was 2.36% and 3.59% for the
2017 Notes and the 2022 Notes, respectively.

12. INCOME TAXES

The Company is incorporated in the Cayman Islands and conducts its primary business operations through
the subsidiaries and VIEs in the PRC. It also has intermediate holding companies in the British Virgin
Islands (“BVI”) and Hong Kong. Under the current laws of the Cayman Islands and BVI, the Company is
not subject to tax on income or capital gains. Additionally, upon payments of dividends by the Company to
its shareholders, no Cayman Islands and BVI withholding tax will be imposed. Under the Hong Kong tax
laws, subsidiaries in Hong Kong are exempted from income tax on their foreign-derived income and there
are no withholding taxes in Hong Kong on remittance of dividends.

China

Under the Enterprise Income Tax (“EIT”) Law, which has been effective since January 1, 2008, domestic
enterprises and Foreign Investment Enterprises (the “FIE”) are subject to a unified 25% enterprise income
tax rate, except for certain entities that are entitled to tax holidays. Tax holidays mainly include preferential
EIT rate for the PRC subsidiaries and VIEs which were recognized as a qualified “High and New
Technology Enterprise” (“HNTE”) or “Software Enterprise”.

Baidu Online, recognized as a qualified “HNTE”, has enjoyed the preferential EIT rate of 15% since 2008.
In April 2011, Baidu Online obtained the certificate of “Key Software Enterprise” for year 2010, which
enabled Baidu Online to enjoy the preferential tax rate of 10% solely for year 2010. The Company recorded
an income tax refund in connection with the over-paid provisional tax for year 2010 in the year ended
December 31, 2011, during which the certificate was granted.

Baidu.com Times Technology (Beijing) Co., Ltd. (“Baidu Times”), a qualified “HNTE” since 2008, enjoyed
50% reduction on the EIT rate in 2010 and 2011, which was granted prior to the effectiveness of the current
EIT Law.

F-40

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

12. INCOME TAXES (CONTINUED)

China (Continued)

Baidu (China) Co., Ltd. (“Baidu China”), recognized as a qualified “Software Enterprise” since 2006,
enjoyed a 50% tax rate reduction for year 2010. In May 2012, Baidu China obtained the HNTE certificate
and recorded an income tax refund in connection with the over-accrual of provisional tax amounting to the
difference between the preferential EIT rate of 15% granted by the Shanghai Tax Bureau to Baidu China
and the progressive EIT rates of 24% originally used in year 2011.

Baidu Netcom, recognized as an HNTE, is entitled to the preferential EIT rate of 15% for years 2010, 2011
and 2012. In May 2011, the Company obtained the HNTE certificate and recorded an income tax refund in
connection with the over-accrued provisional tax for year 2010.

Certain other PRC subsidiaries and VIEs also enjoyed tax holidays in various periods as a result of the
recognition as a qualified HNTE or “Software Enterprise”.

Under the current EIT Law, dividends paid by an FIE to any of its foreign non-resident enterprise investors
are subject to a 10% withholding tax. Thus, the dividends, if and when payable by Baidu Online to Baidu
Holdings, would be subject to 10% withholding tax. A lower tax rate will be applied if such foreign non-
resident enterprise investor’s jurisdiction of incorporation has signed a tax treaty or arrangement for the
avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income with
China. There is such a tax arrangement between PRC and Hong Kong. Thus, the dividends, if and when
payable by Baidu Times and Baidu China to Baidu HK, would be subject to 5% withholding tax rather than
statutory rate of 10% provided that Baidu HK meets the requirements stipulated by relevant PRC tax
regulations. Furthermore, pursuant to the applicable circular and interpretations of the current EIT Law,
dividends from earnings created prior to 2008 but distributed after 2008 are not subject to withholding
income tax.

Moreover, the current EIT Law treats enterprises established outside of China with “effective management
and control” located in China as PRC resident enterprises for tax purposes. The term “effective management
and control” is generally defined as exercising overall management and control over the business, personnel,
accounting, properties, etc. of an enterprise. The Company, if considered a PRC resident enterprise for tax
purposes, would be subject to the PRC Enterprise Income Tax at the rate of 25% on its worldwide income
for the period after January 1, 2008. As of December 31, 2012, the Company has not accrued for PRC tax on
such basis. The Company will continue to monitor its tax status.

Japan

Baidu Japan Inc. (“Baidu Japan”) with a paid-in capital in excess of JPY100.00 million is subject to national
income tax of 30%. Baidu Japan is also subject to inhabitant tax, assessed by both prefectures and
municipalities. Inhabitant tax is computed as a percentage of national income tax. The per capita tax is
based on the Company’s capitalization and the number of employees. In addition, Baidu Japan is subject to
a corporate enterprise tax on a pro forma basis based on the amount of taxable profit subject to the corporate
tax, added-value components, (e.g., labor costs, net interest and rental payments, income/loss for current
year) and a capital component. Baidu Japan has been in a cumulative loss position since its inception.

F-41

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

12. INCOME TAXES (CONTINUED)

The Company had minimal operations in jurisdictions other than the PRC. Income (loss) before income
taxes consists of:

For the years ended December 31,

2010

RMB

2011

RMB

2012

RMB

(In thousands)

2012

US$

PRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-PRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,321,910
(260,747)

8,217,522
(408,343)

12,537,331
(571,894)

2,012,380
(91,795)

4,061,163

7,809,179

11,965,437

1,920,585

The pre-tax losses from non-PRC operations consists primarily of the operating costs, administration
expenses, interest income and charges for share-based compensation. Income taxes consist of:

Current income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax refund due to . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
reduced tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax (benefit) expense . . . . . . . . . . . . . . . . . . .

For the years ended December 31,

2010

RMB

2011

RMB

2012

RMB

2012

US$

(In thousands)

616,994

1,337,469

1,888,378

303,106

(6,625)
(74,374)

(83,907)
(64,701)

(255,189)
(59,030)

(40,961)
(9,475)

535,995

1,188,861

1,574,159

252,670

The reconciliation of tax computed by applying respective statutory income tax rate to pre-tax income is as
follows (amounts in thousands of RMB, and in thousands of US$, except for per share data):

For the years ended December 31,

2010

RMB

2011

RMB

2012

RMB

2012

US$

Expected taxation at PRC EIT statutory rate . . . . . . . . . . . .
Effect of differing tax rates in different jurisdictions . . . . .
Permanent differences – non-taxable income . . . . . . . . . . .
Permanent differences – non-deductible expenses . . . . . . .
Tax incentives relating to R&D expenditures . . . . . . . . . . .
Effect of tax exemption and reduction inside the PRC . . . .
Income tax refund due to reduced tax rate . . . . . . . . . . . . .
Under-provided (over-accrued) EIT for previous years . . .
Effect of tax rate change on deferred taxes . . . . . . . . . . . . .
Addition to valuation allowance . . . . . . . . . . . . . . . . . . . . .

1,015,329
8,416
(733)
10,935
(22,925)
(533,802)
(6,625)
10,359
—
55,041

1,952,295
43,260
(2,804)
9,989
(105,966)
(650,206)
(83,907)
(66,960)
18,216
74,944

2,991,359
138,931
(58,157)
58,201
(154,977)
(1,234,142)
(255,189)
(15,084)
—

103,217

480,146
22,300
(9,335)
9,342
(24,876)
(198,093)
(40,961)
(2,421)
—
16,568

Taxation for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

535,995

1,188,861

1,574,159

252,670

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of tax exemption and reduction inside the PRC on

basic earnings per Class A and Class B ordinary
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13.20%

15.22%

13.16% 13.16%

15.34

18.64

35.32

5.67

F-42

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

12. INCOME TAXES (CONTINUED)

The Company’s effective tax rate decreased in year 2012 compared with year 2011 primarily due to Baidu
China obtaining the HNTE certificate in May 2012 and receiving a tax refund in connection with the over-
accrual of provisional tax in prior year.

The tax effects of temporary differences that give rise to the deferred tax balances at December 31, 2011 and
2012 are as follows:

Provision for doubtful receivables . . . . . . . . . . . . . . . . . .
Fixed assets depreciation . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carry-forward . . . . . . . . . . . . . . . . . . .
Accrued expenses, payroll and others . . . . . . . . . . . . . . .

As of December 31,

2011

RMB

2,586
36,274
248,790
140,805

2012

RMB
(In thousands)
1,655
13,367
333,397
214,211

2012

US$

266
2,146
53,514
34,382

Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

428,455
(254,919)

562,630
(349,012)

90,308
(56,020)

Deferred tax assets, net

. . . . . . . . . . . . . . . . . . . . . . . . . .

173,536

213,618

34,288

As of December 31,

2011

RMB

2012

RMB
(In thousands)

2012

US$

Long-lived assets arising from acquisitions . . . . . . . . . . . . .

131,629

289,482

46,465

Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

131,629

289,482

46,465

The Company does not believe that sufficient positive evidence exists to conclude that the recoverability of
Baidu Japan’s net deferred tax assets is more likely than not to be realized. Consequently, the Company has
provided full valuation allowances on the related net deferred tax assets.

As of December 31, 2012, the Company had net operating losses of approximately RMB1.10 billion
(US$176.69 million) primarily from Qunar, Qiyi, Baidu Japan, Baidu HK and Baidu HR, which can be
carried forward after certain reconciliation per tax regulation to offset future net profit for income tax
purposes. The Japan net operating loss will expire beginning 2015; the PRC net operating loss will expire
beginning 2017; and the Hong Kong net operating loss can be carried forward without an expiration date.

The Company has evaluated its income tax uncertainty under ASC 740-10. ASC 740-10 clarifies the
accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required
to meet before being recognized in the financial statements. The Company has elected to classify interest
and penalties related to an uncertain tax position, if and when required, as part of income tax expense in the
consolidated statements of comprehensive income. As of December 31, 2012, there is no significant tax
uncertainty impact on the Company’s financial position and result of operations.

F-43

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

12. INCOME TAXES (CONTINUED)

The Company did not provide for deferred income taxes and foreign withholding taxes on the undistributed
earnings of foreign subsidiaries as of December 31, 2011 and 2012 on the basis of its intent to permanently
reinvest foreign subsidiaries’ earnings. If these foreign earnings were to be repatriated in the future, the
related tax liability may be reduced by any foreign income taxes previously paid on these earnings.
Determination of the amount of unrecognized deferred tax liability related to these earnings is not
practicable. In the case of its VIEs, undistributed earnings were insignificant as of each of the balance sheet
dates.

In general, the PRC and Japanese tax authorities have up to five and seven years, respectively to conduct
examinations of the Company’s tax filings. Accordingly, the PRC subsidiaries’ tax years 2008 through 2012
and the Japanese subsidiary’s tax years 2007 through 2012 remain open to examination by the respective
taxing jurisdictions.

13. EMPLOYEE DEFINED CONTRIBUTION PLAN

Full time employees of the Group in the PRC participate in a government mandated multi-employer defined
contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance,
employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations
require that the Group make contributions to the government for these benefits based on certain percentages
of the employees’ salaries. The Company has no legal obligation for the benefits beyond the contributions.
The total amounts for such employee benefits, which were expensed as incurred, were RMB218.88 million,
RMB381.74 million and RMB631.25 million (US$101.32 million) for the years ended December 31, 2010,
2011 and 2012, respectively.

14. COMMITMENTS AND CONTINGENCIES

Capital commitments

The Company’s capital commitments relate primarily to commitments in connection with the expansion and
improvement of its network infrastructure and its plan to build additional office buildings and cloud
computing based data centers. Total capital commitments contracted but not yet reflected in the financial
statements amounted to RMB681.21 million (US$109.34 million) as of December 31, 2012. All of the
commitments relating to the network infrastructure are to be fulfilled within the next year and the
commitments relating to the office building and cloud computing based data centers will be settled in
installments as various stages of the construction plan are completed in the next four years.

Operating lease commitments

The Company leases facilities in the PRC under non-cancelable operating leases expiring on different dates.
Payments under operating leases are expensed on a straight-line basis over the periods of the respective
leases. Total rental expense for offices was RMB76.87 million, RMB137.08 million and RMB196.59
million (US$31.55 million) for the years ended December 31, 2010, 2011 and 2012, respectively. Total
operating lease expense for IDC facilities was RMB310.54 million, RMB626.44 million and RMB1.07
billion (US$171.64 million) for the years ended December 31, 2010, 2011 and 2012, respectively.

F-44

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Operating lease commitments (Continued)

Future minimum payments under non-cancelable operating leases with initial terms of one-year or more
consist of the following as of December 31, 2012:

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

RMB

US$

(In thousands)

1,227,718
733,765
602,537
479,111
218,027
138,422

197,062
117,777
96,714
76,903
34,996
22,218

3,399,580

545,670

Commitments for licensed copyrights

The Company enters into non-cancelable licensing agreements with third-party vendors to acquire licensed
copyrights of video contents for its online video platform. Payments for licensed copyrights of video
contents are recorded in “Intangible assets, net” on the consolidated balance sheets (Note 8).

Future minimum payments under non-cancelable licensing agreements consist of the following as of
December 31, 2012:

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

RMB

US$

(In thousands)

232,233
68,735
—

37,276
11,033
—

300,968

48,309

Guarantees

The Company accounts for guarantees in accordance with ASC subtopic 460-10 (“ASC 460-10”),
Guarantees: Overall. Accordingly, the Company evaluates its guarantees to determine whether (a) the
guarantee is specifically excluded from the scope of ASC 460-10, (b) the guarantee is subject to ASC 460-
10 disclosure requirements only, but not subject to the initial recognition and measurement provisions, or
(c) the guarantee is required to be recorded in the financial statements at fair value.

The corporate by-laws require that the Company indemnify its officers and directors, as well as those who
act as directors and officers of other entities at the Company’s request, against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection with any proceedings arising
out of their services to the Company. In addition, the Company has entered into separate indemnification
agreements with each director and each executive officer of the Company that provide for indemnification
of these directors and officers under similar circumstances and under additional circumstances. The
indemnification obligations are more fully described in the by-laws and the indemnification agreements.
The Company purchases standard directors and officers insurance to cover claims or a portion of the claims
its directors and officers. Since a maximum obligation is not explicitly stated in the
made against

F-45

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Guarantees (Continued)

Company’s by-laws or in the indemnification agreements and will depend on the facts and circumstances
that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably
estimated.

Historically, the Company has not been required to make payments related to these obligations, and the fair
value for these obligations is zero in the consolidated balance sheets as of December 31, 2011 and 2012.

Litigation

The Group was involved in certain cases pending in various PRC and U.S. courts and arbitration as of
December 31, 2012. These cases include copyright infringement cases, unfair competition cases, and
defamation cases, among others. Adverse results in these lawsuits may include awards of damages and may
also result in, or even compel, a change in the Company’s business practices, which could result in a loss of
revenue or otherwise harm the business of the Company.

For many proceedings, the Company is currently unable to estimate the reasonably possible loss or a range
of reasonably possible losses as the proceedings are in the early stages, and/or there is a lack of clear or
consistent interpretation of laws specific to the industry-specific complaints among different jurisdictions.
As a result, there is considerable uncertainty regarding the timing or ultimate resolution of such matters,
which includes eventual loss, fine, penalty or business impact, if any, and therefore, an estimate for the
reasonably possible loss or a range of reasonably possible losses cannot be made. However, the Company
believes that such matters, individually and in the aggregate, when finally resolved, are not reasonably likely
to have a material adverse effect on the Company’s consolidated results of operations, financial position and
cash flows. With respect to the limited number of proceedings, for which the Company was able to estimate
the reasonably possible losses or the range of reasonably possible losses, such estimated loss amounts were
immaterial.

15. REDEEMABLE NONCONTROLLING INTERESTS

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . .
Acquisition of Qiyi (1) (Note 3) . . . . . . . . . . . . . . . . . . . . .
Equity issuance of subsidiaries (2) . . . . . . . . . . . . . . . . . . .
Current losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion impact

RMB

US$

(In thousands)

935,978
100,101
25,989
(55,804)
(690)
5,566
22,143

150,235
16,067
4,172
(8,957)
(111)
893
3,554

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . .

1,033,283

165,853

(1) Noncontrolling interests in Qiyi represent the preferred shares of Qiyi held by noncontrolling shareholders,
which could be redeemed upon occurrence of certain events that are not solely within the control of Qiyi
and are accounted for as redeemable noncontrolling interests.

(2) On July 13, 2012, NTT DOCOMO, Inc. (“DCM”) subscribed additional ordinary shares of B.D. Mobile
Telecommunication Limited (“B.D. Mobile”) with cash pursuant to the agreement entered into with Baidu

F-46

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

15. REDEEMABLE NONCONTROLLING INTERESTS (CONTINUED)

Holdings in January 2011, representing 14.00% of the then outstanding ordinary shares. The newly issued
ordinary shares could be redeemed upon occurrence of certain events that are not solely within the control of
B.D. Mobile and are accounted for as redeemable noncontrolling interests.

There were no shares redeemed in the years ended December 31, 2011 and 2012.

16. SHAREHOLDERS’ EQUITY

Ordinary shares

Upon completion of the Company’s initial public offering (“IPO”) in August 2005, 16,648,877 Class B
Ordinary shares were issued upon conversion of all convertible preferred shares. In addition, immediately
following the closing of the IPO, the Memorandum and Articles of Association were amended and restated
such that the authorized share capital consisted of 870,400,000 ordinary shares at a par value of US$0.00005
per share, of which 825,000,000 shares were designated as Class A ordinary shares, 35,400,000 as Class B
ordinary shares, and 10,000,000 shares designated as preferred shares. The rights of the holders of Class A
and Class B ordinary shares are identical, except with respect to voting and conversion rights. Each share of
Class A ordinary shares is entitled to one vote per share and is not convertible into Class B ordinary shares
under any circumstances. Each share of Class B ordinary shares is entitled to ten votes per share and is
convertible into one Class A ordinary share at any time by the holder thereof. Upon any transfer of Class B
ordinary shares by the holder thereof to any person or entity that is not an affiliate of such holder, such Class
B ordinary shares would be automatically converted into an equal number of Class A ordinary shares. There
were 650,000, 1,332 and 40,000 Class B ordinary shares transferred to Class A ordinary shares in the years
ended December 31, 2010, 2011 and 2012, respectively.

As of December 31, 2012, there were 27,202,710 and 7,763,000 Class A and Class B ordinary shares
outstanding, respectively. As of December 31, 2011 and 2012, there were no preferred shares issued and
outstanding.

Retained earnings

In accordance with the Regulations on Enterprises with Foreign Investment of China and their articles of
association, the Company’s PRC subsidiaries, being foreign invested enterprises established in China, are
required to make appropriations to certain statutory reserves, namely a general reserve fund, an enterprise
expansion fund, a staff welfare fund and a bonus fund, all of which are appropriated from net profit as
reported in their PRC statutory accounts. Each of the Company’s PRC subsidiaries is required to allocate at
least 10% of its after-tax profits to a general reserve fund until such fund has reached 50% of its respective
registered capital. Appropriations to the enterprise expansion fund and staff welfare and bonus funds are at
the discretion of the Company’s subsidiaries.

In accordance with the China Company Laws, the Company’s VIEs must make appropriations from their
after-tax profits as reported in their PRC statutory accounts to non-distributable reserve funds, namely a
statutory surplus fund, a statutory public welfare fund and a discretionary surplus fund. Each of the
Company’s VIEs is required to allocate at least 10% of its after-tax profits to the statutory surplus fund until
such fund has reached 50% of its respective registered capital. Appropriations to the statutory public welfare
fund and the discretionary surplus fund are made at the discretion of the Company’s VIEs.

General reserve and statutory surplus funds are restricted to set-off against losses, expansion of production
and operation and increasing registered capital of the respective company. Staff welfare and bonus fund and

F-47

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

16. SHAREHOLDERS’ EQUITY (CONTINUED)

Retained earnings (Continued)

statutory public welfare funds are restricted to capital expenditures for the collective welfare of employees.
The reserves are not allowed to be transferred to the Company in terms of cash dividends, loans or
advances, nor are they allowed for distribution except under liquidation.

2011

RMB

As of December 31,

2012

RMB
(In thousands)

2012

US$

PRC statutory reserve funds . . . . . . . . . . . . . . . . .
Unreserved retained earnings . . . . . . . . . . . . . . . .

249,880
13,354,454

277,812
23,760,407

44,592
3,813,808

Total retained earnings

13,604,334

24,038,219

3,858,400

Under PRC laws and regulations, there are restrictions on the Company’s PRC subsidiaries and VIEs with
respect to transferring certain of their net assets to the Company either in the form of dividends, loans, or
advances. Amounts of net assets restricted include paid up capital and statutory reserve funds of the
Company’s PRC subsidiaries and the net assets of VIEs in which the Company has no legal ownership,
totaling RMB1.22 billion and RMB2.80 billion (US$0.45 billion) as of December 31, 2011 and 2012,
respectively.

Furthermore, cash transfers from the Company’s PRC subsidiaries to its subsidiaries outside of China are
subject to PRC government control of currency conversion. Shortages in the availability of foreign currency
may restrict the ability of the PRC subsidiaries and consolidated affiliated entities to remit sufficient foreign
currency to pay dividends or other payments to the Company, or otherwise satisfy their foreign currency
denominated obligations.

Accumulated other comprehensive loss

The components of accumulated other comprehensive income (loss) are as follows:

As of December 31,

2011

RMB

2012

RMB
(In thousands)

2012

US$

Foreign currency translation adjustment
. . . . . . . . . . . . . . .
Unrealized gains on available-for-sale securities . . . . . . . . .

(84,448)
45

(89,714)
11,436

(14,400)
1,836

Accumulated other comprehensive loss . . . . . . . . . . . . . . . .

(84,403)

(78,278)

(12,564)

F-48

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

17. EARNINGS PER SHARE (“EPS”)

On April 28, 2010, the Company announced a change in the ratio of its American depositary shares
(“ADSs”) representing Class A ordinary shares from one ADS for one share to ten ADSs for one share,
effective on May 12, 2010. For Baidu’s ADS holders, this ratio change has the same effect as a ten-for-one
ADS split.

The following table sets forth the computation of basic and diluted net income attributable to Baidu, Inc.,
after accretion of redeemable noncontrolling interests at the amount of RMB22.14 million (Note 15) in year
2012 (nil in year 2011 and year 2010 respectively), per share for Class A and Class B ordinary shares.
(Amounts in thousands of RMB, and in thousands of US$, except for number of shares, per share and per
ADS data)

For the years ended December 31,

2010

2011

2012

Class A
RMB

Class B
RMB

Class A
RMB

Class B
RMB

Class A
RMB

Class A
US$

Class B Class B
RMB

US$

Earnings per share – basic:
Numerator
Allocation of net income attributable to

Baidu, Inc. . . . . . . . . . . . . . . . . . . . . . . .

2,690,712

834,456

5,153,755 1,484,882

8,106,219

1,301,138 2,327,666

373,616

Denominator
Weighted average ordinary shares

outstanding . . . . . . . . . . . . . . . . . . . . . . 26,566,454 8,238,907

27,086,098 7,803,952

27,145,208

27,145,208 7,794,630 7,794,630

Denominator used for earnings per

share . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - basic . . . . . . . . . . . . .

26,566,454 8,238,907
101.28

101.28

27,086,098 7,803,952
190.27

190.27

27,145,208
298.62

27,145,208 7,794,630 7,794,630
47.93

298.62

47.93

Earnings per share – diluted:
Numerator
Allocation of net income attributable to

Baidu, Inc. for diluted computation . . .
Reallocation of net income attributable to
Baidu, Inc. as a result of conversion of
Class B to Class A shares . . . . . . . . . . .

Allocation of net income attributable to

2,693,365

831,803

5,156,846 1,481,791

8,108,856

1,301,561 2,325,029

373,193

831,803

— 1,481,791

—

2,325,029

373,193

—

—

Baidu, Inc. . . . . . . . . . . . . . . . . . . . . . . .

3,525,168

831,803

6,638,637 1,481,791

10,433,885

1,674,754 2,325,029

373,193

Denominator
Weighted average ordinary shares

outstanding . . . . . . . . . . . . . . . . . . . . . .

26,566,454 8,238,907

27,086,098 7,803,952

27,145,208

27,145,208 7,794,630 7,794,630

Conversion of Class B to Class A

ordinary shares . . . . . . . . . . . . . . . . . . .
Share-based awards . . . . . . . . . . . . . . . . . .

8,238,907
112,474

—
350

7,803,952
72,781

—
—

7,794,630
39,621

7,794,630
39,621

—
—

—
—

Denominator used for earnings per

share . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - diluted . . . . . . . . . . .

34,917,835 8,239,257
100.96

100.96

34,962,831 7,803,952
189.88

189.88

34,979,459
298.29

34,979,459 7,794,630 7,794,630
47.88

298.29

47.88

Earnings per ADS:
Denominator used for earnings per ADS -

basic . . . . . . . . . . . . . . . . . . . . . . . . . . . 265,664,540

270,860,980

271,452,080 271,452,080

Denominator used for earnings per ADS -

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . 349,178,350
10.13

Earnings per ADS - basic . . . . . . . . . . . . .

Earnings per ADS - diluted . . . . . . . . . . . .

10.10

349,628,310
19.03

18.99

349,794,590 349,794,590
4.79

29.86

29.83

4.79

F-49

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

17. EARNINGS PER SHARE (“EPS”) (CONTINUED)

The Company did not include certain stock options and restricted shares in the computation of diluted
earnings per share for the years ended December 31, 2010, 2011 and 2012 because to do so would have
been anti-dilutive for earnings per share for the respective years. These stock options excluded in the
computation of diluted earnings per share for the respective periods, however, could potentially dilute basic
earnings per share in the future.

18. SHARE-BASED AWARDS PLAN

Baidu, Inc.

Incentive compensation plans

In January 2000, the Company adopted the 2000 Option Plan (the “2000 Plan”). The 2000 Plan provided for
the granting of share options and restricted ordinary shares to employees and consultants of the Company.
All the options granted to Company employees and consultants under the 2000 Plan were nonqualified share
options (“NSO”). The Company reserved 5,040,000 ordinary shares for issuance under the 2000 Plan. Under
the 2000 Plan, which has expired during 2010, options granted generally vest 25% after the first year of
service and ratably each month over the remaining 36-month period.

In December 2008, the Company amended the 2000 Plan by adding a new section regarding adjustment of
exercise price. The exercise price per share subject to an option might be amended or adjusted in the
absolute discretion of the 2000 Plan administrator, which was the Board of Directors, and the determination
of which should be final, binding and conclusive. A downward adjustment of the exercise prices should be
effective without the approval of the Company’s shareholders or the approval of the affected grantees.

In December 2008, the Company adopted a share incentive plan (the “2008 Plan”). The 2008 Plan provides
for the granting of share incentives, which include incentive share option (“ISO”), restricted shares and any
other form of award pursuant to the 2008 Plan, to members of the board, employees and consultants of the
Company. However, the Company may grant ISOs only to its employees. The Company has reserved
3,428,777 ordinary shares for issuance under the 2008 Plan, which will expire in the year 2018. The vesting
schedule, time and condition to exercise options will be determined by the compensation committee. The
term of the options may not exceed ten years from the date of the grant, except that five years is the
maximum term of an ISO granted to an employee who holds more than 10% of the voting power of the
Company’s share capital.

Under the 2008 Plan, the exercise price per share subject to an option may be amended or adjusted at the
discretion of the compensation committee,
the determination of which would be final, binding and
conclusive. To the extent not prohibited by applicable laws or exchange rules, a downward adjustment of
the exercise prices would be effective without the approval of the Company’s shareholders or the approval
of the affected grantees. If the Company grants an ISO to an employee who, at the time of that grant, owns
shares representing more than 10% of the voting power of all classes of the Company’s share capital, the
exercise price cannot be less than 110% of the fair market value of the Company’s ordinary shares on the
date of that grant.

Starting from February 15, 2006, the Company has granted restricted Class A ordinary shares of the
Company (“Restricted Shares”). Terms for the Restricted Shares are the same as share options except that
Restricted Shares do not require exercise and have a two to four years vesting term.

F-50

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

18. SHARE-BASED AWARDS PLAN (CONTINUED)

Baidu, Inc. (Continued)

Share options

The following table summarizes the option activity for the year ended December 31, 2012:

Number of
shares

Weighted average
exercise
price(US$)

Share options
Outstanding, December 31, 2011 . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited/Cancelled . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, December 31, 2012 . . . . . . .
Vested and expected to vest at

December 31, 2012 . . . . . . . . . . . . . . . .
Exercisable at December 31, 2012 . . . . . .

71,999
171,488
(33,041)
(875)
(233)
209,338

190,669
23,592

470.45
1,094.80
259.60
1,062.20

1,013.10

1,008.20
525.20

Weighted
average
remaining
contractual
life (Years)

Aggregate
intrinsic
value (US$
in thousands)

2.62

51,539

4.29

4.26
1.84

16,264

15,843
12,517

The aggregate intrinsic value in the table above represents the difference between the Company’s closing
stock price on the last trading day in 2012 and the exercise price.

Total intrinsic value of options exercised for the three years ended December 31, 2010, 2011 and 2012 was
RMB263.97 million, RMB275.86 million and RMB200.91 million (US$32.25 million), respectively.

As of December 31, 2012, there was RMB317.54 million (US$50.97 million) unrecognized share-based
compensation cost related to share options. That deferred cost is expected to be recognized over a
weighted-average vesting period of 3.59 years. To the extent the actual forfeiture rate is different from the
original estimate, actual share-based compensation costs related to these awards may be different from
expectation.

The fair value of each option award was estimated on the date of grant using the Black-Scholes-Merton
valuation model. The volatility assumption was estimated based on implied volatility and historical
volatility of the Company’s share price applying the guidance provided by ASC 718-10. The Company
begins to estimate the volatility assumption solely based on its historical information since year 2009.
Assumptions about the expected term were based on the vesting and contractual terms and employee
demographics. The risk-free rate for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.

F-51

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

18. SHARE-BASED AWARDS PLAN (CONTINUED)

Baidu, Inc. (Continued)

The following table presents the assumptions used to estimate the fair values of the share options granted in
the years presented:

2010

2011

2012

Risk-free interest rate . . . . . . . .
Dividend yield . . . . . . . . . . . . .
Expected volatility range . . . . .
Weighted average expected

volatility . . . . . . . . . . . . . . . .
Expected life (in years) . . . . . .

0.61%~1.13%
—

0.35%~0.43%
—
64.76%~69.70% 48.20%~61.58% 43.60%~44.72%

0.31%~1.03%
—

68.12%
2.65~2.66

58.27%
2.66~3.00

43.75%
2.67~3.08

In addition, the Company recognizes share-based compensation expense net of an estimated forfeiture rate
and therefore only recognizes compensation cost for those shares expected to vest over the service period of
the award. The estimation of the forfeiture rate is based primarily upon historical experience of employee
turnover. To the extent the Company revises this estimate in the future, the share-based payments could be
materially impacted in the year of revision, as well as in following years.

The exercise price of options granted during the years 2010, 2011, and 2012 equaled the market price of the
ordinary shares on the grant date. The weighted-average grant-date fair value of options granted during the
years 2010, 2011, and 2012 was US$279.69, US$432.68, and US$323.00, respectively.

Restricted shares

Restricted shares activity for the year ended December 31, 2012 was as follows:

Restricted shares
Unvested, December 31, 2011 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested, December 31, 2012 . . . . . . . . . . . . . . . . . . . .

Weighted
average grant
date fair
value(US$)

1,181.49
1,152.10
1,113.60
1,270.90
1,164.10

Number
of shares

56,222
85,131
(18,552)
(7,985)
114,816

The total fair value of the restricted shares vested during the years ended December 31, 2010, 2011 and
2012 was RMB237.71 million, RMB198.77 million, RMB128.70 million (US$20.66 million), respectively.

As of December 31, 2012, there was RMB640.50 million (US$102.81 million) unrecognized share-based
compensation cost
related to restricted shares. That deferred cost will be recognized over a
weighted-average vesting period of 3.06 years. To the extent the actual forfeiture rate is different from the
original estimate, actual share-based compensation costs related to these awards may be different from
expectation.

F-52

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

18. SHARE-BASED AWARDS PLAN (CONTINUED)

Subsidiaries

Certain subsidiaries also have equity incentive plans granting share-based awards. Total share-based
compensation expenses recognized and unrecognized were insignificant, both individually and in aggregate,
for any of the years presented.

The following table summarizes the total compensation cost recognized by the Group:

For the years ended December 31,

2010

RMB

2011

RMB

2012

RMB

(In thousands)

Expensed as cost of revenues . . . . . . . . . . . . . . . . . . . . . . . .
Expensed as selling, general and administrative . . . . . . . . . .
. . . . . . . . . . . . . . . .
Expensed as research and development
Capitalized as part of internal-used software . . . . . . . . . . . .

6,302
36,811
50,623
226

7,527
50,012
94,489
1,700

10,105
54,512
147,692
1,944

2012

US$

1,622
8,750
23,706
312

19. RELATED PARTY TRANSACTIONS

The amounts due from/to related parties represent amounts provided to/by Qiyi in the ordinary course of
business. Upon the completion of the acquisition of Qiyi on November 26, 2012, these balances have been
eliminated.

20. SEGMENT REPORTING

The Company has only one single operating segment. Substantially all of the Company’s revenue and long-
lived assets are derived from and located in the PRC. The Company has only minimal operations in Japan
and other countries.

The following table sets forth revenues by geographic area:

For the years ended December 31,

2010
RMB

2011
RMB

2012
RMB

2012
US$

(In thousands)

Revenues:
PRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-PRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,898,805
16,269

14,444,636
56,150

22,198,685
107,341

3,563,135
17,229

The following table sets forth long-lived assets by geographic area:

As of December 31,

2011

RMB

2012

RMB
(In thousands)

2012

US$

Long-lived assets:

PRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-PRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,686,281
145,808

3,862,045
117,989

619,901
18,939

F-53

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

21. FAIR VALUE MEASUREMENT

ASC subtopic 820-10 (“ASC 820-10”), Fair Value Measurements and Disclosures: Overall, establishes a
three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active
markets

Level 2—Include other inputs that are directly or indirectly observable in the marketplace

Level 3—Unobservable inputs which are supported by little or no market activity

ASC 820-10 describes three main approaches to measuring the fair value of assets and liabilities: (1) market
approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant
information generated from market transactions involving identical or comparable assets or liabilities. The
income approach uses valuation techniques to convert future amounts to a single present value amount. The
measurement is based on the value indicated by current market expectations about those future amounts.
The cost approach is based on the amount that would currently be required to replace an asset.

Assets and liabilities measured or disclosed at fair value

In accordance with ASC 820-10, the Company measures available-for-sale securities at fair value on a
recurring basis. The fair values of the Company’s available-for-sale securities as measured and held-to-
maturity securities as disclosed are determined based on the discounted cash flow model using the discount
curve of market interest rates.

The Company measures certain financial assets, including equity method investments and cost method
investments, at fair value on a nonrecurring basis only if an impairment charge were to be recognized. The
Company’s non-financial assets, such as intangible assets, goodwill and fixed assets, would be measured at
fair value only if they were determined to be impaired on an other-than-temporary basis.

F-54

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

21. FAIR VALUE MEASUREMENT (CONTINUED)

Assets and liabilities measured or disclosed at fair value (Continued)

Assets measured or disclosed at fair value are summarized below (in thousands):

Fair value measurement or disclosure
at December 31, 2011 using

Total fair value at
December 31, 2011

Quoted prices in
active markets for
identical assets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Total Losses

RMB

RMB

RMB

RMB

RMB

Fair value disclosure
Cash equivalents

Time deposits . . . . . . .
Money market fund . .

2,419,726
192,324

192,324

2,419,726

Short-term investments
Held-to-maturity securities

Fixed-rate

investments . . . . . . .

9,834,275

Adjustable-rate

investments . . . . . . .

100,027

Fair value measurement
Recurring
Short-term investments
Available-for-sale securities

Adjustable-rate

9,834,275

100,027

investments . . . . . . .

102,682

102,682

Nonrecurring

Long-term

investments . . . . . . .
Intangible assets . . . . .
Goodwill . . . . . . . . . . .

Total assets measured at

—
—
—

fair value . . . . . . . . . . . .

102,682

—

102,682

—
—
—

—

(47,886)
(8,040)
(113,011)

(168,937)

F-55

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

21. FAIR VALUE MEASUREMENT (CONTINUED)

Assets and liabilities measured or disclosed at fair value (Continued)

The Company has no assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the year ended December 31, 2011.

As of December 31, 2011, certain cost and equity method investments, goodwill and intangible assets were
measured using significant unobservable inputs (Level 3) and written down from their respective carrying
value to fair value of nil, with impairment charges incurred and recorded in earnings for the year then ended.

Fair value measurement or disclosure at
December 31, 2012 using

Quoted prices in
active markets for
identical assets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Total losses

RMB

RMB

RMB

RMB

US$

Total fair value at
December 31, 2012

RMB

US$

Fair value disclosure
Cash equivalents

Time deposits . . . . . . . . 3,034,443
Money market fund . . . 4,854,278

487,062
779,165

4,854,278

3,034,443

Short-term investments
Held-to-maturity securities

Fixed-rate

investments . . . . . . . . 17,086,252 2,742,533

17,086,252

Long-term investments
Fixed-rate held-to-

maturity
investments . . . . . . . .

82,601
Long-term notes payable . . . 9,420,285 1,512,060

514,614

9,420,285

514,614

Fair value measurement
Recurring
Short-term investments
Available-for-sale securities

Fixed-rate investments . . . 3,514,399

564,100

Adjustable-rate

investments . . . . . . . .

17,073

2,740

3,514,399

17,073

Non-recurring
Long-term

investments . . . . . . . .

—

—

Total assets measured at

fair value . . . . . . . . . . . . . 3,531,472

566,840

—

3,531,472

—

—

(169,180)(27,155)

(169,180)(27,155)

F-56

BAIDU, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 and 2012

21. FAIR VALUE MEASUREMENT (CONTINUED)

Assets and liabilities measured or disclosed at fair value (Continued)

The Company has no assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the year ended December 31, 2012.

As of December 31, 2012, certain cost method investments (Note 4) were measured using significant
unobservable inputs (Level 3) and written down from their respective carrying value to fair value of nil,
with impairment charges incurred and recorded in earnings for the year then ended.

22. SUBSEQUENT EVENTS

The Company completed several acquisitions with a total cash consideration of RMB399.93 million
(US$64.19 million) subsequent to December 31, 2012. The acquired businesses are mainly related to
development of products and technologies that are compatible with mobile devices for accessing the
Internet. These acquisitions will enhance the depth of the Company’s expertise in products for mobile
devices users and are considered supplementary to the existing online marketing services. These
acquisitions are immaterial, both individually and in aggregate.

F-57