Saturday, November 14, 2009

China Hot Stock: Baidu Inc. (NASDAQ: BIDU)

. Saturday, November 14, 2009

By Stock Wizard

Thanks to the extensive government stimulus measures, lower interest rates and greatly increased lending by state-owned banks, China has recovered much more forcefully than other leading economies. The World Bank and the International Monetary Fund both recently upgraded their growth forecasts for the country — they expect 8.4 percent and 8.5 percent growth for this year, respectively.

There are abundant investment opportunities in the world's fastest growing economy. Chinese stocks offer excellent trading opportunities for the short term as well as long term investors.

In this article, we highlight Baidu.com, which provides Chinese language Internet search services primarily in the People's Republic of China and Japan. The company offers a Chinese language search platform that enables users to find online information, such as Web pages, news, images, and multimedia files.

China, in recent years, has witnessed unprecedented growth in internet usage. China internet population surpassed the United States in 2008 as the world's top user of the Internet. China's internet users have even outnumbered the US population and at the end of June 2009, there were 338 million internet users in China, according to a research by the government-sanctioned China Internet Network Information Center. The number of people online around the world will grow more than 45 percent to 2.2 billion users over the next five years, according to a new report by internet research firm Forrester Research. Asia remains the biggest global internet growth engine: 43 percent of the world's online population will reside in Asia by 2013, with 17 percent of the global online population in China. Growth rates in the US, Western Europe, and the major industrialized nations in Asia Pacific such as Australia, Japan, and South Korea will slow to between 1 percent and 3 percent.

Baidu's dominance of China is expected to continue amid growing demand for internet usage. The search engine's superior understanding of the Chinese culture and language allows it to maintain a strong hold on the all-important Chinese internet market. With only 25.5% of the population online, there are still huge growth opportunities for Internet companies in China as its network penetration grows.

Baidu dominates china's online search market followed by Google in a distant second place. Google.com was the first choice search engine for just 12.7 percent of the users in China at the end August, a significant 3.9 percent drop since last year when it managed 16.6 percent according to data from the China Internet Network Information Center, the government domain registration agency. Meanwhile, the local search engine Baidu managed to grow by 0.3 percent to reach 77.2 percent of the market.

Late in October, the Beijing, China-based company reported that its third quarter net income jumped 41.%, RMB 492.9 million or US$72.2 million, from RMB 347.86 million or US$51.2 million, in the comparable quarter last year. Earnings on a per share basis were RMB 14.14 or US$2.07, compared to RMB 10.00 or US$1.47 in the year ago quarter. Quarterly revenue surged 39.1% to RMB 1.28 billion or US$187.3 million from RMB 919.13 million or US$135.4 million in the prior-year quarter. Analysts, on average, expected the company to report earnings of US$1.81 per share on revenue of US$187.79 million.

Operating profit was RMB 521.4 million or US$76.4 million, an increase of 41.6% from the similar quarter of 2008. Online marketing revenues for the quarter were RMB 1.28 billion or US$187.2 million, an increase of 39.2% from the corresponding period in 2008. Baidu had more than 216,000 active online marketing customers in the third quarter of 2009, representing a 11.3% increase from the corresponding period in 2008 and a 16.0% increase from the previous quarter.

Looking forward to the fourth quarter, Baidu expects moderate year-over-year growth due to the temporary negative impact anticipated when the Online Marketing Classic Edition is discontinued. Baidu currently expects to generate total revenues in an amount ranging from RMB 1.19 billion or US$174 million to RMB 1.23 billion or US$180 million for the fourth quarter of 2009, representing 32% to 36% year-over-year growth. Analysts currently expect revenue in the range of US$202.90 million for the fourth quarter.

The company will offer its Phoenix Nest pay-search system and discontinue its current “Classic” program from Dec. 1, Chief Financial Officer Jennifer Li said in a conference call with analysts. Analysts widely held that the new marketing system would be faced with a great challenge and may even hurt the company's results in short term. The search engine giant boosted third-quarter spending to upgrade technology and lure advertisers to maintain its lead over Google Inc. in China, the world’s fastest-growing major economy.

The company is seeking to increase its presence in rapidly expanding mobile search market. The internet search provider recently announced that it has entered into a strategic partnership with China Unicom (Hong Kong) Limited (NYSE: CHU) to provide wireless search for China Unicom's 3G mobile subscribers. Baidu services including its Internet search, free music download search, and message forum will all be pre-installed on 3G handsets from China Unicom. Baidu services are also embedded in a value-added services platform run by China Telecom, another carrier. Google's main mobile search deal in China is with China Mobile, whose music and application platform uses Google search. According to Beijing-based research company Analysys International, Chinese mobile users performed over 270 million Web searches on their phones in the second quarter this year. Currently, both Google and Baidu are tied with a market share of about 26 percent each.

There are few concerns over regulatory and market risks as Baidu is leveraged to a single economy. Moreover, government regulation of web content remains a threat to Baidu's operations-Government reprimand looms dangerous if Baidu fails to meet China's strict censorship standards. All said, there might be a little risk attached with all China stocks, but there are also prospects of potentially huge rewards.

In terms of stock performance, Baidu shares are up almost 217% since the beginning of the year. Shares of the company are currently trading at a forward 2010 EPS estimates of 48.57 and PEG ratio of 1.86 and hence may look a bit overvalued at current levels. However, given the excellent growth prospects of the industry in general and company in specific, Baidu is one Chinese stock that serious investors simply can't afford to ignore.

This is the first in a series of articles about investment opportunities in China, if you have any particular Chinese stock you'd like to see covered here, let us know. Watch this space for more information on various Chinese stocks.

Full Disclosure: None





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