Shares of Baidu (BIDU), China’s leading Internet search provider, have been drifting lower since a November 11 high of $114.10—until yesterday. As of the close in New York, the shares had moved up to $101.25, a 2.5% gain on the day.
The most recent part of the price decline traces back to comments by Haoyu Shen, Baidu’s vice president of Business operations, that growth will slow next year. “We had a major re-acceleration this year, that’s due to a few reasons,” he told Reuters on December 15. “For these reasons, it most likely won’t repeat itself next year.”
I think that’s true if you’re looking just at Baidu’s market share. The company saw its share of the Chinese search market grow to 73% in the third quarter of 2010 from 71% in the previous quarter. That growth came largely at the expense of Google (GOOG), which saw its market share decline to 25% from 27% for the quarter. After protesting the Chinese government’s efforts to censor its search results in China, Google shut down its mainland China site. It is, as Baidu’s vice-president notes, unlikely that this kind of market share growth due to troubles at a competitor will fall into Baidu’s lap in 2011.
But while Baidu’s market share growth may have peaked, the Internet ad market is just getting started in China and Baidu is just at the beginning of turning market share into ad yuan. The online ad market is projected to grow by 37% in 2010 to $3.7 billion on its way to becoming a $9.5 billion market by 2014. I think those figures may actually be understated since the Chinese consumer is just in the early stages of adopting online shopping.
In any case, today’s (December 21) jump in the price of Baidu shares is a result of a report in Hong Kong’s South China Morning Post that the company expects to post record fourth quarter revenue of 2.4 billion yuan. That would be a 90% increase from the fourth quarter of 2009.
Baidu has seen strong growth from large and small corporate advertisers, investor relations direction Victor Tseng told the newspaper, after upgrading to a new ad system called “Phoenix Nest” in December 2009.
According to a report from JP Morgan in Hong Kong, quoted in the South China Morning Post, Baidu’s average transaction value per click for online ads in mainland China is just $5 (U.S.) compared to $20 in Korea and $70 in the United States. Baidu had a 30.1% share of the Internet ad market on the mainland in third quarter, according to Analysis International. Alibaba, the largest business-to-business e-commerce services provider in the world, was No. 2 with a 9.3% share. Google, which had been No. 2, fell to third with an 8.9% share.
It looks like Baidu has solid support at $95 to $98 a share in New York. To my mind that makes $100 a reasonable entry point but buyers need to be aware that China’s stocks have underperformed most world markets since mid-November on fears that the People’s Bank of China will raise interest rates to damp inflation. For my take on that possibility see my post http://jubakpicks.com/2010/12/17/so-much-depends-on-the-peoples-bank-of-china/
I’m willing to ride out that risk with Baidu so as of today December 22 I’m adding it to the Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ with a target price of $125 a share by September 2011.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Baidu as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio athttp://jubakfund.com/about-the-fund/holdings/