BIDU - Baidu Inc

[angelinvestor]

Found an interesting write-up on Baidu https://variantviews.com/

 

[fareastwarriors]

There's already a thread on Baidu.

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/bidu-baidu-inc/msg254681/#msg254681

[angelinvestor]

Found an interesting write-up on Baidu https://variantviews.com/

[fareastwarriors]

China to investigate Baidu over student's death, shares dive

 

http://www.reuters.com/article/us-china-baidu-idUSKCN0XT0XN

[cmlber]

Anyone here have a good explanation for why BIDU search margins are ~50% while GOOG search margins are only ~31%? 

 

[HJ]

I don't have the exact knowledge of why that's the case, but I would venture to guess that margins for a piece of software of such dominance as the #1 search engine within any jurisdiction really could be something like 90%+ if the company so choses, once it's established its market position.  Margins less than that can be explained as whatever the company wants to charge into the business.  Baidu copies certain business aspects from Google, but is unwilling or unable to copy others.  Google Maps, for example, is infinitely more useful than the Baidu counterpart in China, but may account for way more than its revenue share of the search business COGS. 

 

People generically think of Baidu as the Chinese counterpart to google, but when you peel it back, and think through, they are very different businesses.

[cmlber]

Anyone else confused by the up move this morning on the revenue reduction?  I was hoping to get to pick some up a good amount cheaper this morning, that guidance was pretty bad...

 

Transaction Services was only 347MM RMB Q2 2015.  It was 890MM RMB Q1 2016 which was 332% growth yoy.

 

If we assume Q2 2016 has equal transaction services revenue as Q1 2016, then the new guidance implies 17,260MM RMB for search in Q2 2016, which is 6% growth for the core search business.  But if we assume they were on track to hit guidance in the 1st half of Q2 (i.e. up ~25% yoy), then it implies the 2nd half of Q2 the core search business was down 14%.  So Q3 core search growth should be pretty negative and the quarter should see negative revenue growth, but the couple analyst reports I saw adjusted down to mid single digit revenue growth in Q3. 

[AccentricInv]

Anyone else confused by the up move this morning on the revenue reduction?  I was hoping to get to pick some up a good amount cheaper this morning, that guidance was pretty bad...

 

Transaction Services was only 347MM RMB Q2 2015.  It was 890MM RMB Q1 2016 which was 332% growth yoy.

 

If we assume Q2 2016 has equal transaction services revenue as Q1 2016, then the new guidance implies 17,260MM RMB for search in Q2 2016, which is 6% growth for the core search business.  But if we assume they were on track to hit guidance in the 1st half of Q2 (i.e. up ~25% yoy), then it implies the 2nd half of Q2 the core search business was down 14%.  So Q3 core search growth should be pretty negative and the quarter should see negative revenue growth, but the couple analyst reports I saw adjusted down to mid single digit revenue growth in Q3.

 

Cmlber, you make a great point.  I just ran a couple of the SS numbers, and they're still pricing in 5-15% growth in Q3.  While I usually don't pay attention to quarters, and believe in the long-term business model, the potentially poor Q3 guidance does scare me.

 

Just curious what your thoughts are.  Are you waiting till after the report to purchase more?  Or do you think the market's pricing it in at the $160 levels?

[cmlber]

Anyone else confused by the up move this morning on the revenue reduction?  I was hoping to get to pick some up a good amount cheaper this morning, that guidance was pretty bad...

 

Transaction Services was only 347MM RMB Q2 2015.  It was 890MM RMB Q1 2016 which was 332% growth yoy.

 

If we assume Q2 2016 has equal transaction services revenue as Q1 2016, then the new guidance implies 17,260MM RMB for search in Q2 2016, which is 6% growth for the core search business.  But if we assume they were on track to hit guidance in the 1st half of Q2 (i.e. up ~25% yoy), then it implies the 2nd half of Q2 the core search business was down 14%.  So Q3 core search growth should be pretty negative and the quarter should see negative revenue growth, but the couple analyst reports I saw adjusted down to mid single digit revenue growth in Q3.

 

Cmlber, you make a great point.  I just ran a couple of the SS numbers, and they're still pricing in 5-15% growth in Q3.  While I usually don't pay attention to quarters, and believe in the long-term business model, the potentially poor Q3 guidance does scare me.

 

Just curious what your thoughts are.  Are you waiting till after the report to purchase more?  Or do you think the market's pricing it in at the $160 levels?

 

I never really look at quarters, but I'm waiting until after Q2 results when they issue Q3 guidance to buy.  It shouldn't make much of a difference in the long run, and I think this is a great business to own for 10+ years so it'll probably end up being a dumb decision, but I can't imagine the stock responding favorably to Q3 guidance of negative 5-10% growth. 

[AccentricInv]

I'm sure you guys have seen the news this morning that Acacia is going activist over the iQiyi sale.  (http://www.wsj.com/articles/how-baidus-video-deal-shortchanges-shareholders-1468928952?mod=yahoo_hs)

 

However, more interesting is that "Acacia" is actually Sequoia / Ruane, Cunniff's Hedge Fund arm.  I saw that Sequoia had taken a position in BIDU in Q2, but didn't see them report it in their Q2 letter.  It would have been a 4% position, but they didn't report it in their top 10 holdings, so I did a little digging and found this (http://www.wsj.com/articles/SB10001424052748704198004575311042771457112).

 

The firm also manages private accounts for institutions and affluent investors and has been in the hedge-fund business since 1996, branded with the name Acacia. Like Sequoia, the hedge funds are value-oriented offerings. But they include short positions to bet that certain stocks will fall, and they are more internationally focused.

 

According to their 13F, Sequoia owns $460M worth of BIDU, none of which is in their mutual fund.  The latest ADV indicated Acacia only has ~$1BN in AUM (http://www.adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=3994), so this would theoretically make up 45% of their fund?  This seems way too high, so I must be missing something.  But it's still interesting that Sequoia is getting activist, and this is such a large holding of theirs.  I don't think much of the media has picked up on this yet.

 

[VersaillesinNY]

I'm sure you guys have seen the news this morning that Acacia is going activist over the iQiyi sale.  (http://www.wsj.com/articles/how-baidus-video-deal-shortchanges-shareholders-1468928952?mod=yahoo_hs)

 

However, more interesting is that "Acacia" is actually Sequoia / Ruane, Cunniff's Hedge Fund arm.  I saw that Sequoia had taken a position in BIDU in Q2, but didn't see them report it in their Q2 letter.  It would have been a 4% position, but they didn't report it in their top 10 holdings, so I did a little digging and found this (http://www.wsj.com/articles/SB10001424052748704198004575311042771457112).

 

The firm also manages private accounts for institutions and affluent investors and has been in the hedge-fund business since 1996, branded with the name Acacia. Like Sequoia, the hedge funds are value-oriented offerings. But they include short positions to bet that certain stocks will fall, and they are more internationally focused.

 

According to their 13F, Sequoia owns $460M worth of BIDU, none of which is in their mutual fund.  The latest ADV indicated Acacia only has ~$1BN in AUM (http://www.adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=3994), so this would theoretically make up 45% of their fund?  This seems way too high, so I must be missing something.  But it's still interesting that Sequoia is getting activist, and this is such a large holding of theirs.  I don't think much of the media has picked up on this yet.

 

Acacia is a $5 Billion Hedge fund run by Greg Alexander (30 years’ experience) with a team of 7 people vs Sequoia ($5B and 9 people).

Therefore, Baidu is a 9.2% position.

 

Source: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/greg-alexander's-acacia/msg265554/#msg265554

 

 

[AccentricInv]

 

Acacia is a $5 Billion Hedge fund run by Greg Alexander (30 years’ experience) with a team of 7 people vs Sequoia ($5B and 9 people).

Therefore, Baidu is a 9.2% position.

 

Source: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/greg-alexander's-acacia/msg265554/#msg265554

 

Thanks Versailles!  I knew that $1BN number was way too low.  Is there any indication what their other positions are by an chance?  I guess one could figure it out by seeing what's in the Ruane 13F, but not in Sequoia.  Although that would omit foreign securities and overlaps...

[Foreign Tuffett]

So Baidu's CEO is a major part of the consortium purchasing iQIYI from Baidu, and now Baidu devoting extra resources to iQIYI before the sale takes place?

 

What do some of the Baidu bulls think about this poor stewardship of company resources? How about the appearance of self dealing?

[blainehodder]

Frankly, I don't like it. But I dont like a ton of what Google or MSFT spend money on eithe. The businesses are so good even suboptimal self dealing garbage is worth putting up with.

[AccentricInv]

Some good news for BIDU shareholders this morning.

 

http://www.wsj.com/articles/group-led-by-baidu-ceo-abandons-bid-to-buy-out-video-unit-1469451603

[Foreign Tuffett]

Is anyone still following and/or invested in Baidu? I am doing so preliminary research and it looks attractive from a SOTP perspective.

 

One thing that is bothering me though, is all the negative opinions of the core search function. I recently spoke with an American who recently returned from teaching English in China. He described Baidu search as "garbage" when compared to Google search, and added that the only thing that kept his students from illegally using Google was their fear of being caught by the authorities.

 

There are plenty of complaints on the web that Baidu's search engine is more of a vehicle for paid advertising vehicle than anything else. The below is a good example of the criticism.

 

https://www.quora.com/What-is-the-difference-between-Baidu-and-Google

[gaia10]

I have written a investment report on Baidu. Would love to hear your comments.

 

https://snowballvalue.wordpress.com/

[Foreign Tuffett]

I have written a investment report on Baidu. Would love to hear your comments.

 

https://snowballvalue.wordpress.com/

 

Thanks for sharing. A couple of quick thoughts:

 

1) Nearly all of Baidu's revenue and cash/investments are in RMB. Conversely, nearly all of its debt is denominated in USD. The 2015 annual report mentions that a 10% currency move in favor of $539M increase in the value of their debt. I see this a definite risk factor.

 

2) Ctrip: I believe Baidu currently owns app. 13,144,917 ordinary shares (they acquired more shares after the close of the Qunar transaction). At ~$45 per share and 8 ADRs per ordinary share these are currently worth ~$4.7B. Look right to you?   

 

 

[atbed]

BIDU is up nicely today. Active online marketing customers found a bottom and bounced ~4% QoQ, and their average spend is up 30%+. Any arguments for fading here?

 

Is this finally the breakout? Fingers crossed

[sleepydragon]

china banned VPNs. Probabbly good for bidu. ::)

[gaia10]

I wrote an update on Baidu. Would love to hear your comments.

 

https://snowballvalue.wordpress.com/2017/09/27/update-on-baidu/

 

 

PS. Thank you Foreign Tuffett for pointing out the Ctrip share count change and the currency risk. I have adjusted my valuation and taken note of the currency risk.

 

[cmlber]

I wrote an update on Baidu. Would love to hear your comments.

 

https://snowballvalue.wordpress.com/2017/09/27/update-on-baidu/

 

 

PS. Thank you Foreign Tuffett for pointing out the Ctrip share count change and the currency risk. I have adjusted my valuation and taken note of the currency risk.

 

Why sell if you think:  "Going forward, Baidu is likely going to compound its search business near the industry growth rate of 20%-30% year over year while unlocking value for its other businesses and inventing new technology." 

 

Should the search business be worth the same multiple as Google's search business?  Consumption (driver of ad spend) in China is rising much faster than everywhere else in the world and internet penetration is still only ~50%. 

[blainehodder]

Price is finally catching up with the obvious value of search.

[gaia10]

I wrote an update on Baidu. Would love to hear your comments.

 

https://snowballvalue.wordpress.com/2017/09/27/update-on-baidu/

 

 

PS. Thank you Foreign Tuffett for pointing out the Ctrip share count change and the currency risk. I have adjusted my valuation and taken note of the currency risk.

 

Why sell if you think:  "Going forward, Baidu is likely going to compound its search business near the industry growth rate of 20%-30% year over year while unlocking value for its other businesses and inventing new technology." 

 

Should the search business be worth the same multiple as Google's search business?  Consumption (driver of ad spend) in China is rising much faster than everywhere else in the world and internet penetration is still only ~50%.

 

The reason I am selling is because I see other interesting opportunities within the technology industry in China that can achieve a higher IRR. While Baidu's search revenue can compound near 20% yoy, there are other firms trading near Baidu's multiples with higher upside and greater moat.

 

Baidu could theoretically trade at a higher valuation than Google if growth is the only factor in consideration. However, in terms of quality, Baidu does not have the moat nor the competitive advantage that Google enjoys. For example, Google has 7 products with more than 1 billion MAU whereas Baidu only has its popular search engine with more than 500 mil MAU. Balancing the quality and growth aspect of Baidu, in my view, Baidu should trade within range of Google (trading quality for growth).

[cmlber]

I wrote an update on Baidu. Would love to hear your comments.

 

https://snowballvalue.wordpress.com/2017/09/27/update-on-baidu/

 

 

PS. Thank you Foreign Tuffett for pointing out the Ctrip share count change and the currency risk. I have adjusted my valuation and taken note of the currency risk.

 

Why sell if you think:  "Going forward, Baidu is likely going to compound its search business near the industry growth rate of 20%-30% year over year while unlocking value for its other businesses and inventing new technology." 

 

Should the search business be worth the same multiple as Google's search business?  Consumption (driver of ad spend) in China is rising much faster than everywhere else in the world and internet penetration is still only ~50%.

 

The reason I am selling is because I see other interesting opportunities within the technology industry in China that can achieve a higher IRR. While Baidu's search revenue can compound near 20% yoy, there are other firms trading near Baidu's multiples with higher upside and greater moat.

 

Baidu could theoretically trade at a higher valuation than Google if growth is the only factor in consideration. However, in terms of quality, Baidu does not have the moat nor the competitive advantage that Google enjoys. For example, Google has 7 products with more than 1 billion MAU whereas Baidu only has its popular search engine with more than 500 mil MAU. Balancing the quality and growth aspect of Baidu, in my view, Baidu should trade within range of Google (trading quality for growth).

 

Which Chinese tech companies do you like best out of curiosity? 

 

I agree Google is a higher quality business, but having your market growing 20%/yr is a nice tailwind...

 

And Google itself may be undervalued.  On an absolute basis even at the current price I could see a 20%+ IRR on BIDU for a while.