Chinese Stocks: Did The Magic Fade Away?

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Looking back at recent 12 months stock market rally, one cannot overlook the absent of long time performing Chinese stock Baidu (NASDAQ: BIDU), which was named the Google (NASDAQ: GOOG) of China. We got used for Baidu to outperform technology sector and NASDAQ index. We got used to Baidu beating analyst estimate quarter by quarter but, recently, this is not the case. So, what does it mean for Baidu? Is the company's still a buy? Should Baidu become an investment for the long term or a short term trade, to try and make a profit from the large daily change in share price?

BAIDU's short and long term history

During the past 12 months, Baidu has broken its tradition and promise. While Google is now back at all times high and soared for about 40%, at the last 12 months, Baidu for the same period is about -8% and the NASDAQ index rose by approx. 30%!

 

<img src="/media/images/user_14011/baidu-vs-google_large.JPG" />

Baidu's history shows entirely different picture. Baidu has shown great performance rising from 6$ a share (6$ as a relative price to 1:10 shares split) at the IPO to more than 160$ around May, 2011, exceeding by far the NASDAQ index and Google share.

 

<img src="/media/images/user_14011/baidu-vs-google-max_large.JPG" />

But, it is not just Baidu's share price decline that shades on Baidu. In addition, weekly price range is relatively large and jumpy (sometimes daily range is similar too) ranging from ±2% - ±15% and more, which adds to the uncertainty and volatility of the share.

Similar goes for Dang E-Commerce China (NYSE: DANG) (-8%), doing the same business as Amazon) (+14%). Dang is also all under-performing relatively to other shares in the technology Index. Dang is traded at around 4.7$ a share while median analyst estimate is 5.8$ a share although revenues are increasing at annual pace of more than 40%.

What are the reasons for Baidu's share price?

Can Baidu's performance explain this behavior? Is the magic gone or is the company undervalued and poses a great opportunity for the long term? Don't let the five (5) year chart to confuse you! Baidu's share price history has shown similar patterns before breakthrough for new highs. Baidu's share has visited 100-400$ price range (before stock split) several times and the same goes for the price range of 100-150$.

Baidu's performance is still impressive: profit margin, P/E, increased revenues do not fall from Google's performance. Google has left China almost completely, leaving Baidu as the major dominant player in the Chinese market (70% and more following Google leave) and still China market Internet penetration is relatively low and there is a lot of room to grow.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>P/E</p> </td> <td> <p>Profit margin %</p> </td> <td> <p>Earning / share $</p> </td> <td> <p>Revenues</p> <p> TTM B$</p> </td> <td> <p>Market cap</p> <p>B$</p> </td> </tr> <tr> <td> <p>Baidu</p> </td> <td> <p>28.7</p> </td> <td> <p>45.8</p> </td> <td> <p>3.87</p> </td> <td> <p>2.2</p> </td> <td> <p>30.2</p> </td> </tr> <tr> <td> <p>Google</p> </td> <td> <p>21.8</p> </td> <td> <p>25.7</p> </td> <td> <p>33.74</p> </td> <td> <p>37.9</p> </td> <td> <p>240</p> </td> </tr> </tbody> </table>

So, why is Baidu's share under-performing? Chinese government involvement in the Internet market, surprising regulation and statements from government official who want to limit the Chinese market and limit IPO, contribute to the investment risk. No wonder then when the markets are up and there many other opportunities which are more appealing and without "surprises" investors are trying to avoid these shares. Add to this the headlines for a slowdown in China (relative slowdown, it is still remarkable compared to US and Europe) and you might get "cold feet".

What is the future of Baidu?

When I look at Baidu's fundamentals and performance, Baidu is undervalued. The company shows constant growth and great profit margins and the future looks bright and promising. Market share might be with little growth but, don't forget that together with it the number of users is growing rapidly!

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kaligem has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Baidu, and Google. Motley Fool newsletter services recommend Amazon.com, Baidu, Google, and SINA . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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