Why Baidu Deserves a Spot in a Value Investor´s Portfolio

I have been interested in Baidu for quite a while and today decided to open a position in the company by buying 6 shares at a price of USD 163. I will increase the position when prices turn more favorable.
On SeekingAlpha I have outlined why shares are a buy at current levels in detail. You´ll find the pitch including my valuation model here:

http://seekingalpha.com/article/3994400-baidu-sum-parts-valuation-indicates-shares-worth-255

For all the folks in a rush, here´s a fast track introduction as to why Baidu may be suitable for a value investor´s portfolio despite being an internet company and Chinese:

  • Sum of the parts valuation results in value of USD 255 per ADR
  • or 60% upside until end of FY2017
  • Baidu search is significantly undervalued trading at 11x FY2017 after tax profits while growing at a > 20% clip
  • Comparable businesses command multiples in excess of 20x profits
  • High search margins are buried under large investments into O2O and iQyi
  • Sale of online-to-offline businesses and Chinese Netflix pendant iQyi will reveal true earnings potential or provide upside optionality if turning profitable.

Here´s a brief update on what Chinese think of the company and its services. Headline here is that Baidu is unloved but there is no alternative for it, which will ensure growing profits for years to come.

http://seekingalpha.com/article/3995910-chinese-sentiment-toward-baidu-leaves-much-desired

Disclosure:

I am currently long Baidu (BIDU)

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22 thoughts on “Why Baidu Deserves a Spot in a Value Investor´s Portfolio

    1. Hey ebdem,
      Went through it. Mostly confirms my view without presenting the actual numbers. Baidu means buying search on the cheap and getting upside optionality from o2o and iQyi on top for free.

      Btw. Congrats on RTN. Really seems to turn the corner here!

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        1. Thought you´d be invested in Restaurant Brands, since you provided me with a link to your posts in the Wertpapierforum. But don´t want to talk you into any kind of disclosure now haha!

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          1. Oh.. i thought you meant: http://finance.yahoo.com/quote/RTN?ltr=1 – I don’t know this company. But I bought some Restaurant Group stocks recently, but my timing was – as always – not the best ;).

            If you are currently looking for value, maybe this might be interesting, too:
            A turnaround case: http://www.wertpapier-forum.de/topic/49520-zardoya-otis/page__st__20
            A greek stock: latticework.com/our-greek-addition-2/ – I really like what I read.
            A chinese stock: http://de.4-traders.com/TONGDA-GROUP-HOLDINGS-LTD-6170609/fundamentals/

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            1. Just realized, they got the same ticket as Raytheon. Guess we´ll never be able to time the bottom of s.th. but as long we are not too far off when determining intrinsic value we should do fine. When I first purchased RICK somewhat below 11 it came crushing down to 8 within a matter of weeks. Just a chance to buy more of whats cheap if the homework is done!

              As always thanks for the ideas. WIll have a look into it.

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              1. Yes. We can’t time the dips and money is made on the long term. Making money is just one thing – what interests me even more in investing is the learning process. Getting to know the business world better every day is really, really interesting.
                I took a deeper lootk at Thrace and Tongda: http://www.wertpapier-forum.de/topic/49775-thrace-group-thrace-plastics/ and http://www.wertpapier-forum.de/topic/49772-tongda-group/. Tongda’s business has a intense cyclical nature. Thrace seems to some good value.

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                1. I feel I am not really good valuing highly cyclical business (e.g. National Oilwell Varco). It´s a much tougher exercise to figure out normalized earnings / cash flows. Alos I don´t want to dip much more into Chinese equities except from building up my stake in baidu, at prices of around 150-160. Baidu is a business that I am quite comfortable to invest in, since I witnessed first hand how the competition (Bing, Qihoo etc.) in China is just not useable.

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  1. My thoughts on mutuionline:
    1. With refinancing opportunities diminishing the mortgage division is a macro-play on the recovery of the italian housing market.
    2. I am not really sure what the drivers are behind the BPO division.
    3. Going through the last quarterly filing reveals that they expect more or less flattish sales going forward, hence a P/E of around 10 seems reasonable if that trend continues and cheap if things return to growth.

    Some Questions:
    1. Is MutuiOnline gaining share from traditional sales channels? If so this should offset weaknesses in housing, consumer loans, insurance etc.
    2. How does the banking crisis in Italy affect mutui. Skyhigh NPLs ratios´ and failed stress test don´t exactly boost confidence and enable banks to increase lending.
    3. Political uncertainty due to the rise of extremist parties (five star).

    If I knew that Mutui would increasingly take market share I could possibly ignore some of the other risks since the company seems to have a lot of room to grow when looking at the size of the italian mortgage market.

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    1. Hey, thanks for your questions. TGV gives a good insight in the company: http://www.valuewalk.com/2016/02/tgv-partners-fund-letter/. As I understood a quite interesting point about Italy is, that the internet market is still underdeveloped and should grow in the next years.

      In my eyes GruppoMutuionline will gain share from traditional sales channels. It isn’t free from the whole banking market development and the political situation. But I think other players (mainly banks) will use the service of GruppoMutuionline as it is cheaper.

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      1. I can´t access the article. Can you forward that to me somehow?
        Do you have any data about how the share of brokered mortgages is among european countries? What I also noticed is that Mutui Online´s website do not look up to date when compared to e.g. interhyp etc. Probably this is a positive and easy improvable for Mutui. Just wondering why it didn´t already happen.

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          1. I am aware that they have sort of a perma-bear opinion. But what they claim makes sense to me. Italy needs reform, which it will only get with a positive referendum outcome. Currently Unemployment is high, thus NPLs are skyrocketing, which leads to writedowns and pressure on bank capital ratios. This is not an environment where banks will be very reluctant to increase lending and real estate prices will rather decrease than increase. Probably it is wise to take a wait and see approach until after the referendum, as you suggested.

            http://www.zerohedge.com/news/2016-09-02/italian-referendum-could-result-death-euro

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              1. I´m not sure if Italy will expose investor´s to haircuts. In a crisis this is probably the worst thing that can be done. Confidence in the state as well as the banking sector will fall off a cliff and increase the stress on the economy and the banking system.
                I am no expert on Italy but I believe the government should encourage bank recapitalization and mergers of weaker institutions to quickly solve the NPL issue that weighs on lending. And by that I don´t mean creating another € 5 bn. bailout fund that will only push the ball further down the road but will never solve a € 200 bn.+ bad loan problem.

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                1. It’s a risk that might become real if Renzi fails and Grillo and his party become head of the government. I hope they wont make it. But I am not sure…

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