Friday September 07, 2012
by Scott Kessler, S&P Capital IQ analyst, The Outlook
Our latest Focus Stock is Baidu (BIDU), whose American depositary shares carry S&P Capital IQ’s highest investment recommendation of 5-STARS, or strong buy.
Baidu is the leading provider of Chinese Internet search services and we see considerable growth ahead. China’s Internet population, already the largest in the world, is growing in size and sophistication, and should drive growth in customers, revenues, and profits.
While we see Baidu as having stiff competition from other large Internet companies and challenges related to mobile, we believe it is positioned well and operating effectively.
As of August 2012, Baidu.com was the most visited website in China and the fifth-most trafficked website around the world. Interestingly, many or most offerings from Google, Facebook, and YouTube are not accessible in China.
China’s 513 million online users exceeded the totals of North America, South America and Latin America, combined, and accounted for 23% of the world’s Internet population, as of year- end 2011, according to Internet World Stats.
From 2007 to 2011, Baidu’s profits have increased more than 10-fold. We project per-ADS profits of $4.83 for 2012, $6.89 for 2013 and $9.24 for 2014.
We forecast that revenues will rise 59% in 2012, 44% in 2013 and 38% in 2014, largely driven by growth in the Chinese search segment.
Baidu currently trades at 27-times our 2012 per-ADS profit estimate of $4.83. We see three-year compound annual growth in per-ADS earnings of 45%, leading to a P/E-to-growth (PEG) ratio of 0.6.
We note that the shares’ indicated P/E is below our projected growth rates for revenues and earnings.
We employ relative P/E and P/E-to- growth analysis involving both major Chinese Internet companies listed on U.S. exchanges, and Google, to value Baidu.
Based on Capital IQ data, the peer group of nine Chinese companies we used had an average 2012 P/E of 20 and PEG ratio of 1.6. Applying these multiples to Baidu and averaging the results, its share price would be around $200.
Meanwhile, Google recently had a 2012 P/E of 17 and PEG ratio of 1.0. Assuming Baidu traded at comparable multiples, and averaging the results, it would be valued at around $150.
Blending the inputs related to Google and the Chinese Internet company peer group results in our 12-month target price of $180.
We see a number of investment risks related to our recommendation and target price. The company is based in and operates in China, and we view government entities as having considerable oversight of and control over the company and its offerings.
We see Baidu as an attractively positioned leader at the heart of China’s Internet. We believe the company has prepared and invested effectively as users increasingly employ wireless devices and tablets to conduct searches, consume content and interact with applications.
In our view, the company offers significant growth potential, a strong balance sheet, and a compelling valuation. Despite some risks, we see Baidu as a franchise Internet holding.
Learn more about this financial newsletter at S&P The Outlook.