Should you Baidu?

On August 5, will
list ADSs (American Depository Shares) on NASDAQ (symbol BIDU). 
Baidu, which means "100 levels" in Chinese, is China’s largest search
engine and the 7th most globally trafficked Web site.  Privately
Baidu will only float about 3.7 million shares and will IPO between $19
and $21 per share.  It is a highly anticipated public offering,
and it will likely IPO at $21/share and will rise quickly on the
first day of trading.  Because the underwriters are CSFB and
Goldman Sachs, it will be a traditional IPO.  Thus, average Joe’s
like myself will be locked out of this IPO opportunity (I am a strong
proponent of auction IPOs because traditional IPOs participants are
typically limited to institutions, high net-worth investors, and
special guests). 
I’ve been mulling over buying some shares at the outset, likely at
a higher price than the initial price of $19-$21.  This investment
is a very risky one, but there is a tremendous amount of potential
that Baidu will be a stellar buy.  First, the negatives.  If’s ADRs list at $20 per share, the price-to-equity ratio for
BIDU shares will be 528.  This is far, far higher than the P-E
ratio for any major tech stock, including Google.  It is very
overvalued–on paper.  The question is whether a small,
market-leading company in the world’s fastest growing Internet market
will expand quickly, bringing down the P-E ratio.  Secondly, is the search engine leader for China, beating out
and, two other larger, older China Internet plays. 
It is very much like Google, with a spartan, no-frills interface. 
However, Google is quickly making inroads into China and is especially
popular among Chinese who speak foreign languages.  Google is the
800-pound Gorilla of search, and there’s a big risk that Baidu will
lose its place as the king of Chinese search.  Thirdly, the
Chinese Internet market is growing, but volatile both financially
and politically.  While Internet search in China is growing
by leaps and bounds, this nascent market is fraught with risk. 
It’s still unclear whether search will be a very profitable endeavor in
the Chinese market.
Now for the upside.  This IPO will be HOT.  For those
who missed out on the Google IPO, will be a second chance to
get in on the ground floor of the fast-growing Internet search
market.  Initial buyers will disregard the sky high P-E
ratio.  The question is–at what price is it savvy to buy shares,
and at what price is it foolish?  Secondly, Google owns 2.6% of, indicating that global search leader Google highly
regards Baidu’s growth prospects.  It has been speculated
that Google will buy Baidu outright to quickly enter the
Chinese search market.  However, it’s also been noted that Google
may opt to go it alone, making Google a formidable competitor to
Baidu.  Also, Chairman & CEO Robin Li and others will
continue to own a large majority of shares after IPO.  I believe
it’s good when a company’s executives have their wealth tied
to their company, because they have a personal interest in their
company’s success.  Plus, they lock away shares, discouraging
share dilution.  Thirdly, at present it appears that Baidu’s
Internet search engine technology is superior in terms of handling
Chinese search.  Chinese characters are unicode, not ASCII. 
As a result, Google and other potential competitors must built of their
unicode search indexes.  In this respect, Baidu is at the
forefront and should dominate Chinese language search, at least in the
next few years.  Chinese who speak only Chinese will prefer
Baidu’s search capabilities.  Google would do well to buy Baidu
and incorporate it as its unicode language (primarily East and
Southeast Asian languages) search engine.  (Google recently opened
a research center in Shanghai to beef up its unicode search, but it is
currently embroiled in a legal dispute with Microsoft for hiring away
one of its top Chinese executives.) 
In short, I plan to buy ADRs shortly after IPO.  I
think it will be a great long-term buy, at least in Internet
time.  I have that same good feeling I had with a couple of other
choices, including Google, Morningstar, and Cogent Technologies. 
But I will not buy Baidu if the price exceeds $25 at open. 
Keep in mind, some risky bets turn sour.  Last week Infospace, a
stock I own, announced its 2Q results.  Although it beat analyst
expectations by 6 cents per share, it slashed its outlook for the rest
of the year dramatically.  The stock dropped 35% in one day. 
I didn’t lose too much because I didn’t have a big stake, but it
reminded me that investing can be risky.  In the case of
Infospace, nothing could have indicated they would revise their
forecast by so much.  Most analysts rated them a buy, and in the
aftermath most analysts changed their ratings from buy to hold or sell
and slashed their price target by about $20.00.  I feel that
Infospace mislead investors and analysts and opened themselves up to
shareholder lawsuits.  If there are any class action lawsuits, I
would definitely sign on.  What Infospace did shafted share
holders.  My recommendation changes to a strong "Don’t buy"
if you don’t own Infospace shares.
Here are some research links if you would like to research the upcoming Baidu IPO further:
In case Internet search is not of interest to you, you could also
invest in Tim Hortons, a staple in Canada.  Known for its donuts,
Tim Hortons is very popular north of the border and in the northern
U.S.  Wendy’s International, parent company of the hamburger
chain, owns Tim Hortons and will spin off up to 18% of Tim Hortons in
an initial public offering.  I haven’t looked at the
company’s financials to see if it will be a good investment. 
Fortunately, it is not a tracking stock, and Tim Hortons has a cult
following similar to Krispy Kreme.  Krispy Kreme, which in my
humble opinion makes much tastier donuts, used to be a darling stock
until it over-expanded and was caught doing shady account.  If Tim
Hortons financials are sound, and it has a realistic expansion plan
into the U.S. and elsewhere, it could be a decent buy.

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