http://money.cnn.com/2005/08/02/technology/techinvestor/lamonica/index.htm
Chinese techs: Still the yuan?
Wireless and Internet stocks from China have been on a tear. Is it too late to invest now?
August 2, 2005: 1:19 PM EDT
By Paul R. La Monica, CNN/Money senior writer
NEW YORK (CNN/Money) - It's getting increasingly difficult to ignore the massive growth potential of Chinese tech stocks.
Keep an eye on the yuan and Baidu
And this could be just the beginning of an explosive growth curve. A basket of a dozen Chinese tech firms that trade in the U.S. are expected to report, on average, sales gains of 35 percent this year and 39 percent next year while profits are expected to soar 56 percent this year and 78 percent in 2006, according to data from Thomson/Baseline.
"These businesses are in their early stages in China. Search, e-commerce and wireless are relatively nascent industries," said Jason Tsai, an analyst with Think Equity Partners.
There are other catalysts that could keep Chinese techs moving higher as well.
The revaluation of the yuan should be a boost for the Chinese tech firms since most of them are services-oriented companies doing most of their business in China, as opposed to big exporters of industrial goods.
"Obviously, the intention of the revaluation was to put China in a more even playing field with the rest of the world in terms of trade," said Tsai. "For the public Chinese techs, their businesses are all denominated in yuan but reported in U.S. dollars so when they report earnings, they will be getting a one-time boost."
And later this week, Baidu, a popular Chinese search engine that has been compared to Google, is scheduled to go public in the U.S.
The company has already attracted a noteworthy group of investors, including venture capital firms Draper Fisher Jurvetson ePlanet Ventures and Integrity Partners as well as Google (Research), which owns a 2.6 percent stake.
The revaluation of the yuan should be a boost for the Chinese tech firms since most of them are services-oriented companies doing most of their business in China, as opposed to big exporters of industrial goods.
http://www.forbes.com/associatedpress/feeds/ap/2005/07/31/ap2164792.html
Associated Press
China Search Engine Baidu.com Set for IPO
07.31.2005, 11:25 PM
Baidu.com takes its name from a 900-year-old poem but its ambitions are ultramodern - to become the Chinese-language equivalent of Internet search giant Google Inc.
Little known abroad, 5-year-old Baidu.com says it already is the world's sixth most-visited Internet site, thanks to a strong following from China's 100 million-plus Web surfers.
Now the startup founded by two Chinese veterans of American tech firms is preparing to follow Google's example with an initial public offering in the United States, hoping to raise $45 million.
Baidu.com is in the front ranks of an emerging group of Chinese companies that are trying to create Internet services uniquely suited to their country's ideogram-based language and the political restrictions of its communist government
"Here's a homegrown company that has created what really is a very strong search product," said David Wolf, managing director of Wolf Group Asia, a Beijing consulting firm.
Baidu.com was founded in 2000 by Robin Li, who earned a master's degree in computer science from the State University of New York at Buffalo and worked for U.S. search engine firm Infoseek, and Eric Xu, a Ph.D. from Texas A&M and a veteran of American biotech firms. Xu later left the company.
The name - pronounced "by doo" - means "one hundred times." It comes from a Song dynasty poem and refers to a man ardently searching for his lover in a festival crowd.
Google bought 2.6 percent of Baidu.com last year in a move that outsiders thought might lead to the American giant taking over the tiny Chinese startup. But Baidu.com has stayed independent.
Google's influence shows, though, in Baidu.com's spare white site that is nearly identical to the American firm's.
By contrast, competitor 3721.com - bought in 2003 by U.S.-based Yahoo! - is a busier, colorful site with animated graphics.
Other early backers were U.S.-based venture capital firms including Draper Fisher Jurvetson and the investment arm of International Data Group. Draper Fisher is Baidu.com's biggest single shareholder, with a 28 percent stake.
Baidu.com's planned IPO is modest beside the $1.2 billion that Google's public offering raised last August. But its tentative price for the block of shares being offered values the whole Chinese company at $650 million. No date has been announced for the IPO.
The company says it already makes money - some $303,000 in the three months that ended on March 31.
China's communist government promotes Internet use for business and education. But it also has launched the world's most sweeping effort to police what its people can see online, blocking access to material deemed subversive or pornographic.
The extent of the censorship controls has been highlighted by the changes that foreign companies have made when they launch Chinese versions of commonly used services.
Free-speech activists criticized Microsoft Corp. when the blogging section of its recently launched China-based Web portal rejected such words as democracy, freedom and human rights, labeling them "forbidden language."
Google has also taken heat for blocking access to material that Chinese leaders dislike. A search on Google's China-based service for such topics as Taiwan, the Dalai Lama or the banned spiritual group Falun Gong returns a message that says "site cannot be found."
And communist leaders, early believers in the Internet's economic promise, seem intent on keeping foreign involvement to a minimum in order to keep the profits for China's own firms.
Baidu.com's decision to stay independent could help it with intensely nationalistic Chinese regulators, eliminating any doubts about divided loyalties, said Wolf.
"It's a company that has grown up in the Chinese system. It's going to be a favorite of a lot of partners here and an implicit favorite of the government for that reason," he said.
Internet firms with foreign partners have been challenged by regulators who demand assurances that Chinese managers will stay in place and not surrender control to outsiders.
Baidu.com, 3721.com and other Chinese search engines also face daunting linguistic challenges that designers working in English and most other languages don't.
Chinese uses thousands of ideograms. On a computer, they usually are written by typing words phonetically in Roman letters, then using special software to convert them to characters.
Making things even more complex, the mainland's communist leaders simplified many characters after the 1949 revolution, while Taiwan, Hong Kong, Singapore and other societies use the old system.
So a search engine must sift through twice as many characters. And Chinese is written without spaces between words, making it hard for a machine to figure out where one ends and the next begins.
Then there are the quirks of a writing system with a vast literary history, 1 billion modern users and pressure to keep up with technology and international commerce. Baidu.com's advertising notes that Chinese has 38 ways to say "I."
Financial analysts forecast fast growth but brutal competition in the industry over the next few years, leaving only a handful of competitors.
Already, Baidu.com has been through a court battle with 3721.com after accusing its rival of adding elements to its software that blocked users from reaching the Baidu.com site.
A Beijing court ruled against 3721.com in April, ordering it stop such "unfair competition."
The lawsuit "did much to reinforce Baidu's underdog image," said Wolf. "That turned out to be very positive for them in China. It made people check them out."
Baidu.com is IPO of the week
By Renaissance Capital
Last Update: 6:31 PM ETAug. 3, 2005
Editor's note: Renaissance Capital runs the IPO Plus Fund (IPOSX: news, chart, profile) . The fund may have investments in the securities mentioned in its report. For more information, see the company's Web site at www.ipohome.com.
GREENWICH, Conn. (MarketWatch) -- Included in this week's busy IPO lineup is a deal that could prove to be one of the hottest offerings of 2005. The company goes by the name of Baidu (pronounced "Buy--do"), a fast-growing, ad-supported online search engine in China, and it has been referred to by many in the investment community as the "Chinese Google."
The media has already picked up on the comparison, and not surprisingly, demand for this deal is rumored to be white hot.
In support of this, the company on Wednesday upped the size of the deal to 4.04 million shares from 3.6 million, and increased the estimated price range to $23-$25 a share, from the earlier level of $19-$21 a share.
At the midpoint of the new price level, the company will raise $97 million
Goldman Sachs, Credit Suisse First Boston and Piper Jaffray are underwriting the IPO. Baidu plans to list on the Nasdaq under the ticker symbol "BIDU". Pricing is slated for Thursday night.
Founded in 2000, by a pair of Internet engineers, Baidu started out providing Internet search technology to China's online portals before launching its own Chinese language search engine in 2001.
Since then, Baidu (BIDU: news, chart, profile) has used a strong search technology platform and a growing network of third party Web site partners to rapidly grow its audience of users. In 2004, Baidu was the second largest Web site in China and the sixth largest globally, not a bad accomplishment in less than five years.
Traffic is good, but cash flow is what counts
Of course, it's not about how much traffic an Internet company can generate (investors in the 1999 bubble era can attest to that), but how much revenue and earnings that traffic can generate. And in that department, Baidu has shown some impressive trends thus far.
Net revenue has grown from $1.3 million in 2002 to $13.4 million in 2004, which translates into a compounded growth rate of 225%.
In its most recent quarter ended June 2005, Baidu generated roughly $8 million in net revenue and appears to be on track to deliver more than $30 million in revenue this year (at least 125% growth year-over-year).
Profitability has also increased, with the company breaking even on an operating cash flow basis in 2003 and producing $4.5 million in operating cash flow in 2004.
During the last six quarters, its operating cash flow margin has expanded from 29% to an estimated 37% in the second quarter of 2005.
Although the dynamics of the search engine industry are not particularly obvious to the average user, search engines generate the bulk of their revenue from advertisers who pay fees for priority placement within specific search engine results.
Unlike in the early Internet days when an advertiser would agree to pay for a rectangular ad banner seen by thousands of users of varying demographics, search engines enable advertisers to generated highly targeted leads and better returns on their investment dollars.
On the surface, Baidu looks and sounds a lot like Google (GOOG: news, chart, profile) .
Its flagship website Baidu.com is a knock-off of Google's no-frills home page equipped only with a logo at the top of the page, a slender menu bar with Chinese lettering and a blank search box.
Conducting a basic search yields a list of what we assume are relevant links, all in Chinese, along with a handful of links along the right column of the site, akin to Google's sponsored links section.
When a user clicks on a sponsored link, Baidu is paid a "per-click" fee according to a pre-arranged price set by an automated auction-based process. This is exactly how Google generates the vast majority of its revenue.
Like Google, Baidu also uses a hybrid approach to generating traffic, which consists of its internally-managed website Baidu.com and a network of third party websites known as its "Baidu Union."
Baidu Union members typically place Baidu's search box on their Web site in exchange for a cut of the advertising revenue. At the end of June 2005, its Baidu Union consisted of more 76,000 third party Web sites.
Baidu also is attacking a potentially huge market opportunity, given the sheer number of potential Internet users in China and the growing popularity of online search in one of the fastest growing economies in the world. The number of Internet search users in China hit 83 million in 2004 and is projected to grow to 187 million in 2007, which is a compounded annual growth rate of over 31%. Although the dollar value of China's paid search market (estimated at just $50 million in 2004) pales in comparison to the U.S., potential Baidu investors are likely to believe that this market could explode as China's rapidly growing economy leads to higher and higher advertising budgets.
However, that is about where the similarities of Baidu and Google stop and the differences begin.
In addition to the obvious differences in size and scope (Google generated $1.38 billion in total revenue in its latest quarter and operates in dozens of countries, whereas Baidu had $8 million in quarterly revenue and operates only in China), there are several important distinctions to which investors should make themselves aware.
Baidu relies heavily on a network of more than 200 regional distributors for sales, billing and collections, compared with Google's direct sales model. Although this is common practice in China and has enabled Baidu to rapidly grow its advertiser base, none of these arrangements are long-term and many are non-exclusive.
Additionally, the regulatory landscape in China with respect to Internet services is vastly different than it is in other parts of the world.
Censorship is common and the Chinese government is continuously modifying and-or enacting laws that can have a major impact on an emerging industry such as Internet search.
For example, the Chinese government can levy fines or shut down an Internet site if it finds its content or service to be "socially unstabilizing".
Lastly, Baidu generates an estimated 21% of its user traffic from MP3 searches, which exposes it to potential copyright infringement claims, especially if there is an industry crackdown in China on the piracy of music.
Other Caveats
Although we are certain that Baidu's IPO will be met with strong demand, the long-term investment risks are substantial. In addition to the above-mentioned issues, competition is accelerating from U.S. Internet search giants Google, Yahoo (YHOO: news, chart, profile) and Microsoft (MSFT: news, chart, profile) .
Each of these companies has significantly greater resources than Baidu will have after its IPO, and the power of their respective brands and proven track records should make any investor nervous. Also bear in mind that China's government is in the process of relaxing restrictions for foreign competitors, which is sure to lead to even greater competition for Baidu.
Baidu's management also raises a few question marks. While results to date have been strong and it has hired executives with experience in dealing with China's government, two key executives recently left the company and several insiders are selling.
Baidu's co-founder and former chief strategic officer resigned in December 2004, and on July 7 (five days prior to Baidu's IPO filing) marketing director Bi Sheng resigned to pursue "non-search" related Internet opportunities.
Such management turnover leading up to an IPO combined with an executive team that does not appear to have any prior experience running a public company does not offer much reassurance with competitors like Google and Yahoo knocking on its doorstep.
Also, we were surprised to see insiders offering up so much stock if Baidu is indeed a "baby Google."
Almost 30% of the IPO shares are coming from insiders, which does not resonate well with us given Baidu's early stage of development.
Indeed, Google's insiders sold shares when it went public, put Google's market was much more established at that point, and the company was generating more than $2 billion in revenue and over $500 million in cash earnings.
Finally, investors should be aware of Baidu's dual-class share structure, which provides its insiders with dominating voting control.
Given Google's recent equity investment in Baidu (Google will own 2.4% of the company after the IPO), we suspect that Baidu's dual-class structure was enacted to prevent a possible takeover of the company down the road, which may not necessarily be in the best interests of its investors.
Despite a litany of longer-term risks, Baidu's comparison with Internet search phenom Google has generated enormous buzz around this offering.
For that reason, along with a small float and a valuation that many will view as attractive relative to Baidu's perceived growth prospects, Baidu's IPO debut is bound to be a success for those lucky few who can actually get shares at the offer price.
http://www.bloomberg.com/apps/news?pid=10000087&sid=aL7srxJIixew
Baidu.com, China's Google, Seeks $101 Mln After Boosting IPO
Aug. 4 (Bloomberg) -- China's Baidu.com Inc., a search engine that models itself on Google Inc., is seeking to raise as much as $101 million in a U.S. initial public offering today after raising the offer by 30 percent to meet investor demand.
Beijing-based Baidu.com and its shareholders boosted the number of shares they plan to sell to 4.04 million from 3.7 million. They are now asking as much as $25 a share, up from $21, according to regulatory filings. The money raised will fund new features and help Baidu.com gain a bigger slice of China's online advertising market.
Baidu.com, founded in 2000, is tapping growing investor demand for Chinese companies and is taking advantage of surging search-engine stocks. Search advertising in China is expected to quadruple to 5.62 billion yuan ($690 million) by 2007, according to researcher iResearch Inc. Shares of Google, which owns about 2.6 percent of Baidu.com, sold in an August 2004 IPO for $85 and are now near $300.
``Look at the chart of Google and you can see why there's so much interest in this deal,'' said Sal Morreale, a sales trader at Cantor Fitzgerald & Co. in Los Angeles, who follows new issues and isn't involved in Baidu.com's offering. ``This deal was on the radar screens very, very early.''
Goldman Sachs Group Inc. and Credit Suisse First Boston are managing Baidu.com's share sale, which will represent about 13 percent of the company. Baidu.com's American depositary shares will start trading tomorrow on the Nasdaq Stock Market under the symbol ``BIDU.''
Surge Likely
At $25 a share, the company would have a market capitalization of about $808 million. Shares of Google, which raised $1.67 billion in its IPO and has a market value of $83 billion, fell $1.89 to $297.30 yesterday in Nasdaq Stock Market composite trading.
Baidu.com shares probably will surge when they begin trading, said John Fitzgibbon, an analyst in New York with IPOdesktop.com, a Web site that tracks initial public offerings. The first day of trading is scheduled for tomorrow, according to Bloomberg data. Fitzgibbon said he is expecting a ``pop.''
The company will sell 3.2 million shares and shareholders are offering 831,700 shares, according to the filing. A further 564,000 shares may be sold if demand is strong enough.
The sale is likely after the close of U.S. stock markets later today.
Founders Selling
Founders Robin Li, 37, and Eric Xu, both Chinese citizens who were educated in the U.S. are both selling stock.
Li, the company's chief executive, plans to sell 250,000 shares, or 3 percent of his stake, worth as much as $6.25 million. His remaining 22 percent stake will be worth as much as $181.8 million, assuming the shares are priced at $25 each.
Li got his masters degree in computer science from the State University of New York at Buffalo. He worked as an engineer for search engine Infoseek Corp. before returning to China to found Baidu.com.
Xu got his doctorate from TexasA&MUniversity and plans to sell 160,000 shares, or 7 percent of his stake, worth as much as $4 million. His remaining 7 percent stake will be worth as much as $55.5 million.
Cayman Islands-based Draper Fisher Jurvetson ePlanet Ventures L.P., a venture capital firm, owns 28 percent, and doesn't plan to sell any shares in the IPO. Danville, California-based Integrity Partners holds an 11 percent stake.
Mimics Google
Li and Xu picked Baidu.com's name from a poem written during China's Song dynasty about a man searching for his lover and going ``all the way to look for her,'' according to the company's Web site.
The Chinese company's site echoes Google's stark pages. Baidu.com has a single search box accompanied by a blue paw-print. Like Google, Baidu.com makes money by allowing advertisers to bid in online auctions to be displayed alongside search results. Advertisers pay a fee when users click on the ads.
Google and Yahoo! Inc., which rank second and third behind Baidu.com in China, are also making investments in the country. Yahoo acquired 3721 Network Software Co. for as much as $123 million in November 2003. Google in July hired former Microsoft executive Kai-Fu Lee to open a Chinese research lab.
``You get a sense that something amazing and enormous is happening'' in China, Google Chief Executive Officer Eric Schmidt, 50, said in a July 21 interview. ``The Internet in China is still underdeveloped.''
Baidu.com's sales almost tripled to 110.9 yuan in 2004 from a year earlier. The company had a 2004 net income of 12 million yuan in 2004, compared with a net loss of 8.89 million yuan a year earlier.
Competition
The company faces competition for Web surfers from home-grown Chinese Internet companies including Sohu.com Inc. and Netease.com Inc., which are based in Beijing, and Shanghai-based Sina Corp. All three companies are traded on the Nasdaq Stock Market.
Shares of Netease, which runs a Web site and offers online games, surged 21 percent yesterday to $72.51 after the company said second-quarter profit doubled to $29.3 million.
The number of Internet users in China rose 18 percent to 94 million in January, Piper Jaffray Co. analyst Safa Rashtchy said in a July 8 note.
Baidu.com accounts for 37 percent of the Chinese search market, according to Analysys International Ltd., a Beijing-based market researcher. Google accounted for 23 percent and Yahoo for 21 percent.
Chinese search engines also have to deal with language nuances. As sentences in Chinese are made up of phrases that represent words in English, search engines need to break down the phrases before matching them against a user's search, Baidu.com said in regulatory filings. Chinese phrases also have more meanings than their English equivalents, adding to the complexity.
To contact the reporter on this story:
Jonathan Thaw in San Francisco atjthaw@bloomberg.net.
Last Updated: August 4, 2005 00:14 EDT
IPO VIEW-China's Google hopeful needs an edge
5 dy 13 hr 37 min ago
By Wei Gu
NEW YORK (Reuters) - Chinese search engine Baidu.com could become one of the hottest U.S. initial public offerings this year in light of Wall Street's interest in China and online seach engines.
But Baidu needs to find an edge over Google, which is expanding in China, to justify its high premiums.
The Beijing-based company's price to earnings ratio, based on an assumed pricing of $20 and annualized earnings of the most recent quarter, is an astounding 528, as calculated by Francis Gaskins, an IPO expert with IPOdesktop.com.
Google Inc. (GOOG.O: Quote, Profile, Research), which launched a blockbuster $3 billion IPO last year, had a P/E ratio of 73 before it went public in August, based on its IPO price of $85, Gaskins said. Google shares have surged to $290.
The fact that Baidu is only selling $75 million of shares means demand could well exceed supply when it debuts on Nasdaq on Aug. 4 under the proposed symbol "BIDU." Goldman Sachs and Credit Suisse First Boston are lead managers.
"Seventy five million dollars is almost nothing for an IPO," Gaskins said. "If you want to participate in China's search market, there is nobody else."
China, already the world's largest computer market, has become a key battlefield for all the major Web search players, including Google, Yahoo Inc. (YHOO.O: Quote, Profile, Research), and Microsoft Corp.'s (MSFT.O: Quote, Profile, Research) search offering.
Shanghai iResearch has estimated that China's Web search market was worth about $50 million in 2004 and is forecast to expand to about $200 million by 2006.
Adding allure to Baidu's IPO is Google's 2.6 percent stake in the company. There is speculation that Google might acquire Baidu to expand quickly in China, similar to what eBay Inc. (EBAY.O: Quote, Profile, Research) did to Chinese online auction house Eachnet.
But if Google choses to go into China alone, that could present a big risk for Baidu.
The Silicon Valley-based U.S. search giant has won a license to operate in China and bought a Web address there. Google is hiring staff with the aim of opening an office in the country this year,
Five-year-old Baidu is still China's most popular search service. It is the nation's second largest Web Site and seventh largest globally measured by user traffic, says Alexa.com., a San Francisco-based Internet traffic ranking company. Baidu had more than 34,600 online market customers in 2004.
But Google has clearly gained in popularity there, particularly among those who can read English.
Fay Qian, an international news editor for a Shanghai newspaper, said she uses both but prefers Google over Baidu.
"Google has multiple languages and I can use it as a dictionary," Qian said. "But sometimes I cannot access certain search results so I have to revert to Baidu."
Qian was not sure what caused the problem. But Chinese authorities briefly blocked access to Google in 2002 over concerns the search engine could be used by local citizens to find information on politically sensitive topics.
Baidu has its own legal issues. The Financial Times reported earlier this month that Baidu has agreed to remove links to thousands of Internet sites offering pirated music, following complaints by R2G, a tracker of piracy and manager of licenses for music publishers.
Music download has been an important differentiation at Baidu, whose main page looks almost identical to that of Google's except Baidu has MP3 search and message board tabs.
The fact Google is relatively new in China means that it does not have as many advertisements as Baidu, which is a big draw for Yue Futao, editor of China Business News.
"But when Google starts competing aggressively in the China market their Web Site might soon have too many ads as well," said Yue, who mostly uses Google.