Tuesday, November 18, 2008

Not a Good Week for China "Dot Coms"

Both Baidu.com (BIDU) and Ctrip.com (CTRP) have taken serious whacks this week, showing yet again the risk to holding individual equities in this type of market is simply too great - hence the better focus appears to be ETFs as the "risk" part of risk/reward is overweighted - bad news is not just punishing stocks now, it is obliterating them. The ability to wake up and find news that has you down 30% in any single equity is like no time I've been around markets.

Baidu.com (BIDU) had a very damning press report yesterday - effectively it is alleged they have been altering search results to push those that pay the highest at the top (effectively blackballing some companies which are not paying from the search results), but that's just the tip of the iceburg considering these are drug companies, many of which are unlicensed. Ah, youthful capitalism.... today the company announced it is suspending customers worth 10 to 15% of revenue.
  • Baidu said Tuesday it has been in contact with CCTV and has suspended customers worth about 10 percent to 15 percent of the company's revenue.
This was one of those stocks legendary hedge fund manager Julian Robertson was buying about 5 weeks ago. [Oct 13: Julian Robertson Buying Some of Our Names] Showing even the best are being hammered by this relentless market. We closed our position September 8th @ $275, saying "$275 could quickly become $225 in this market" - well I guess $275 can turn into $125 in this market. The stock is now down 55% from where we sold it and frankly at some point it gets appealing in terms of valuation - even with a loss of 20% of revenue. This is still a near monopoly or at least the stronger of a near duopoly in the fastest growing online market in the world. If I take next year's analysts estimates of $7.22 and drop if by 25%, we still get $5.41 - so we have 23x 2009 estimates (based on a very serious haircut I applied) for a company growing 50-75%.... that said, I have other companies on my watch lists growing 50% for a 4-8 PE ratio so what is cheap anymore?
  • U.S.-traded shares of Chinese search engine operator Baidu.com Inc. sank Monday -- a drop one analyst attributed to a report by China's state television network that Baidu may have let unlicensed health clinics buy popular medical ad keywords on its search engine.
  • American Depositary Shares of Baidu fell $44.80, or 25 percent, to close at $134.09. Earlier, the stock traded as low as $130.51 -- its cheapest price since May 2007.
  • Sterne Agee & Leach analyst James Lee said Monday that a report by CCTV over the weekend into medical malpractice in China indicated some consumers may have found their way to improperly licensed or unlicensed private clinics and health centers via advertisements that came up when they searched for health-related topics on Baidu.
  • aidu, which holds a 70 percent share of the search market in China, removed the ads for medical practitioners that were considered questionable over the weekend, Lee said.
  • In a client note, Piper Jaffray analyst Gene Munster said the questionable ads on Baidu "were typically selling drugs; we do not believe these are fake drugs per se, but were being sold through non-accredited medical Web sites that should not score as high on sponsored results."
  • The company was also accused of pulling from its search index some organizations that declined to buy keywords.
On the plus side ... at least this is not happening in Russia - because once you are featured on "state run TV" your company is most likey toast :)

On the other hand leading online Chinese travel firm Ctrip.com (CTRP) is being blown up on its earnings report/guidance - down 20%+ today. This has been one of my favorite company's over the years - almost always coming through and being rewarded by the market - in fact I've sold out of this name a few times due to valuation only to see it constantly go higher. It was one of the few bastions of stability in Chinese stocks - however, today nothing is stable. Full report here.

We closed out our Ctrip.com position September 5th in the mid $40s. Today... traded down as low as $17s before "rebounding" to $19s. No chest thumping here folks - if you sold anything in September you have a 99.8% chance of looking a lot smarter than you really are...
  • In the leading Chinese travel website's third-quarter report, revenue rose 15% to $54.5 million. Margins, meanwhile, deteriorated, with earnings falling by 5% to $0.22 a share. But as lackluster as it all sounds, it was roughly in line with market expectations. The Olympic Games were a coup for companies booking foreigners and athletes, but Ctrip specializes in getting Chinese citizens themselves booked into hotels and checked into airplanes.
  • Ctrip's fall comes with Wall Street expecting a healthy year-over-year pickup in business during the current quarter. Analysts are looking for a 38% top-line advance in the fourth quarter, but now Ctrip's outlook calls for net revenue to inch just 5% to 15% higher.
With today's drop and the past two months dismemberment, the stock still trades at 20x 2008 estimates; again compared to other Chinese peers (in different sectors) with similar or better growth rates - that is still 'expensive'.

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