China's online ad market spending will rise 37% this year to $3.

Baidu Seems Poised To Rake In EPS Gains
By DONALD H. GOLD, INVESTOR'S BUSINESS DAILY
Posted 12/14/2010 06:30 PM ET


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2" Baidu (BIDU) really is a superstar stock. The leading Chinese search engine has proved itself over the years in the most important ways: The company grabbed the lead in a young and crucial industry, forcing its rivals to play catch-up.

And can you remember any market uptrend in recent years that didn't include Baidu in a leadership role? No.

Baidu's business model resembles that of other media, such as broadcast TV, radio and newspapers: It sells ads. The search engine, like CBS' "Late Show With David Letterman," is a lure to attract eyes.


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So let's look at China's online ad market. It's booming. Well, that's no surprise. In China, a lot of markets are booming, including autos, consumer electronics, housing and sportswear.

China's online ad market spending will rise 37% this year to $3.7 billion. What's more, says digital marketing and media analyst eMarketer, "Strong double-digit growth rates will continue through 2014, when ad spending in the country will hit $9.5 billion, more than double what will be spent this year."

A Nov. 30 report by Internet/Media Analyst Eric Wen of Mirae Asset sees a big near-term push from several sources. First, a rash of Chinese IPOs will lift ad spending.

Why? None of these hot new names can command leadership in their respective fields. And what do companies battling for market share have to do? Advertise.

Wen also points to Weibo — Chinese for microblogging.

"We believe Weibo has enlarged the market for online advertising as Chinese people's reading and interacting with news are now moving online. Over time, advertisers will follow," he said.

Baidu may not be well-placed to become a Weibo center. But it may benefit by the new advertisers drawn by Weibo providers. Wen says a cost-benefit analysis will show many that Baidu offers a better value for most advertisers.

Baidu has logged triple-digit EPS gains for three straight quarters, with a fourth likely to be recorded in Q4. Sales growth has accelerated for three straight quarters.

After-tax profit hit 47.5% in Q3, its highest in years.

When this year's book is closed, Baidu will have recorded its sixth straight full-year profit gain. Pretax margin and return on equity, two key gauges, last year came in at 40%. Sponsorship is famously solid.

The stock has built a very tight flat base. Baidu is just now about 1% below its 10-week moving average. So far it has well-endured a harsh battering that has assaulted many Chinese ADRs in the past week, including Ctrip.com (CTRP), VanceInfo Technologies (VIT) and Home Inns & Hotels Management (HMIN).