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China

Basking in Baidu

by Kris_Tuttle on October 28, 2009

We were not fully prepared for the sharp sell-off in Baidu stock on Tuesday when BIDU opened up in the $360 range, down from the $430 level where it closed on Monday.  As the Google of China the stock has a short and compelling positioning that many would say make it a “must own” kind of name.  Of course it trades at a high valuation based on conventional metrics.

This was a perfect time to put our Intrinsic Value (IV) model to work.  Our IV for 2010 came to $496 which is what we tend to use to capture a one year return view on a stock.  With current trading around our 2009 value of $372 it was a perfect opportunity to add shares to the model portfolio.

After we completed the work and added in some other factors our conviction level became quite high.  BIDU has a TEV a bit above $14B.  Compare that to Google with a TEV of $153B.  Of course Baidu is at an earlier stage of development but they continue to dominate search in China.

Unlike other parts of the world China is not going to let Google get a majority market share there, not unless the revenue stays in China.  The Europeans have realized first hand how devastating it can be.  Today billions and soon tens of billions of advertising dollars will be flowing out of Europe and into the US-domiciled Google.  Nobody in Europe is happy about it and the concerns are getting more acute.

Although China is a puzzle of good and bad the fact is that Baidu is in a very strong position to grow into higher valuations even from our current IV of $496.  At current growth and profitability trajectories the shares will be over $600 in 2011.

Google has transitioned through some different versions of their online system before and even guided investors to very low “seasonal” results in some past summers.  Post these short-term cautions the stock has done extremely well.  These are companies that have massive secular growth trends firmly in their grasp.  When the IV is attractive these stocks should always be on the top of your “buy list.”

Although the shares have bounced we are not suggesting we know where they will trade in the short term.  Only that the company is worth $496/share in the next 12 months and $650 per share in the next 24 months.

[Disclosure: Our Research 2.0 model portfolio added BIDU as a position yesterday.]

Getting in on the next bubble in Chinese real estate.

by Kris_Tuttle on June 19, 2009

Recent inputs regarding investor interest in Shanghai property shows it’s again running very high.  There are some key structural reasons this is probably a good time to be considering taking some positions here:

  1. The Chinese are now making it easier to buy property.  A recent offering calls for investors to come up with a 30% downpayment to receive a 4% loan for the remaining 70%.  The 3% deed tax and 0.05% stamp duty is now very low.  The capital gain tax has been reduced (for resales within 2 years) to 5% of the gain versus what had been 5% of the entire amount.
  2. Recent policy changes to allow the local currency to appreciate gradually adds an additional kicker to returns to external investors that makes this even more attractive.  Although exchange rates are unpredictable, most feel that the RMB has been kept down structurally and will tend to trend up over time versus other major currencies.

Caution on China is always a good idea and we know that there is still inventory to be worked off in a number of major cities there.  However the global investor appettite for this asset class looks like it will be aided and abetted by changes in deal terms and exchange rates.

Many investors have gone to China or Hong Kong to cash in this trend over the last decade or so.  Those of us wanting to exploit this trend in a less wholehearted way might look to the new Claymore China Real Estate ETF (TAO) for a simple way to have exposure.  We can’t speak to the quality of this ETF but in a market offering few such choices this one is at least available.

[Disclosure: At the time of this writing we hold a few shares of TAO in our own and managed accounts.]