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China: how to profit off her virtual revolution

Sunday, 2 Sep 2007

Summary

In today's sister  piece, Money Thoughts, we suggested that the internet is pervading China politically as well as economically. We give you some hard facts off which to enrich yourselves by focusing on one share.

Topics Covered

  1. Internet usage in China
  2. The share that is trouncing Google

Background

  1. Internet usage in China

According to the South China Morning Post of 1st September, here are some fascinating numbers:

  • Before SARS, China had 59 million internet users; six months thereafter, she had 68 million users
  • Of these, about half said that the web was their main source of information. Only 10% got their information off newspapers, and 27% got it off television.
According to an online Fortune magazine article of 31st August, last year there were 113.5 mn internet users; by 2011, the number of users is projected to rise by 83% - to 245.5 mn. The room for growth is enormous, given that today, only about 13% of China's population uses the internet!

The share that is trouncing Google

Always discuss share ideas with your financial adviser!

Go to your free Bloomberg screen and compare "Goog" with "Bidu": see what I mean?

Obviously we stand in awe of Google - it's just that Baidu is doing better. Baidu also is trouncing other China portal stocks, e.g. Sina, Sohu and China.com

Baidu shares doubled from March 2006 to late April this year - and have doubled again since. They also have withstood recent market turbulence in America (remember that Baidu was listed in America's NASDAQ in 2005).

Here are reasons put forth in the just-mentioned Fortune article explaining Baidu's stellar performance;
  • Baidu is China's number one web search engine,
  • It has 60% of the mainland market - versus Google's 20%,
  • Baidu had 120,000 active advertisers last quarter - but that is merely 0.6% of China's 20 mn small and medium-sized businesses,
  • Like Google, it makes money by "...selling text-based ads placed near appropriate search results", and
  • However, last quarter, half of its online traffic was in services other than search. It wants to add more services in order to get consumers to stay on the site longer.

UBS AG issued an interesting report on Baidu on 13th August. Some points worth highlighting are that -

  • Baidu generates the most traffic of any website operating in China, and is the world's fourth most used site, and
  • Baidu has developed a "targetisement" advertising strategy since 2006. "Targetisement is a new advertising form banner ad that delivers different ads to different users - based on users' behaviour after analysing the cookies stored in their PCs or their keyword searches." In other words: Baidu's advertising strategy is based on "different strokes for different folks".

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