Options traders are the most bearish in a year on Baidu Inc., China’s biggest search engine, on concern acquisition costs will reduce profitability.
Puts protecting against a 10 percent decline in Baidu’s American depositary receipts cost 4.3 points more than calls betting on a rally of the same magnitude last week, three-month data compiled by Bloomberg showed. The price relationship known as skew was the highest since October 2012. Baidu has risen 54 percent this year and reached a two-year high Oct. 2. The Bloomberg China-US Equity Index fell 0.1 percent for the week.
Baidu has made five acquisitions (BIDU:US) over the past year to maintain its lead among China’s Internet companies as smaller competitor Qihoo 360 Technology Co. gains ground in the online search market. The Beijing-based company paid $1.85 billion for app store 91 wireless in July and bought a stake in group-deal site Nuomi.com for $160 million in August. Baidu will probably report the slowest profit growth (BIDU:US) on record in 2013, according to the mean estimate of 24 analysts surveyed by Bloomberg.
“After significant price appreciation, people understandably are asking how Baidu is going to monetize its recent investments and acquisitions,” Scott Kessler, an Internet equity analyst at S&P Capital IQ in New York, said by phone Oct. 11. “We expect Baidu’s aggressive spending to continue to pressure margins. Some data have shown its search market share has declined while Qihoo’s share has risen.”
Baidu’s skew, or the difference in put and call implied volatility, rose 56 percent over the past month to 4.2 points on Oct. 11. Its ADRs retreated 2.6 percent last week to $154.90, dropping for the first time since August.
Its share in web searches slid to 60 percent in early October while Qihoo’s portion rose to 21 percent last month, according to Chinese data provider CNZZ. Baidu’s search share measured by page views may have decreased about 1.5 percentage points to 65 percent over the three months through Sept. 24, while Qihoo’s increased 2.7 percentage points to 19.5 percent, Beijing-based T.H. Capital LLC said in a note Oct. 9, citing figures compiled by the research firm.
Baidu, China’s second-largest Internet company by market value after Hong Kong-listed Tencent Holdings Ltd. (700), also acquired video business PPStream Inc. for $370 million in June to merge it with its video unit iQiyi.com, which it purchased in November.
Higher spending on acquisitions and advertising caused a 4.6 percent decline in Baidu’s second-quarter net income to 2.64 billion yuan ($431 million) from a year earlier, the company said in July. Profit for the three months ended in September may drop 0.9 percent from a year ago to 2.98 billion yuan, according to the average projection of eight analysts compiled by Bloomberg. Net income margin may narrow to 35 percent in 2013 from 47 percent, according to analysts’ average estimate compiled by Bloomberg.
While Baidu is No. 1 in search, it’s “going through a mobile transition and its mobile business isn’t monetized as well as the desktop,” Walter Price, a senior portfolio manager at Allianz Global Investors, said by phone from San Francisco Oct. 10. “So their earnings growth is going to slow down for a while and margins are going to be under some pressure. It’s probably going to take Baidu a couple of years to get through it.”
The iShares China Large-Cap ETF (FXI:US), the biggest Chinese exchange-traded fund in the U.S., climbed 0.9 percent to $38.36 in New York for a second weekly rally. The Standard & Poor’s 500 Index added 0.8 percent last week on speculation U.S. lawmakers were making progress toward an agreement on raising the debt limit to avoid a default.
The China-US gauge of the most-traded Chinese stocks in the U.S. rose 0.9 percent on Oct. 11, trimming the weekly slump.
E-Commerce China Dangdang Inc. (DANG:US), the nation’s biggest online book seller, sank 14 percent last week to $10.28, the largest weekly retreat since the end of August.
Seaspan Corp. (SSW:US), a Hong Kong-based container-ship operator, rallied 9.8 percent on Oct. 11, paring a weekly loss of 10 percent. The company said Oct. 11 it terminated a sale of offering common shares and convertible notes to raise funds. It had planned to sell 5.7 million shares and $125 million of bonds, according to its statement Oct. 7.
Bona Film Group Ltd. (BONA:US), based in Beijing, surged 20 percent last week to $6.84, the highest level since March 2011. It was the biggest weekly gainer on the China-US measure.
China’s economy may have expanded 7.8 percent in the last three months, according to a Bloomberg News survey of 30 economists as of Oct. 11. September industrial production may have risen 10.2 percent from a year earlier, compared with 10.4 percent in August. The government is scheduled to report the data this week.
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