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Author: TMFBreakerWade Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 89  
Subject: 1% Baidu Date: 9/2/2008 8:24 AM
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Baidu (Nasdaq: BIDU)

Why I like it
1. I think that Baidu might very well be, - the safest way to get in on the massive potential of the Chinese economy.
2. China has recently passed the United States with 250M people online. That’s 1/5 of their population btw.
3. Put China in perspective, the growth rates are staggering. GDP is up 8-9% per year, advertising is growing between 15-20% and online advertising is up 40%. Baidu is clearly in a position to capitalize.
4. It’s the top dog. Commands 74% of Chinese web traffic and 61% of search engine market spending. For perspective, (in China) Google only owns 26% of the ad revenue market.
5. China is only up to 51% internet usage while the United States has a market penetration of 71%.
6. At the Fools advisor roundtable David, Bill, and James Early all said Baidu was their favorite pick for 2008 (among the Foolish advisors top picks). It’s rare to see all of them agree on 1 stock.

Business
Baidu is the leading Chinese internet search provider and the largest website in China as measured by user traffic. It also offer’s online community based products and entertainment platforms. Like Google they are constantly developing and introducing new programs. For example one of these newer programs is Baidu Movie, which allows users to watch and download free movies, TV series, and cartoons.

Risks
1. Imo, the primary risk to any Chinese business is government interference and internal corruption. Thus far I have not seen evidence of either affecting Baidu.
2. Baidu could experience a failure to attract additional customers and increase spending per customer.
3. If some other search portal somehow, someway, took its top dog status – I would be very concerned.
4. No doubt about it, at 31 times Price to Sales, Baidu is a richly valued stock. The problem is, I’m not sure this one will ever be cheap. However, if growth rates were to slow the company would be taken behind the woodshed and beaten worse than most.

Management
Ownership – According to the 20F Ceo Robyn Li owns 5.6M shares or 16.4% of the company. Combined all directors and executives own 20% of Baidu.
Allocation – When Baidu spends money, it focuses on natural transitions that will accentuate the core business. For comparison’s sake: Bidu Roe 40.1% Roc 23.7%. Google’s Roe 21.2% and Roc 16.1%.
Tenure – Robyn Li is the co-founder has been with the company since inception and has been the Ceo since 2004. Prior to starting Baidu, Mr Li worked as a staff engineer for a pioneer company in the Internet search industry. I would say, he has the right experience for the job.
Stewardship – Since the IPO, management has controlled the share count. What started at 32.3M shares has grown to only 34.2M shares. Stock based compensation is reasonable at only 9.3M TTM, that’s 7.84% of net income and 2.6% of sales.

Valuation
Even if I assume a 13% discount rate with a very conservative 50% growth rate yrs 1-5 years (for perspective, bottom line growth was up 108% quarter over quarter), then 25% yrs 6-10 with a 3% terminal, I value Baidu at around $410 per share. If I’m close, that would yield a safety net of about 20%. I consider this an exceptional deal for such a bright prospect.
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