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No. of Recommendations: 12
deja vu is my feeling after reading the latest conf call. As you may remember, I pounded the table on BIDU around two years ago, as the stock had a meaningful correction as the market was concerned about elevated investment.

Well, here we are again. The core search biz is doing great (38% rev growth last Q, which may slow down a bit to low 30's in coming Q's). Number of advertiser up 21% YoY and 13% sequentially. Mobile is half of revenue. Monetization is increasing at both desktop and mobile and the gap is closing (now over 60% of desktop cost per click). Mgmt also disclosed search is generating 50%+ op margin, which I had always expected. btw, i wish GOOGL would give similar level of disclosure. Not even sure what they are afraid of.

Now comes the downer. They are investing heavily in O2O (online travel, takeout delivery and Groupon like service), and mgmt is so encouraged by early traction that they will double down on investment, which is hurting op margin by 30% (along with 500bps hit from the online video service).

I don't know where consensus EPS will settle at, but I think looking at headline P/E completely misses the point. Core search is doing $10+ EPS ($9B search rev * 50% op margin * 80% after-tax) in '15 and should do easily $12+ in '16. A 20-25x multiple does not feel stretched for this kind of business, which gives you $240-300.

Then you get cash and a bunch of loss-making assets at various stages. QUNR, the #2 OTA, is publicly listed and could be worth a lot more if it ever decides to play nice with CTRP or even merge. iQiYi, one of the leading online video sites, has plenty of comps to get a positive valuation. Then the other stuff have VC stage comps with semi-crazy valuation. Let's just say they are 0 to be conservative. the flip side is i am overlooking the interim losses.

I am about as negative as you will find on China macro, but the positives here are just so hard to ignore. The stock has doubled the last two years, but revenue more than doubled. Stock will be volatile as it always has been, but it should be a compounder for years to come. Founder/CEO has a meaningful stake and his track record speaks for itself.
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