ETFs to Watch on Baidu's Dire Q2 - ETF News And Commentary

The dominant search engine company of China – Baidu (BIDU) – released mixed second-quarter results after the market closed on July 27. While the company beat our revenue estimate, the earnings miss along with a tepid guidance dampened investors’ mood and weighed on the stock price.

Q2 in Detail

The Beijing-based company’s second-quarter 2015 earnings per share of $1.64 fell short of the Zacks Consensus Estimate of $1.80 but nudged up from the year-ago earnings by 0.6%. Total revenue of $2.673 billion surged 38.3% year over year and exceeded the Zacks Consensus Estimate of $2.580 billion on a 37.1% rise in online marketing revenues.

Operating profit fell 2.5% as a result of video site iQiyi's higher content costs and an 81% jump in selling, general and administrative expenses thanks to higher promotional outlays. Also, a 56.2% surge in R&D expenses ate away much of the benefits derived from revenue growth, lower bandwidth and depreciation cost in proportion to revenues. Investors should note that, as a percentage of revenues, traffic acquisition costs were flat year over year but failed to boost margins.

The outlook was unenthusiastic as well. Baidu anticipates total revenue for Q3 between $2.931 billion (RMB18.170 billion) and $2.997 billion (RMB18.580 billion). The projected revenue will likely register a year-over-year expansion of 34.4−37.4%. The projected revenue is less than analysts’ estimates which were pegged at RMB 18.79 billion. Also, the projected growth rate was lower than the pace achieved in the second quarter (38.3%).

Market Impact   

Quite expectedly, Baidu’s downbeat results and guidance resulted in pessimism among investors as the stock traded in the red post earnings. The stock retreated about 6.3% in the after-market session while it was down 4.2% at close on the July 27 trading session (which was probably the impact of the acute Chinese equities sell-off) , indicating that investors are losing hopes on Baidu. Investors should also note that Baidu has fallen about 13.3% so far this year (as of July 27) (read: Is China A-Shares ETFs Rally Over?).

Baidu has a sizable exposure (at least over 8.0%) in many Internet and China-based funds like CSI China Five Year Plan ETF (KFYP), China Technology ETF (CQQQ), CSI China Internet ETF (KWEB), NASDAQ China Technology ETF (QQQC) and Golden Dragon Halter USX China Portfolio (PGJ).

This suggests that the performance of these funds is highly dependent on Baidu. As a result, the above-mentioned ETFs could pare gains and fall out of investors’ favor in the coming days. Below, we have highlighted these funds:

KFYP in Focus
 
KFYP, a $3.3 million-ETF, tracks the CSI Overseas China Five-Year Plan Index and holds 150 stocks in its basket. The stock under review, Baidu, occupies the third position in the basket with 10.61% of assets. The fund charges 68 bps in fees (read: ETFs to Gain from Alibaba Revenue Growth and New CEO).

About half of the portfolio is skewed toward the Technology sector. KFYP has lost about 0.5% in the year-to-date frame (as of July 27, 2015). The fund has a Zacks ETF Rank #3 (Hold).

CQQQ in Focus

The fund looks to track the AlphaShares China Technology Index. Here also, the in-focus Baidu takes the second spot in its 76-security basket with a 10.17% share. Notably, China accounts for about 93.31% share of this ETF. The $76.3 million-fund charges 70 bps in fees. CQQQ is up about 0.4% year to date and has a Zacks ETF Rank #3.

QQQC in Focus

This $19.5 million ETF puts 9.92% weight in Baidu, its second holding. The fund charges 65 bps in fees and has Zacks ETF Rank #3. The fund is up over 7% so far this year.

KWEB in Focus

This $112 million-China Internet ETF holds a basket of 59 stocks, giving exposure to a variety of industries in the Technology space. Baidu holds the third position with about 8.69% exposure. The fund charges 68 bps in fees and has gained about 10% in the year-to-date frame.

PGJ in Focus

The fund invests 8.88% of its $202.4 million basket in Baidu, the fund’s second holding. Overall, the stock has 86 stocks in its portfolio. The expense ratio of the fund is 0.70% and the product has a Zacks ETF Rank #3. The fund is up 9% this year.

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BAIDU INC (BIDU): Free Stock Analysis Report
 
KRANS-C CHN 5YP (KFYP): ETF Research Reports
 
GLBL-X NDQ CHIN (QQQC): ETF Research Reports
 
GUGG-CHINA TEC (CQQQ): ETF Research Reports
 
KRANS-C CHN INT (KWEB): ETF Research Reports
 
PWRSH-GL DR HA (PGJ): ETF Research Reports
 
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