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Baidu's Earnings Beat Puts These ETFs in Focus

Zacks Equity Research

Last week, the dominant search engine company of China – Baidu (BIDU) – delivered a stellar performance, with its second-quarter 2014 numbers beating the Zacks Consensus Estimate on both lines. In any case, Baidu – the Google of China – has an impressive history of beating top-line estimates. It was the bottom line which saw a volatile trend in the past few quarters though 2014 has seen surprises only on the upside.

Q2 in Detail

The Beijing-based company’s second-quarter 2014 core earnings per share of $1.63 breezed past the Zacks Consensus Estimate of $1.24 by 31.5% and improved from the year-ago earnings by 33.6%. Expansion in the operating margin was behind the beat. Solid revenues coupled with cost containment boosted the operating margin.

Total revenue of $1.93 billion surged 58.5% year over year exceeding the Zacks Consensus Estimate of $1.80 billion helped by a 57% rise in online marketing revenues. Management noted that a focus on mobile-related services including mobile search, mobile map and app distribution made the company a winner this season. This was the first time Baidu generated as much as 30% of its revenues from mobile-oriented product and services.

In the quarter under review, operating profit grew about 22.5% mainly on the back of lower bandwidth cost in the proportion of revenues. Though content costs as a percentage of sales rose in the quarter, they slid sequentially. 

The outlook was enthusiastic too. Baidu anticipates that its total revenue for Q3 will range between $2.163 billion and $2.221 billion. The projected revenue will likely register a year-over-year expansion of 50.9−55.0%. Not only this, but management indicated enhanced investment in mobile applications in the latter half of 2014.

Given the popularity of mobile devices with the ongoing tech craze, especially among younger consumers, we believe the decision should give a big-time boost to the company. In its earnings call, the CEO of Baidu commented that mobile traffic at times exceeds the usage of desktop during holidays.

Market Impact   

Quite expectedly, Baidu’s beat cheered investors as the stock traded in the green in after-hour trade. Following the earnings release on July 24 after the closing bell, its shares advanced about 6.23%.
In any case, investors were almost confirmed about the beat evidenced by a 2.07% rise in shares during the trading session of July 24. Investors should also note that Baidu climbed about 62% over the last one year (as of July 24), while shares soared by over 10.8% in Friday’s session.
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) (read: 4 ETFs to Tap on Upcoming Alibaba IPO).
This suggests that the performance of these funds is highly dependent on Baidu. As a result, the above-mentioned ETFs could add smart gains and be in focus in the coming days. Below, we have highlighted three funds that have big exposure to Baidu:
KFYP in Focus
KFYP tracks the CSI Overseas China Five-Year Plan Index and holds 202 stocks in its basket. The stock under review, Baidu, occupies the second position in the basket with 15.0% of assets.

About two-fifths of the portfolio is skewed toward Information Technology. KFYP added nearly 3.55% in the year-to-date frame and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Medium’ risk outlook (read: 3 China ETFs Surging Higher).

CQQQ in Focus

The technology fund looks to track the AlphaShares China Technology Index. Here also, in-focus Baidu takes the second spot in its 64-security basket with a 10.11% share. Notably, China accounts for about 58% share of this ETF while Hong Kong accounts for the rest. IXP was up 6.0% year-to-date and has a Zacks ETF Rank of 3 with a ‘High’ risk outlook (read: China Internet ETF: The Best Choice in the Space?).

KWEB in Focus

This China Internet ETF holds a basket of 43 stocks, giving exposure to a variety of industries in the Technology space including Internet & Mobile Applications, Internet & Catalog Retail, and Software & Programming. Like the other two, Baidu holds second position with about 9.7% exposure. The fund has gained about 14.5% in the year-to-date frame.

Bottom Line

Though there are three ETFs we have described above, we suggest investors focus on China Internet ETFs. The China Internet space has not only been the best performer in the past month, it is spearheading the entire China equities space that has so far suffered from economic slowdown (read: Guide to Internet ETFs).

Coming to Baidu, the company has been investing heavily to build a position in the mobile and video segments. While some of the company’s recent acquisitions and investment considerations are still to be materialized and might see some bumps in the road ahead, we believe Baidu is approaching its brighter days.

This is especially true as the largest emerging nation – China – is seeing an increasing number of Internet users and there is a vast scope for further expansion as internet penetration in the country is still very low.

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