Profit Growth Doubts at Baidu Spur ADRs Tumble: China Overnight

Chinese stocks fell for a third week in New York before Internet companies from Baidu Inc. to Ctrip.com International Ltd. (CTRP) report second-quarter earnings that analysts estimate will show slower profit growth.

The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese shares in the U.S. sank 1.9 percent last week to 86.11. Baidu, the nation’s largest online search engine, hit an 18- month low while online travel agency Ctrip capped the longest losing streak since 2008. New Oriental Education & Technology Group Inc. (EDU) fell the most on record after saying the U.S. regulator is investigating its accounting practices and Muddy Waters LLC questioned its ownership structure.

Analysts expect Baidu to report today that profit in the three months ended June 30 rose 52 percent, after growing at least 70 percent in the previous nine quarters, according to data compiled by Bloomberg. Government reports showed net income for state-owned companies dropped 12 percent in the first half while gross domestic product expanded last quarter at the slowest pace in three years.

“They will give us very little upside surprise,” Michael Ding, lead manager of the China Region Fund (USCOX) at U.S. Global Investors Inc., which oversees $2.2 billion, said in a telephone interview from San Antonio, Texas on July 20. “Advertising sales of Internet companies slowed down amid a slowdown in consumption. Baidu’s growth is on the downside as it doesn’t have many new revenue sources.”

The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., climbed 2.1 percent last week to $33.26, snapping a two-week slump. The Standard & Poor’s 500 Index (SPX) added 0.4 percent to 1,362.66, a second week of gains.

‘Pretty Bearish’

Beijing-based Baidu forecast in April sales would increase as much as 60 percent in the second quarter to 5.46 billion yuan ($857 million), compared with the $5.47 billion projection of analysts. Profit for the period may have risen to $2.49 billion from $1.88 billion in the previous quarter, analysts predicted.

Baidu’s second-quarter results and third-quarter guidance won’t exceed analysts’ estimate, Tian X. Hou, the founder of T.H. Capital LLC wrote in a July 20 note. “The Street has a pretty bearish view on China’s economy, which is reflected in their outlook on Baidu.”

The stock fell to $104.98 on July 17, the lowest level since January 2011. Baidu retreated 0.2 percent on July 20, ending the week up 0.7 percent.

Sell Recommendation

Ctrip, the largest online travel agency in China, is due to report earnings tomorrow. The company forecast revenue growth of 15 percent to 20 percent for the second quarter, according to a PR Newswire statement on May 16. The average estimate of 13 analysts was for a 21 percent increase to $156 million, according to data compiled by Bloomberg.

Ctrip’s ADRs fell 2.9 percent in its sixth weekly slide, which was the longest periods of losses in four years. The ADRs sank 1.3 percent on July 20 to $14.63.

E-Commerce China Dangdang Inc. (DANG), the nation’s largest online book retailer, declined 13 percent last week to $5.09, the most in seven weeks. Beijing-based 86Research Ltd. recommended selling the shares of the company on July 17, citing concern about its deteriorating cash flow.

Internet data-center service provider 21Vianet Group Inc. (VNET) tumbled 12 percent to $9.96 last week, the worst performance in a year.

Muddy Waters

New Oriental’s ADRs jumped 15 percent to $12.91 on July 20, trimming the weekly loss to 42 percent. The rebound followed a 35 percent slump on July 18 as Muddy Waters questioned the ownership of some of New Oriental’s schools and the consolidation of their financial statements with the parent company.

The Beijing-based educational services provider said it formed a special committee comprised of three independent directors to conduct a review of the allegations in a July 20 statement, aiming “to provide the highest level of transparency to its shareholders.”

SouFun Holdings Ltd. (SFUN), which runs China’s biggest real estate information website, tumbled 11 percent last week to $13.42, the lowest level this year.

China will keep a “firm grip” on the real estate market to prevent a rebound in housing prices, the Xinhua News Agency said July 19. Cities that have loosened controls must “set straight” government policies, the state-owned Xinhua reported, citing a notice from the Ministry of Land and Resources and the Ministry of Housing and Urban-Rural Development.

The Shanghai Composite Index (SHCOMP) of shares traded in mainland China declined 0.8 percent last week to 2,168.64, completing its fifth weekly slump.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: Tal Barak Harif at tbarak@bloomberg.net

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