April 15 (Bloomberg) -- Qihoo 360 Technology Co., the Chinese Internet company whose search engine debut drove shares to a record, is falling along with rival Baidu Inc. on concern advertising spending isn’t keeping pace with economic growth.
Qihoo, a Beijing-based software developer that introduced a search engine in August, has retreated 13 percent from an all-time high reached March 5 in New York, while Baidu, owner of China’s most-used search tool, has slid 0.8 percent. Qihoo’s 30-day correlation with shares of Beijing-based Baidu rose to 0.44 last week, the highest since Aug. 6 and compared with negative 0.28 Feb. 26, when their movements were most divergent.
The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. has slumped 9.3 percent this year on concern the economy’s emergence from a seven-quarter slowdown will be hampered by government curbs to the property market. While both companies dominate China’s search market, they reported slowing sales growth in 2012, and Qihoo said in March operating margin will “see the bottom” in the first quarter due to the cost of expanding its business to mobile Internet.
“The outlook for first-quarter ad revenue isn’t optimistic because the rebound in business ad spending has been lagging behind the macroeconomic recovery,” Henry Guo, an analyst at research firm ABR Investment Strategy LLC, which focuses on technology and media companies, said by phone from San Francisco April 12. “Baidu and Qihoo will move generally in the same direction unless Qihoo’s market share can rise significantly in the short term. We don’t think that is likely to happen.”
Guo recommended buying shares of Baidu and Qihoo, saying that the companies will benefit from a rebound in the online ad market should China’s economic growth rate continues to rise. Baidu’s ADRs rose 8.4 percent last week to $90.62 in New York and Qihoo gained 5.8 percent to $30.17.
China’s economy probably grew 8 percent in the first quarter, according to the median of 40 economist forecasts compiled by Bloomberg before a government report today. The pace of growth rose to 7.9 percent in the last three months of 2012.
The economists’ projection represents a drop from a forecast of 8.2 percent in February, as China’s largest cities restricted multiple home purchases this month after policy makers in March asked local governments to step up efforts to cool the property market.
Baidu’s online marketing sales, which accounted for 99 percent of the Internet company’s total income of $1 billion in the fourth quarter, increased 41 percent from a year earlier, it said in a Feb. 4 earnings statement. That was down from a growth of 50 percent in the previous three months and 60 percent in the second quarter of 2012, according to its quarterly results.
Qihoo, whose web ad revenue contributed to 65 percent of total sales for the final quarter of 2012, rose 49 percent from a year earlier, according to its earnings report dated March 5. That slowed from a growth pace of 67 percent in the previous quarter and 90 percent in April-June of 2012. Qihoo has cornered about 12 percent of China’s search market to Baidu’s 79 percent, according to March data from New York-based Internet-tracking firm Experian Hitwise.
Both companies must find ways to make money from mobile devices as more users shift from desk computers to smartphones in China, according to Erik Lam, director of Asian equity sales at Auerbach Grayson & Co. in New York.
“Investors are concerned about the sustainability of Baidu’s competitive edge in the current environment, where the transition from desktop computers to mobile smartphones has arisen as a major issue,” Lam said April 12. “Whether Baidu rises to the challenge will determine its fate in the marketplace.”
Qihoo Chief Financial Officer Alex Xu said advertising is “probably not going to be a meaningful contributor in the early days of mobile monetization” in a conference call March 5. Operating margin based on Non-Generally Accepted Accounting Principles will drop to 25 percent for the first quarter from 30 percent last year, and it will probably take “several years” to get to 40 percent, he said.
The iShares FTSE China 25 Index Fund, the largest Chinese exchange-traded fund in the U.S., fell 0.7 percent to $36 on April 12, rising 1 percent for the week. The Standard & Poor’s 500 Index slipped 0.3 percent from a record high to 1,588.85, trimming its weekly advance to 2.3 percent.
The China-US gauge slipped 0.5 percent to 89.99 April 12 in New York, paring its five-day gain to 1.1 percent.
Suntech Power Holdings Co., whose main unit was forced into bankruptcy after defaulting on a $541 million bond repayment last month, jumped 80 percent to 75 cents, the steepest weekly advance on record. While the Wuxi, China-based solar maker had the biggest gain on the Bloomberg China-US gauge for the week, it is still down 60 percent from this year’s high reached Jan. 16.
The stock jumped 16 percent April 8 after a news service owned by Hong Kong Economic Times said Warren Buffett’s MidAmerican Energy Holdings Co. may buy the solar panel maker, citing an unidentified person. Tina Potthoff, a spokeswoman for MidAmerican in Des Moines, Iowa, said by e-mail that it doesn’t comment on speculation. Shashin Surti, a spokesman for Suntech, said it also doesn’t comment on speculation by e-mail April 9.
Suntech’s ADRs tumbled 14 percent to 75 cents April 12.
Short interest in Suntech’s shares has plunged to its lowest level since 2007, suggesting investors have closed out positions betting the stock will decline since the solar company’s main unit went bankrupt last month. The portion of outstanding shares sold short fell to as little as 2.2 percent on April 3 from 6.5 percent on March 18, according to data from Markit Group Ltd., a London-based researcher. The percentage was 3.2 percent April 11.
The Hang Seng China Enterprises Index in Hong Kong retreated 0.5 percent to 10,655.68 on April 12, trimming its weekly advance to 2.2 percent, while the Shanghai Composite Index of domestic Chinese shares dropped 0.6 percent to 2,206.78 for a third weekly retreat of 0.8 percent.
“People were very bullish about China’s economic rebound at the end of last year, but the momentum has weakened over the last few months,” Wang Qinwei, an economist focused on China’s economy and equities at Capital Economics Ltd., a London-based research firm, said by phone April 12. “We are even more pessimistic about the growth rate, which may even be slower than the previous quarter.”
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