Baidu Retreats on Chinese Private Hospital Advertising Boycott

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Baidu Inc. fell to a three-week low on concern the Chinese search-engine operator’s revenue will be crimped amid a conflict with private hospitals over advertising.

The American depositary receipts dropped 2.4 percent to $203.60 in New York, the lowest closing price since March 17. Trading volume of 4.1 million shares was 1.4 times the daily average of the past three months.

The stock slid after China Business News reported that an association of private hospitals said its members had stopped advertising on Baidu effective April 5. The move comes as the company cracks down on what it says is false health-care information in ads posted on its site. It rejected ad requests last year for over 7,800 hospitals affiliated with the Putian Healthcare Industry Chamber of Commerce, the group that agreed to the boycott, the company said on March 26.

Members of the health-care group represent about 15 percent of Baidu’s search revenue, and during each week of the boycott the company will lose about 1 percent of sales, according to 86Research Ltd. “The suspension may last for just several weeks, but longer term China’s private hospitals will notably slow their ad spending,” Juan Lin, a Shanghai-based analyst for the firm, said by phone Monday.

Stifel Nicolaus & Co. cut its sales estimates for Baidu from the second quarter by as much as 3 percent, analysts led by George Askew wrote in a research note on Monday, reiterating a hold rating.

‘Long-Term Positive’

Baidu said in a statement on the company’s official microblog on April 4 that it won’t cooperate with private hospitals that provide fake medical health-care information on its platform, while “high entry barriers and strict auditing are Baidu Promotion’s long-term business requirements.” The Beijing-based company did not provide details about specific alleged false information.

While Baidu’s efforts to prevent false advertising and the health-care advertisers’ boycott may weigh on revenue “for a short time,” it ultimately will benefit the company as it establishes greater trust with users of its search engine, said Di Zhou, an associate portfolio manager at Santa Fe, New Mexico-based Thornburg Investment Management Inc.

“It is a long-term positive for Baidu to eliminate advertising of illegal medical services from its search results as it will help Baidu improve user experience,” Zhou said by e-mail Monday.

By weeding out “lower quality” hospitals, only higher quality ones will be purchasing ads, which boosts return on investment and improves the effectiveness of Baidu’s search platform, Barclays Plc analysts led by Alicia Yap wrote in a research note Monday. An increased effort to clean up lower-quality accounts has been reflected in a slowdown in marketing customer growth in last year, they wrote.

The Bloomberg China-US Equity Index advanced 1 percent to 118.77. The iShares China Large-Cap ETF jumped 1.2 percent to $46.22. The Standard & Poor’s 500 Index gained 0.7 percent.

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