Baidu Tops Drop on Profitability Concern: China Overnight

Baidu Inc. led the benchmark index of Chinese stocks traded in New York to its lowest level in 2013 on concern plans by the nation’s most-used search engine to spend more developing its technology will sap profitability.

The Bloomberg China-US Equity Index of the most-traded Chinese shares in the U.S. fell 0.2 percent to 97.6, the lowest close since Dec. 28. Baidu, which posted the smallest profit increase since 2009 in the last quarter, sank as much as 11 percent after the stock was downgraded and analysts cut price targets. China Southern Airlines Co. slid as local airports plan to lift fees while mobile chipmaker Spreadtrum Communications Inc. jumped the most since May on an improving outlook for smartphone-chip demand.

Baidu, facing competition from new search engines, said Feb. 4 that first-quarter revenue may be as little as $945.4 million, below the $969 million mean of 11 analysts’ estimates compiled by Bloomberg. Chief Executive Officer Robin Li said on a conference call that the Beijing-based company will continue to invest in mobile search tools, improving network infrastructure and expanding its video business in 2013.

“Management seeks to sacrifice profitability for growth in 2013 amid competition in the web search area,” Henry Guo, a senior analyst at research firm ABR Investment Strategy LLC, which focuses on technology and media companies, said by phone from San Francisco yesterday. “We won’t see a catalyst for Baidu’s stock to go up in the near term as it will take up to two years for its mobile search to make money.”

The iShares FTSE China 25 Index Fund, the largest Chinese exchange-traded fund in the U.S., was little changed at a four-week low of $40.62. The Standard & Poor’s 500 Index climbed 1 percent to 1,511.29 as Dell Inc. agreed to be taken private.

Baidu Downgraded

Baidu’s American depositary receipts dropped 10 percent to $96.37, the biggest retreat since September 2011. Trading volume was more than three times the daily average over the past three months.

Raymond James & Associates Inc. analyst Aaron Kessler cut his recommendation on Baidu yesterday to market perform, equivalent to hold, from outperform, citing the outlook for lower profit margins and concerns about mobile search, where Baidu is less dominant. George Askew at Stifel Nicolaus & Co. Inc. also downgraded the stock to hold from buy.

Baidu’s operating margin, which measures operating profit as a percentage of sales, was 45 percent in the fourth quarter, down from 51 percent a year earlier and 53 percent for the previous three months, data compiled by Bloomberg show. Analysts forecast the ratio will narrow to 44 percent in the first quarter.

Target Cuts

“We expect margins to remain pressured throughout 2013 due to increased investments in the core search business and the consolidation of its online video website,” Kessler at Raymond James wrote in a note dated yesterday. Baidu’s “significant mobile monetization is still several quarters away,” he wrote.

At least 10 analysts, including Morgan Stanley’s Richard Ji, cut price targets for Baidu after its earnings report.

Qihoo 360 Technology Co., a Beijing-based Internet company that started a search engine in August, advanced 2.9 percent in its second day of gains to a one-week high of $31.72. The company has considered investing in and acquiring smaller companies to help it compete against larger rivals, Chairman and CEO Zhou Hongyi said in a Feb. 2 interview in Hong Kong. Inc., which also competes with Baidu in online search services and operates games and video websites, slid for a second day after providing a first-quarter profit forecast Feb. 4 that was below analysts’ estimates. The Beijing-based company’s shares dropped 1.5 percent to $45.8, the lowest level this year.

Chipmakers Surge

Spreadtrum Communications Inc., a Shanghai-based chipmaker for mobile devices, surged 11 percent to $17.2, jumping the most since May and posting the biggest gain on the China-US gauge. Semiconductor Manufacturing International Corp., a Shanghai-based integrated-circuit foundry, advanced 6.1 percent to $3.13 in New York, its largest rally in four weeks.

ARM Holdings Plc, whose chip designs power Apple Inc.’s iPhone and iPad, yesterday reported fourth-quarter sales that rose more than analysts predicted as demand for smartphones surged and as its first-quarter sales forecast also exceeded what analysts had projected.

“ARM’s good results boosted people’s optimism about mobile chip market for the first quarter,” Jun Zhang, an analyst at Wedge Partners Corp., said by phone from San Jose, California yesterday. “Overall handset inventory levels in January decreased as smartphone chip shipments rebounded slightly in the month.”

Airlines Slump

China Southern, Asia’s biggest airline by passenger numbers, slumped 1.7 percent to $29. China Eastern Airlines Corp. lost 0.7 percent to $22.57 in a second day of declines.

Beijing Capital International Airport Co., the world’s second busiest airport by passengers, said regulators will allow it to charge domestic carriers the same fees as foreign airlines for international flights from April 1. The fee increase, which also applies to domestic flights that connect to international flights, will help boost revenue, the airport said in a Feb. 4 statement.

Airports in Shanghai, Guangzhou and Hainan province announced fee increases after receiving the regulator’s notice.

The Hang Seng China Enterprises Index dropped 2.8 percent to a four-week low of 11,813.39 yesterday. The Shanghai Composite Index of domestic Chinese shares advanced 0.2 percent to 2,433.13, climbing for a seventh day in the longest stretch of gains since February last year.

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