Baidu Leads First Decline in Week as SMIC Gains: China Overnight

Baidu Inc. tumbled, sending Chinese stocks trading in the U.S. lower for the first time in a week, on concern the Internet company has risen higher than its profit outlook warrants.

The Bloomberg China-US Equity Index of the most-traded Chinese shares in the U.S. slid 0.8 percent to 93.97 in New York. Baidu, owner of China’s largest search engine, fell the most since April, while Qihoo 360 Technology Ltd. declined for a second day. Semiconductor Manufacturing International Corp. surged the most in a month before reporting earnings this week and NQ Mobile Inc. jumped 13 percent to a record.

Baidu’s shares surged 40 percent last month after boosting spending to attract advertisers on its applications for tablets and smartphones. The Beijing-based company agreed to buy app store 91 Wireless for $1.9 billion in July, a month after acquiring PPS Net TV’s Internet video business for $370 million. While second-quarter earnings beat forecasts, the profit margin fell to 35 percent from 51 percent, according to a statement on July 24.

“Baidu’s profit margin is still on a declining trend,” Echo He, an analyst at Maxim Group LLC, said in a phone interview from New York yesterday. “We don’t know where the bottom is. That’s the biggest risk.”

The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., retreated from an eight-week high, dropping 0.9 percent to $34.67. The Standard & Poor’s 500 Index slipped 0.2 percent to 1,707.14 as stronger growth in U.S. service industries raised concern that the Federal Reserve will temper monetary stimulus.

Expensive Acquisitions

American depositary receipts of Baidu declined 4.2 percent to $133.89, paring its gain this year to 34 percent. Before yesterday’s decline, the shares traded at 25 times estimated earnings, the most expensive level in more than a year, and compared with a multiple of 15 four months earlier, Bloomberg data show.

Increased competition will force Baidu to seek more expensive acquisition deals to gain market share, reducing its margins, according to Maxim’s He, who has a sell rating on Baidu. Qihoo, the second most-used search engine in China, is in initial talks to buy Inc.’s Sogou unit to help it compete with Baidu for Internet searches, Chief Financial Officer Alex Xu said July 19.

ADRs of Qihoo slid to $66.02. The shares have increased 122 percent this year, including a 41 percent surge in July alone.

NQ Volatility

Semiconductor Manufacturing, known as SMIC, rose 8.6 percent to $4.03. The ADRs traded about 6 percent above their equivalent shares in Hong Kong, the biggest premium since December 2009. Over 1.2 million shares changed hands, more than 7 times the average daily volume of the past three months. The Shanghai-based company is scheduled to release earnings Aug. 8.

NQ Mobile, a Beijing-based mobile security service provider, surged to a record $17.95 with trading volume more than triple the three-month average. Piper Jaffray & Co., which underwrote NQ’s initial public offering in May 2011, raised its target 41 percent to $24.

One-month at-the-money volatility surged to an all-time high of 131 percent on Aug. 2, before retreating to 130 percent yesterday, Bloomberg data show.

JA Solar Holdings Co., China’s biggest solar-cell maker, rose 4.2 percent to $8.75. The company said it has secured a credit line of 550 million yuan ($90 million) from the Bank of Communications of China.

The Hang Seng China Enterprises Index in Hong Kong slipped

0.1 percent to 9,725.96. The Shanghai Composite Index rose for a fifth day, gaining 1 percent to 2,050.48 after a measure of the service sector rose in July for the first time in four months.

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