Baidu.com, Inc. 4Q09: Growing Beyond Phoenix Nest…

Earnings topped: Sales of US$184.7mn rose 40% YoY, 5% above our estimates and helped by better performance of Phoenix Nest. Diluted EPS of Rmb12.27 (US$1.80) grew 48% YoY, 8% ahead of our forecast.

What we liked: 1) Paying customers and ARPU (average spending per customer) rose 13% and 24% YoY each. Notably, Baidu’s total paying customers account for less than 1% of total SMEs in China. 2) Sales from Baidu Union outpaced its “organic” paid listing sales (+50-60% YoY, vs 20-30%, on our estimates). 3) Baidu has attracted more large corporate customers for paid listings, who often spend significantly more than SMEs. 4) Baidu offered strong 1Q2010 guidance, with sales likely up 48-52% YoY.

What concerned us: 1) Japanese venture trimmed Baidu’s earnings by 10%. 2) ARPU dipped 3.4% QoQ, affected by the customer transition to Phoenix Nest.
Venturing beyond paid search: On our observation, Baidu has been actively searching for its next growth driver: 1) Baidu, which owns ~25% of the wireless search traffic in China, has established partnerships with China Unicom and China Telecom to enlarge its market share in the 3G era. Notably, total Chinese mobile Internet users doubled over the past year to ~60% of total online population in 2009, yet only represent ~30% of overall mobile subscribers in China (CNNIC). 2) Baidu has partnered with Providence (a global leading private equity fund focusing on media investments) to offer “Hulu”-like licensed online video content. According to iResearch, online rich media advertising sales in China may surge 40%+ p.a. over the next three years, vs 20-30% for overall online advertising. 3) Baidu developed a joint venture with Rakuten (the e-commerce leader in Japan) for online shopping in China. Yet, it may face an uphill battle against Taobao, which has captured 80%+ of the market in China.

Full report HERE