Strategic trade
Trade view / 01 October 2015 at 5:15 GMT

Baidu breakthrough as Microsoft's search engine in China

China Watcher / Shanghai
China
Instrument: BIDU:xnas
Price target:
Market price:
Background

Microsoft and Baidu have announced that they will begin to co-operate in China, in a move that should help to solidify their respective market positions. Baidu will become the default search engine for Windows 10 in China. Co-operation with one of China’s tech giants should help Microsoft to sell more legitimate copies of its operating system in China.

From Baidu’s standpoint, becoming the default search engine on Windows 10’s browser will see it take the majority of the market share away from the Chinese version of Bing. In all likelihood, Microsoft has probably decided that Bing is an unfeasible business in China, and has decided to sacrifice it in return for better sales of its operating system.

The co-operation between Baidu and Microsoft would be beneficial for both firms, because it would help them to stave off competition in their respective markets. Google’s weak relationship with the Chinese government means that Google Search and its many apps are completely banned on the mainland, and even the Google Chrome browser had severe difficulties loading any website a few months ago.

China’s brand-loving consumers are often assumed to offer strong demand for anything that Apple produces. Whilst this may be true, Apple products in China approach double that of the US, which for a country with a much lower GDP per capita, it makes Apple products all but unattainable for the wealthy minority.

This means that PC, and thus Windows, continues to hold a dominant share of the operating system market. Another aspect to this is that Alibaba is developing its own operating system, which is in use on smartphones, smart watches and the soon-to-be-launched smart car, which suggests that a PC operating system may potentially be launched. This would be detrimental to both Microsoft and Baidu (since Alibaba would incorporate the operating system into its services ecosystem), and so both firms have moved to mitigate this risk.

I have discussed before how smaller Chinese firms are using the big three tech firms (Baidu, Alibaba and Tencent) to leverage their business model in China, and this seems to be a valid strategy for large western firms as well.

Management and risk description

China is currently enjoying a week-long national holiday to celebrate the birth of the People’s Republic, which means that with exchanges closed, US-listed Chinese firms won’t be affected by domestic volatility over the coming few days. Nevertheless, this may all be delayed until the opening of the domestic exchanges, when several days of events are priced into the market.

The volatility that Chinese equities have endured over the past few months seems to have died down, and that should help to see US-listed Chinese equities post returns based on company-specific issues.
However, volatility surrounding the health of the Chinese economy continues to linger, and this could derail the thesis of this trade view.

Baidu monthly chart
Baidu's 5 year share price chart
Source: Stockcharts.com

For the purpose of this trade, I will set the time horizon to two months. This will encompass the conference calls of both companies, and from then on, we should get further information on the co-operation.

Parameters

Entry: $137.41.

Stop: $130.

Target:
$155.

Time Horizon:
Two months


— Edited by Adam Courtenay

For more on equities click here         


Non-independent investment research disclaimer applies. Read more
12 April
kelly23 kelly23
The best way to get the chrome browser is here. http://browserreview.net/chrome/

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail