Strategic trade
Trade view / 16 December 2014 at 3:23 GMT

Baidu maps out long-term success with Uber investment

China Watcher / Shanghai
China
Price target:
Market price:
Background

Two of China’s tech giants have spent 2014 funding the spending habits of their respective taxi hailing apps, as they fight for market share without consideration of profits. Alibaba’s Kuaidi Dache and Tencent’s Didi Dache have been offering subsidies to both taxi drivers and passengers, in order to gain market share.

While this has subsided somewhat, both tech giants have just toned down their aggressive market share gaining strategy – as opposed to focusing on actually generating meaningful revenue. While these two battle with domestic apps, Baidu, another Chinese tech giant, has reportedly bought a minority stake in Uber, which may be worth as much as $600 million.

Uber operates a service that is a direct rival to traditional taxis in Western countries, but in China it operates a premium service. Taxis in Shanghai, for example, are numerous and fares are cheap, so Uber would have very little to gain from directly competing with them. Instead, the firm operates a fleet of luxury cars, such as Audi A8s and Teslas, that passengers are willing to pay a premium to ride in. The investment from Baidu would provide a strong boost to the ride-sharing firm as it expands in China.

While neither firm has confirmed or denied the reports, Baidu spokesman Kaiser Kuo has stated that the firm will announce an investment in an American startup company that is “a household name in the US” on Wednesday December 17. The headline news has been priced into the share price, since reports surfaced late last week, but investors will be interested to see the details of the deal, and this could provide a driver to the share price on Wednesday.

One risk that I have discussed previously is that Baidu’s leading Maps application uses a Tencent-backed map content provider. So if Tencent ever chooses to boost its presence in China’s map business, it could easily take a large proportion of Baidu Map’s leading market share by cancelling the relationship between Baidu and the map content provider NavInfo.

Baidu seems to be taking steps to both mitigate this risk and expand its Baidu Maps service overseas by partnering with Nokia Here in order to power the desktop and mapping services for Baidu Maps outside of China. While this implies that Baidu is looking to shore up its mapping services without using a rival’s content, the most important implication is that Baidu is targeting overseas markets where both Google Maps and Apple Maps are dominant. The short-term strategy for Baidu will be to cater for Chinese tourists and Mandarin speakers overseas, but I expect that we will eventually see Baidu release versions in other languages, as it has done with its search engine.

Management and risk description

I have given the trade a three-month trade view, because it will cover the fourth quarter earnings release expected at the start of February. Baidu has a consistent record of beating earnings estimates, so the risk from the earnings release shouldn’t be great.

The only concern to investors in the near term is that recent Chinese data has been impressive, which has continued with this morning’s release of the HSBC PMI at 49.5, which missed the consensus figure of 49.8.  

Parameters

Entry: $225.81

Stop: $215

Target: $250

Time horizon: Three months


— Edited by Robert Ryan


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