Take a look at the following table, which assumes trailing multiples and annualized (for the fourth quarter) FY10 earnings:
Compared to any of the American search engine giants, Baidu’s numbers are way out. This is the classic illustration of a bubble – where a single concept (in this case, domination of the Chinese consumer market) totally distorts any reasonable valuation of the price of both assets and earnings.
No Surprises From the Big 2 …
First, let’s look at the market value of America’s largest two online consumer tech providers: Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG). On a price/earnings basis, it is safe to say that neither is an outlier given that Mr. Softie can’t seem to grow earnings at all while Google has met the percentage growth that is standard for the industry in 2010.
In terms of the market capitalization of both companies divided by the difference between the firms’ assets and liabilities (price/book) there’s not a lot to raise your eyebrows at either. While Microsoft has a high return on equity (I have used the crude but tried-and-tested formula of net profits/market cap), you would expect to see this in light of the lack of growth in earnings.
… But “Lei Lo Mo,” What’s going on with Baidu and Yahoo?
Now consider this. Buyers of Baidu are paying 90 times earnings, and 46 times the break-up value of the company in order to get in on Chinese consumer action. Sometimes it’s OK to pay a high price for both earnings and book value if the return on equity is growing aggressively, as this means that the company is leveraging the resources at its disposal in order to give back more to its shareholders the next year. In the case of Baidu, however, the company has the lowest ROE of the pack, and has grown its earnings only marginally more this year than has Yahoo.
Added to that, Baidu’s ROE growth is pathetic given its massive P/B ratio: at best (using 2009 data) its at half the rate of Yahoo’s, nearer to Google’s, which is more than four times larger. Baidu ought to be valued at half the price it is now — and that’s being generous. The reverse is true for Yahoo, however.
Okay, okay, I hear you say. Not Yahoo again; the eternal value play that’s lost 60% of its market value in the last 5 years after multitudinous management overhauls and false-start product launches.
But consider this: Yahoo has managed to grow its earnings over the last year by the same percentage as Baidu, while it still trades at 21 times earnings and 1.4 times book. Those multiples are the second-lowest and lowest, respectively, of all the Big Four.
All of this is why the American internet giant has an ROE growth of 238% this year vs. Baidu’s 140%. In other words, Yahoo is putting your money to work more efficiently than is its Chinese counterpart.
Part of the reason for the company’s stunningly undervalued earnings and asset prices vs. its eye-popping Eastern-style ROE growth is the oft-overlooked 37% stake it has in the $8.7 billion Chinese e-commerce upstart Alibaba.com (ALBCF.PK). That stake has bolstered Yahoo’s balance sheet by around $3 billion in the previous five years, and continues to offer an investor keen on riding on the dragon’s coattails a cheap way of doing so.
One often cited investment analogy in Asia is the Chinese word for crisis: It is the sum of the characters meaning “danger” and “opportunity”. If you are searching for value, make sure your money is on the right side of that character equation and the Year of the Rabbit might well live up to the sort of productivity for which its namesake is world-reknowned.
Disclosure: No positions held