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It’s been almost a month since Google (NASDAQ:GOOG) caused a global uproar by saying it no longer wanted to censor results of its Chinese search engine, Google.cn. Since then, analysts have touted China’s Internet search leader Baidu (NASDAQ:BIDU) as a can’t-miss.

At first glance this seems reasonable enough – indeed, the share price of Baidu’s Nasdaq-listed unit has gone up 10.5% since Google’s January 12 announcement, and it just posted better-than-expected results for the fourth quarter of 2009.

But while Baidu is the dominant search engine company in China and will get a bump if Google retreats from there, we think investors and analysts are too high on its potential in light of Google’s missteps and are overestimating the increased market share if Google leaves China.

Here are some factors we think are reason to be wary of buying into Baidu:

First, while Google appears to be in a precarious spot in China and vulnerable to stronger moves by Baidu, it is not the big player in the Chinese Internet that it has been made out to be, and its retreat will not add significantly to Baidu’s revenue in the short-term. The notion that Google’s search operations in China were doing well, which quickly gained traction in the press over the last month, is a myth.

The widely cited figure that Google commands a 36% market share in China is grossly inflated. Over the last year, our firm, the China Market Research Group, cmrconsulting.com.cn interviewed 2,000 Chinese between the ages of 18-35 in 10 cities about their internet usage habits.

About 76% of respondents said Baidu was their search engine of choice. Google users, who tend to be more white-collar and worldly, told us that a significant portion of the time they use the US-based Google.com, not Google.cn. Not only do they want uncensored searches, but they use Google for English-language searches and to find information on English-language websites and in academic journals.

Google.cn results in English are relatively poor in comparison. When searching in Chinese, however, many Google users told us they switch back to Baidu.

In reality, Google.cn, the censored Chinese engine, has a market share closer to 10-15% than 36%. Google never convinced Chinese users that its Chinese searches were superior to Baidu’s, either in marketing campaigns or in actual search results. Baidu even launched effective ad campaigns that poked fun at Google by highlighting the difficulties foreigners have in understanding the Chinese language.

The second factor is that not all appears to be right with Baidu’s management. The abrupt departure in January of its chief technology officer and chief operations officer should be enough to give investors pause. The company has also recently announced that it will venture into online video hosting, an expensive business with questionable prospects of profitability.

Finally, the more likely beneficiaries of Google’s fence-sitting are innovative Chinese companies like Sina (NASDAQ:SINA), Sohu (NASDAQ:SOHU), and Tencent (OTCPK:TCEHY), which owns the hugely popular instant messaging program QQ and the social networking site Qzone.com. Digital marketing is becoming more and more important in China, and all three of these firms have powerful platforms that stand to do well from online advertising. QQ, which has a massive built-in base of loyal users, is even developing a search engine of its own and could eat into both Google and Baidu’s market share.

It is a common misconception that China’s censorship and regulations have left Chinese netizens in a black hole without access to technology. On the contrary, China’s Internet community, with 384 million users, is the most vibrant in the world. There are plenty of local companies that are developing innovative, China-focused services that are unlike anything offered elsewhere. These are the ones that will profit from a weakening Google, which has never been innovative enough for Chinese users’ tastes and has proven itself untrustworthy in the government’s eyes.

Investors should definitely be looking at China’s internet players. They are continuing to grow and post solid numbers. However, for some, valuations might be getting too high and investors should be cautious.

This column was written by CMR Analysts James Roy and Michelle Wei, and Business Analyst Lillian Zhang

Disclosure: none