Face-Off: Baidu Vs. NetEase

Apr.24.12 | About: Baidu, Inc. (BIDU)

"Don't let what you cannot do interfere with what you can do."

John Wooden

Two splendid companies are going to be examined in detail and pitted against each other in the hopes of finding a champion. Additional data has also been provided on three other plays for investors who might be looking for other ideas. At the end of the article we will offer our opinion as to which one we think is better.

Baidu is a Chinese Internet search provider. Its search services allow users to find pertinent information online, including Web pages, news, images, documents, etc. Baidu serves three types of online participants, including users, customers and Baidu union members. As of December 31, 2010, it had approximately 412,000 active online marketing customers.

Reasons to be bullish on Baidu, Inc (NASDAQ:BIDU):

  • It is the leading Chinese-language internet search provider. In addition, it offers hundreds of millions of local (Chinese) consumers and businesses instant messaging services, online marketing services, entertainment and commerce platforms.
  • Operating margins of 54%.
  • A projected growth rate of 53% in 2012 and 41% in 2013.
  • Approximately, 50 million locals are joining the ranks of the middle class every year and an increase in discretionary income usually leads to higher spending on new technologies, which is a bonus to Baidu as it leads to increased usage of its services. It is now installing its search box on smart phones in China, which will only serve to further boost sales and revenues.
  • A good free cash flow of $656 million.
  • A very strong five year sales growth rate of 79%.
  • Net income has skyrocketed from $218 million in 2009 to $1.02 billion in 2011.
  • A very good long-term debt to equity ratio of 0.15.
  • Excellent profit margins of 45%.
  • A strong institution presence; percentage held by institutions is 77%.
  • Strong operating margins of 52%.
  • A ROE of 53%.
  • A 5 year ROE average of 41%.
  • A strong quarterly revenue growth rate of 82.5%.
  • A very good quarterly earnings growth rate of 76.9%.
  • A high beta of 1.93 which makes it a good candidate for covered writes.
  • Cash flow per share is up almost 250% from $1.01 in 2009 to $3.42 in 2011.
  • Sales surged from $652 in 2009 to $2.3 billion in 2011.
  • Annual EPS before NRI has skyrocketed from $0.25 in 2007 to $3.02 in 2011.
  • A very good current and quick ratio of 3.6 and 3.60 respectively.
  • It has a projected EPS growth rate for the next 3-5 years of 45%.
  • Total 3 year returns of 557%.
  • An incredible 5 year total return in excess of 1300%.
  • A very low long term debt to equity ratio of 0.15.
  • Year over year projected growth rates for 2012 and 2013 stands at 52.3% and 41.8% respectively.
  • $100K invested for eight years would have grown to $1.7 million.

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NetEase, Inc., an Internet technology company based in China, engages in the development of applications, services and other technologies for the Internet in China. It also offers online advertising on its own sites. It has an online mall and provides online games to users through licensing or in house development.

Netease.Com-Adr (NASDAQ:NTES) is our play of choice for the following reasons:

  • A good free levered cash flow of $330 million.
  • A good 3 year total return of 93%.
  • An excellent 5 year returns of 230%.
  • A strong 5 year sales growth rate of 35%.
  • A good quarterly earnings growth rate of 26%.
  • A good quarterly revenue growth rate of 28%.
  • Good operating margins of 45.5%.
  • Great profit margins of 44%.
  • Percentage held by institutions is 48%.
  • A fairly high beta of 1.41 which makes it a good candidate for covered writes. Selling covered calls opens a second stream of income.
  • Gross profits surged from $370 million in 2009 to $562 million in 2011.
  • Net income almost doubled from $269 million in 2009 to $512 million in 2011.
  • Cash flow per share increased from $2.26 in 2009 to $4.29 in 2011.
  • Sales increased from $560 million in 2009 to $1.18 billion in 2011.
  • Annual EPS before NRI increased from $1.31 to $3.92.
  • It has EPS projected growth rate for the next 3-5 years of 15.82%.
  • A good 5 year average ROE of 31%.
  • A very good current ratio of 6.34.
  • A great cash ratio of 6.24.
  • An excellent quick ratio of 6.24.
  • Year over year projected growth rates for 2012 and 2013 stand at 14.57% and 12.25% respectively.
  • $100K would invested for 10 years would have grown to a stunning $2.04 million.

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Company: Baidu Inc

Free cash flow= $565 million

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Growth

  1. Net Income ($mil) 12/2011 = 1026
  2. Net Income ($mil) 12/2010 = 522
  3. Net Income ($mil) 12/2009 = 218
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 97
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 85.09
  6. EBITDA ($mil) 12/2010 = 668
  7. EBITDA ($mil) 12/2009 = 293
  8. Net Income Reported Quarterly ($mil) = 326
  9. Annual Net Income this Yr/ Net Income last Yr = 96.68
  10. Cash flow ($/share) 12/2011= 3.42
  11. Cash Flow ($/share) 12/2010 = 2.35
  12. Cash Flow ($/share) 12/2009 = 1.01
  1. Sales ($mil) 12/2011 = 2304
  2. Sales ($mil) 12/2010 = 1202
  3. Sales ($mil) 12/2009 = 652
  1. Annual EPS before NRI 12/2007 = 0.25
  2. Annual EPS before NRI 12/2008 = 0.44
  3. Annual EPS before NRI 12/2009 = 0.63
  4. Annual EPS before NRI 12/2010 = 1.53
  5. Annual EPS before NRI 12/2011 = 3.02

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Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 2.89
  2. Next 3-5 Year Estimate EPS Growth rate = 45.35
  3. EPS Growth Quarterly(1)/Q(-3) = -186
  4. ROE 5 Year Average 06/2011 = 41.72
  5. Return on Investment 06/2011 = 47.92
  6. Debt/Total Cap 5 Year Average 06/2011 = 3.35
  1. Current Ratio 06/2011 = 3.6
  2. Current Ratio 5 Year Average = 3.43
  3. Quick Ratio = 3.6
  4. Cash Ratio = 3.46
  5. Interest Coverage Quarterly = N/A

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Valuation

  1. Book Value = 6.95
  2. Price/ Book = 20.07
  3. Price/ Cash Flow = 40.80
  4. Price/ Sales = 21.16

Company: Netease.Com-Adr

Levered Free Cash Flow = 330.18M

Basic Key ratios

Percentage Held by Insiders = 54.7

Growth

  1. Net Income ($mil) 12/2011 = 512
  2. Net Income ($mil) 12/2010 = 338
  3. Net Income ($mil) 12/2009 = 269
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 51.32
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 32.25
  1. EBITDA ($mil) 12/2011 = N/A
  2. EBITDA ($mil) 12/2010 = 426
  3. EBITDA ($mil) 12/2009 = 336
  4. Net Income Reported Quarterlytr ($mil) = 143
  5. Annual Net Income this Yr/ Net Income last Yr = 51.42
  6. Cash Flow ($/share) 12/2011 = 4.29
  7. Cash Flow ($/share) 12/2010 = 2.87
  8. Cash Flow ($/share) 12/2009 = 2.26
  1. Sales ($mil) 12/2011 = 1187
  2. Sales ($mil) 12/2010 = 834
  3. Sales ($mil) 12/2009 = 560
  1. Annual EPS before NRI 12/2007 = 1.31
  2. Annual EPS before NRI 12/2008 = 1.72
  3. Annual EPS before NRI 12/2009 = 2.09
  4. Annual EPS before NRI 12/2010 = 2.6
  5. Annual EPS before NRI 12/2011 = 3.92

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Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 3.85
  2. Next 3-5 Year Estimate EPS Growth rate = 15.82
  3. EPS Growth Quarterly(1)/Q(-3) = -126.74
  4. ROE 5 Year Average 12/2011 = 31.37
  5. ROE 5 Year Average 09/2011 = 31.37
  6. ROE 5 Year Average 06/2011 = 31.86
  7. Return on Investment 06/2011 = 27.45
  8. Debt/Total Cap 5 Year Average 12/2011 = 1.34
  9. Debt/Total Cap 5 Year Average 09/2011 = 1.34
  10. Debt/Total Cap 5 Year Average 06/2011 = 2.44
  1. Current Ratio 06/2011 = 6.34
  2. Current Ratio 5 Year Average = 5.73
  3. Quick Ratio = 6.34
  4. Cash Ratio = 6.24
  5. Interest Coverage Quarterly = N/A

Valuation

  1. Book Value = 15.90
  2. Price/ Book = 3.99
  3. Price/ Cash Flow = 18.80
  4. Price/ Sales = 6.59

Other interesting companies

Company: CF Industries Holdings Inc (NYSE:CF)

Levered Free Cash Flow = 1.85B

Basic Key ratios

  1. Percentage Held by Insiders = 0.42
  2. Number of Institutional Sellers 12 Weeks = 1

Growth

  1. Net Income ($mil) 12/2011 = 1539
  2. Net Income ($mil) 12/2010 = 349
  3. Net Income ($mil) 12/2009 = 366
  4. 12mo Net Income this Q/12 mo Net Income 4Q's ago = 340.78
  5. Q Net Income this Q/ same qtr yr ago = 119.12
  1. EBITDA ($mil) 12/2011 = 3209
  2. EBITDA ($mil) 12/2010 = 1304
  3. EBITDA ($mil) 12/2009 = 798
  4. Net Income Rpt Qtr ($mil) = 439
  5. Anl Net Income this Yr/ Net Income last Yr = 340.78
  1. Anl EPS before NRI 12/2007 = 6.39
  2. Anl EPS before NRI 12/2008 = 14.41
  3. Anl EPS before NRI 12/2009 = 7.8
  4. Anl EPS before NRI 12/2010 = 8.62
  5. Anl EPS before NRI 12/2011 = 22.9
  1. Cash Flow ($/share) 12/2011 = 30.85
  2. Cash Flow ($/share) 12/2010 = 13.44
  3. Cash Flow ($/share) 12/2009 = 10
  4. Div 5yr Growth 12/2011 = N/A
  1. Sales ($mil) 12/2011 = 6098
  2. Sales ($mil) 12/2010 = 3965
  3. Sales ($mil) 12/2009 = 2608

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Dividend history

  1. Div Yield = 0.9
  2. Div Yield 5 Yr Average 12/2011 = N/A
  3. Div Yield 5 Yr Average 09/2011 = 0.43
  4. Annual Dividend 12/2011 = 1
  5. Annual Dividend 12/2010 = 0.4
  6. Forward Yield = 0.85
  7. Div 5yr Growth 12/2011 = N/A

Dividend sustainability

  1. Payout Ratio 09/2011 = 0.07
  2. Payout Ratio 06/2011 = 0.09
  3. Payout Ratio 5 Yr Average 09/2011 = 0.04
  4. Change in Payout Ratio = 0.03

Performance

  1. Current Ratio 12/2011 = N/A
  2. Current Ratio 09/2011 = 1.74
  3. Current Ratio 06/2011 = 1.37
  4. Current Ratio 5 Yr Average = 2.05
  5. Quick Ratio = 1.45
  6. Cash Ratio = 1.19
  7. Interest Coverage 12/2011 = N/A
  8. Interest Coverage 09/2011 = 25.76
  9. Interest Coverage 06/2011 = 18.15

Company: Canadian Natural Resources Limited (NYSE:CNQ)

Levered Free Cash Flow = -$653M

Basic Key ratios

  1. Percentage Held by Insiders = 5
  2. Market Cap ($mil) = 36918

Growth

  1. Net Income ($mil) 12/2011 = 2675
  2. Net Income ($mil) 12/2010 = 1655
  3. Net Income ($mil) 12/2009 = 1391
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 62.68
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 294.61
  1. EBITDA ($mil) 12/2011 = 7690
  2. EBITDA ($mil) 12/2010 = 7163
  3. EBITDA ($mil) 12/2009 = 4581
  4. Net Income Reported Quarterlytr ($mil) = 831
  5. Annual Net Income this Yr/ Net Income last Yr = 61.66
  6. Cash Flow ($/share) 12/2011 = 5.65
  7. Cash Flow ($/share) 12/2010 = 5.89
  8. Cash Flow ($/share) 12/2009 = 4.96
  1. Sales ($mil) 12/2011 = 15483
  2. Sales ($mil) 12/2010 = 14697
  3. Sales ($mil) 12/2009 = 9820
  1. Annual EPS before NRI 12/2007 = 2.09
  2. Annual EPS before NRI 12/2008 = 2.51
  3. Annual EPS before NRI 12/2009 = 2.68
  4. Annual EPS before NRI 12/2010 = 2.3
  5. Annual EPS before NRI 12/2011 = 2.31

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Dividend history

  1. Dividend Yield = 1.3%
  2. Dividend Yield 5 Year Average = 0.8%
  3. Annual Dividend 12/2011 = 0.37
  4. Annual Dividend 12/2010 = 0.29
  5. Forward Yield = 1.25
  6. Dividend 5 year Growth = 21.42%
  1. Dividend sustainability
  2. Payout Ratio 06/2011 = 0.15
  3. Payout Ratio 5 Year Average 06/2011 = 0.11
  4. Change in Payout Ratio = 0.04

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -35.35
  2. Next 3-5 Year Estimate EPS Growth rate = 8
  3. EPS Growth Quarterly(1)/Q(-3) = 1-122.22
  4. ROE 5 Year Average 06/2011 = 17.14
  5. Return on Investment 06/2011 = 8.64
  6. Debt/Total Cap 5 Year Average 06/2011 = 37.36
  1. Current Ratio 06/2011 = 0.69
  2. Current Ratio 5 Year Average = 0.75
  3. Quick Ratio = 0.55
  4. Cash Ratio = 0.04
  5. Interest Coverage Quarterly = 16.52

Companhia Siderurgica Nacional (NYSE:SID)

Levered Free Cash Flow : -1.14B

Growth

  1. Net income for the past three years
  2. Net Income 2009 = $1320 million
  3. Net Income 2010 = $1437 million
  4. Net Income 2011 = $N/A million
  1. EBITDA 12/2011 = $N/A million
  2. EBITDA 12/2010 = $1991 million
  3. EBITDA 12/2009 = $2096 million
  4. Net income Reported Quarterly = $-25 million
  1. Total cash flow from operating activities
  2. 2008 = $2.07 billion
  3. 2009 = $-443.45 million
  4. 2010 = $1.5 billion
  1. Cash Flow 12/2011 = N/A $/share
  2. Cash Flow 12/2010 = 1.35 $/share
  3. Cash Flow 12/2009 = 1.22 $/share
  1. Annual EPS before NRI 12/2010 = 1.02
  2. Annual EPS before NRI 12/2009 = 1.88
  3. Annual EPS before NRI 12/2008 = 1.56
  4. Annual EPS before NRI 12/2007 = 1.11

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Performance

  1. ROE = 45%
  2. Return on Assets = 7.66%
  3. Quarterly Earnings Growth = 84%
  4. Quarterly Revenue Growth = 21%
  1. Current Ratio =4.5
  2. Current Ratio 5 Year Average = 2.55
  3. Quick Ratio = 3.6
  4. Cash Ratio = 2.48
  5. Interest Coverage 03/2012 = 3.6

Dividend sustainability and history

  1. Payout Ratio 06/2011 = 0.49
  2. Payout Ratio 5 Year Average 09/2011 = 0.32
  3. Payout Ratio 5 Year Average 06/2011 = 0.32
  4. Change in Payout Ratio = 0.18
  1. Dividend yield 5 year average = 5.8%
  2. Dividend growth rate 3 year Average = -1.94%
  3. Dividend yield 7.2%
  4. Dividend growth rate 5 year average = 8.81%
  5. Consecutive dividend increases = 2 years
  6. Paying dividends since = 1994

Conclusion

These are both great plays, and ideally one should invest in both. However, if we were forced to choose we would side slightly with Baidu Inc. It has a much better three and five year total rate of return, stronger projected growth rates for 2012 and 2013, and a stronger five-year sales growth of 79% vs. 34% for NetEase Inc.

Even though the markets have pulled back a little bit, they are still extremely overbought and need to let out more steam. Investors should wait for a strong pullback before committing funds to this market. A pullback in the 7-12% ranges would qualify as a strong pullback.

Disclaimer

This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: EPS and EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com.