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Baidu: Beware Downside Risk

Let's quickly check the scoreboard with Mr. James Taylor. When he wrote his article on June 7, he called Baidu overvalued at around 140 and a market cap of 4.25 billion. As of closing on Fri. Sept. 21, a mere three and half months later, Baidu is firing on all cylinders with new products and strong earnings growth and now has a stock price of 284 with a market cap of 9.66 billion. So Mr. James Taylor, you are wrong to the tune off 100 percentage points. And Baidu is far from done...time for you to eat some crow...

China 3C Group Gets Catalysts From Best Buy, Intended U.S. Listing

Another new day, another overhyped China story.

SmartGuyAB gets all the validation he needs for an investment in 3G group when Best Buy opened its first branded store in Shanghai and chose 3C Group as a supplier. Validation of what? They can open up a store? The modern business history of China is filled with the greatest American companies that have struggled big-time in China: Google (minority market share), Ebay (losing market share, bad acquisition), and Wal-mart (losing to competitors). Best Buy is way late in the game playing with companies with entrenched leadership position, localized market knowledge, and huge amounts of cash. Best Buy is a non-factor in the China market. SmartGuyAB can talk about Gome, Carrefour, and Suning as "nothing you’d expect to see at your local mall," but yet can't see that Best Buy is "nothing you’d expect to see at your local mall [in China]?" Isn't it ironic, don't you think?

Let's do some due diligence here. The two areas that the China 3C Group focuses on are cell phones and...drum roll...fax machines and corded phones. You're going to place a huge bet on a company that does most of their sales in the distribution of largely commoditized products like fax machines and corded phones? Right...

They have no competitive advantage when it comes to fax machines and corded phones. These major retailers in China Gome, Carrefour, and Suning can go direct with the suppliers like Brother, Samsung, HP, and others any time they want. 3C's agreement with these China chains is very, very weak. All these huge retailers in China have to do is pick up the phone and they can cut out 3C anytime to boost their margins. Or, maybe these retailers think that this market segment is way to way to weak to get involved in. Either way, this does not portend the kind of growth estimates that 3C is overhyping.

Second, mobile phones. The market for mobile phones is highly, highly competitive in China with thousands of companies selling a huge range of handsets. Even if they manage to grow in this area, they are by no means the leader and margins will be slim to none.

3C group is another example of a way overhyped China story that is easy to fall for. It is not the real deal. Your money would be way better spent on China market leaders in rapidly growing industries of which 3C is obviously not.

Baidu: Beware Downside Risk

I'm getting really tired of people like James Taylor who write about China, but who have little idea about what they're talking about. Case in point is his article on the valuation of Baidu. In it, he states that "I typed in a search for 'basketball' and I received numerous matches. However, unlike Google, where there are numerous ads affiliated with my search found on the right side of the page, with Baidu I found none."

Mr. Taylor, hello! If the Chinese did searches by typing in English, then they would use Google instead of Baidu. Common sense should dictate that most Chinese would type in "篮球" (the Chinese characters for basketball) instead of "basketball." That's why the search for basketball has barely any ads and the search for the Chinese characters for basketball leads to a whole string of ads. The ads under the English have almost no value in Baidu, while the ads that match with the Chinese characters have value. Use some common sense and do some basic due diligence.

All the valuation models in the world will you do no good if you don't have a basic understanding of China's people and culture. What James Taylor has shown is just plain ignorance about China.