· Google China Co-President resigned. Google announced that the company’s co-president of China operations Johnny Chou has resigned, but will stay on board until December 31st.
· Localizing plan rejected. The Chinese press reported that the Google HQ rejected Johnny Chou’s plan to localize Google China’s development and distribution.
· Dr. Lee will run the show. There will not be a replacement for Mr. Chou, and Dr. Kai-Fu Lee will be the sole President of Google China going forward.
· Very positive for Baidu. We believe Mr. Chou’s leaving is a major blow to Google China’s localization effort, which is the key to catching up with Baidu.
· Management conflict unsustainable. We view Google China’s management conflict as unsustainable over the longer-term, as Mr. Chou’s frustration has been widely reported by the Chinese press, which led to his departure. We believe his departure is a major setback for Google China as existing localized initiatives face uncertainty.
· Foreign competitors facing issues. We believe that Baidu will likely maintain if not extend its market leading position due to issues faced by its main competitors Google and Yahoo. We listed management conflict as a major concern for Baidu’s peers, which was confirmed by the recent departure of Yahoo China President after being on the job for just 40 days. In addition, MSN China’s two top managers also resigned recently, leaving the company in strategic uncertainty.
· Reiterate Buy with $130 price target. We believe the news is positive for Baidu and recommend aggressive investors buy BIDU on the news.