Chinese ADRs Are Heating Up, Is This One A Buy?

Last month Bloomberg reported that the U.S. is moving closer to delisting Chinese firms. It all has to do with access and seeing audited records. 

If these Chinese American Depository Receipts (ADRs) are reluctant to be transparent, then they could very well be delisted. 

Now it seems that the Chinese are open to sharing records. And the threat of delisting might be off the table. 

Many Chinese ADRs have been under pressure for the last 3-5 months because of the threat of delisting. 

But with the threat no longer looming, it’s time to revisit some of these names. 

Baidu (BIDU) is a major player in AI and autonomous driving. And one of the largest Chinese ADRs. 

It’s considered the Google (GOOGL) of China and the 3rd most searched Chinese stock amongst financial pros. That’s up two spots from April, and an interesting development given the tech selloff in the U.S.

But does that make it a buy?   

Find out what we think below…

Baidu’s Business

Baidu is a leading AI and internet services company in China. The firm operates through Baidu Core and iQIYI segments. 

Baidu Core consists of:

• Baidu App. The firm’s flagship app enables users to access its search, feed, content, and other services through mobile devices. In March 2022, monthly average users reached 632 million. 
• Haokan. A video app for content creators and curators. 
• Quanmin. A flash video app for users to create and share short videos, usually less than a minute long. 
• Baidu Wiki. The “Wikipedia of China”
• Baidu Knows. An online community where users can pose questions to other users, such as individuals, professionals, and enterprises.
• Baidu Experience. An online platform where users share daily knowledge and experience, providing practical tips and interesting perspectives in areas, such as software, lifestyle, and games, etc.

Also included in Baidu Core are AI Building Blocks: Baijahao, Smart Mini Program, and Managed Page. 

In addition, Baidu offers online marketing services, which include pay for performance, an auction-based service that allows customers to bid for priority placement of paid sponsored links and reach users who search for information related to their products or services. 

BIDU is heavy in the auto and transportation space with Intelligent Driving, Apollo Self Driving, Intelligent EVs, and Apollo Robotaxi.  

iQIYI is an innovative market-leading online entertainment service in China. iQIYI’s platform features iQIYI’s original content, as well as a comprehensive library of other professionally-produced content, professional user-generated content, and user-generated content. The number of total subscribing members was 101.7 million as of December 31, 2020, and 100.7 million excluding individuals with trial memberships.

On May 26, 2022, BIDU reported its Q1 results. Its revenues from Baidu Core were RMB 21.4 billion ($3.37 billion), increasing 4% year over year; online marketing revenue was RMB 15.7 billion ($2.47 billion), decreasing 4% year over year, and non-online marketing revenue was RMB 5.7 billion ($903 million), up 35% year over year, driven by cloud and other AI-powered businesses.

Its revenue from iQIYI was 7.3 billion ($1.15 billion), decreasing 9% year over year.

Financials

The days of easy money are now long gone. You can’t just show growth and expect your stock price to rise, you also need to show profit. 

Right now, BIDU has $28.39 billion in cash from operations (TTM), total debt of $14.44 billion, and a market cap of approximately $50 billion. 

After appearing stuck in 2019 and 2020, with almost the same revenue, BIDU saw its revenues spike in 2021. A sign that the company still has areas it can grow. 

It’s been able to grow its revenue (YoY) 10.75%. And over the last 5-years BIDU has seen its revenues grow an average of 11.43%

One metric investors care a lot about now in this market is free cash flow. BIDU has been able to maintain a positive free cash flow consistently for years. 

In fact, its cash from operations (TTM) is $2.82 billion, which is significantly higher than the sector median of $263 million. 

Furthermore, the firm’s liquidity and financial health are excellent. Typically, you want to see a company with a quick ratio above 1. BIDU has a quick ratio of 2.79x, which means it has 2.79x more quick assets than current liabilities. BIDU has a current ratio of 3.10x. Again, investors are looking for anything above 1 here, which tells them the firm has enough assets to cover their short-term liabilities.  

Valuation

Some investors look at the P/E ratio to give them an indication of how much a company is worth. The P/E ratio shows how much investors are willing to pay per share for $1 of earnings. 

And lately, stocks with a high P/E have been getting slaughtered in the market. However, if you check out the P/E of BIDU, it is very reasonable at 17.53x. In fact, it is historically below its five year average of 20.06x. 

This discount is primarily due to the concern U.S. investors have for Chinese listed companies.

The price-to-cash-flow ratio compares a company’s stock price to its operating cash flow per share. BIDU has a price/cash flow of 19.2x, which is slightly higher than the average S&P 500 company at 15.5x. The lower the number, the better the value of the stock. 

While BIDU hits pretty average scores for valuation, its profitability numbers are off the charts. 

The firm has an EBITDA margin (TTM) of 21.31%, which is comfortably above the sector median of 20.32%. And as mentioned earlier, BIDU has over $2.8 billion in cash from operations, which is no comparison to the sector median of $263 million. 

When compared to other Chinese ADRs, BIDU beats BABA, and JD in gross profit margin, and EBITDA margin. 

However, it does not stack up as well as the others in the growth category. 

It is not growing as fast as JD, BABA, or NTES. 

Our Opinion – 6/10

The biggest knock on BIDU is that it’s a Chinese ADR. And with that comes so much regulatory and political uncertainty. There have been threats in the past of possibly delisting Chinese ADRs. 

However, they’ve recently been getting positive momentum. BIDU is in several growth sectors like cloud, AI, autonomous driving, and machine learning. But we believe BABA and NTES are better companies, and we prefer those two over BIDU.