Baidu (NASDAQ:BIDU) illustrates how Chinese stocks still depend on Western capital.
The search engine and the cloud computing company released their second-quarter results earlier this month. These saw revenues increase 27% year over year in basic operations, 17% quarter over quarter. There was a non-GAAP net profit of $ 830 million, or $ 2.39 per share.
Yet barring big moves in today’s pre-market, BIDU stock will open for less than $ 154 per share, with a market cap of around $ 53 billion. Shares are down 26% on the year and are halved from their February peak. The price / earnings ratio is less than 8.
Why? In short, communism.
China is an authoritarian country. If he was a communist, companies like Baidu would not exist.
Nonetheless, the government’s antitrust crackdown is causing economists like George Magnus to cry out âCommunist political controlâ. Capital is being politicized, he argues, so the fundamentals are disappearing. Chinese stocks are expected to trade at a permanent discount.
TV analyst Jim Cramer burned by his call to buy the initial public offering of DiDi Global (NYSE:HAVE I GOT), agrees with Magnus. Investors should avoid chinese stocks, he said, due to the uncertainty of government policy.
The voice of Ray Dalio of Bridgewater Associates, which is worth $ 20 billion, is drowning. The government implements an antitrust policy and seek to reduce inequalities, he writes. Critics are absent.
Regardless of why China changed its policies, they had a huge impact on Baidu. An issue of new shares in Hong Kong in March resulted in the equivalent of $ 260 per share. Baidu also sells debt at 1.13% above comparable T-bills, with their “fair value” indexed. at 2.42%.
What is Baidu doing?
Baidu has always relied on investors to capture its best ideas as spin-offs.
His last effort is Kunlun, which designs artificial intelligence processors for advanced applications. Kunlun was spun with a valuation of $ 2 billion. It would be higher, except that Chinese manufacturers cannot produce chips with lines smaller than 14 nanometers. Samsung (OTCMKTS:SSNLF), which produces 7nm chips for Kunlun, is under pressure to cut it.
Baidu also has a robot taxi unit called Apollo who, he says, will become the “Android of the autonomous automotive industry.” A public company plans to build 1,000 robot taxis around. There were rumors of a spin-off in 2019, but that did not happen.
Baidu also has the AI ââvoice unit Xiaodu, Which one is raise funds from private equity. This is the new trend, private equity comes in when public markets are not up to par. This is a new challenge for policymakers in Beijing who are trying to spread technological wealth. This is a good indication that their work is not yet finished.
The result on the BIDU stock
This redistribution of wealth is trickier than even Xi Jinping thinks.
If the purpose of the crackdown is to give low-income Chinese people a taste of the wealth produced by companies like Baidu, it has failed. Their stocks have collapsed and billionaires are doing good business with private equity.
If China fails to disentangle the concentration of wealth, what chance do American policymakers have? Robin Li, CEO of Baidu saw his fortune dwindle during the crackdown, but still worth it $ 8.8 billion.
The result is that stocks like BIDU stocks look like incredible bargains. Tech stocks aren’t supposed to have PEs of 8. But with their credibility, and that of the government, so weak right now, this is where they will stay for a while. I guess it’s not forever.
At the time of publication, Dana Blankenhorn does not hold any positions with the companies mentioned in this article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.
Dana blankenhorn has been a financial and technology journalist since 1978. He is the author of Living with Moore’s Law: Past, Present and Future available in the Amazon Kindle store. Write to him at [email protected] or tweet it on @danablankenhorn. He writes a Substack newsletter, Facing the future, which covers technology, markets and politics.