Baidu shares drop on mild growth forecast

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Baidu's third-quarter net profit more than doubled, compared with a year ago, and its revenue almost doubled.

Baidu's third-quarter net profit more than doubled, compared with a year ago, and its revenue almost doubled. [China Daily]

A senior executive of China's top search engine, Baidu Inc, forecast its top- and bottom-line growth rates will be moderate over the next year, sending its shares down 6 percent on Wednesday.

Haoyu Shen, Baidu's senior vice-president of business operations, said that after this year's fast-paced growth the company will face tougher comparisons in 2011, although it would seek growth through acquisitions and new advertising methods.

"No ... We have such a bigger base," he said at the Reuters China Investment Summit when asked whether Baidu can maintain its stellar top- and bottom-line growth rates next year.

Baidu's third-quarter net profit more than doubled, compared with a year ago, and its revenue almost doubled.

"We had a major re-acceleration this year, and that had several reasons," said Shen, citing the rebound in the Chinese economy, the switch to its new keyword advertising system and Google Inc's downscaling in China. "For these reasons, it most likely won't repeat itself next year," he said.

Baidu shares fell $6.42 to close at $100.42 on the Nasdaq after his comments. They had soared more than 160 percent this year after the company's main competitor, Google, said it would shut its China search page, following a serious hacking episode and on censorship concerns. Shen said the "Google effect" - an increase in traffic resulting from the disruption in the US company's Chinese operations earlier this year - mildly increased Baidu's business but that is largely over now. He said Baidu's strong performance this year was also due to the introduction late last year of its Phoenix Nest keyword advertising system, which was ramped up fully this year.

The system has enabled Baidu, named after an ancient poem, to make money from its clients as well as offer more value-added services.

Shen said traffic acquisition costs as a percentage of revenue will come in near 10 to 11 percent for 2010.

Baidu was the only Asian name in the top 100 holdings of the world's 30 biggest hedge funds in the third quarter of 2010, according to Thomson Reuters' StreetSight. The hedge funds increased their Baidu holdings by about 20 percent in the third quarter, the data show. Although Baidu has delved into e-commerce and online video this year, it will continue to focus on search functions, Shen said.

Baidu has linked up with Japanese online retailer Rakuten Inc to operate an online shopping mall, and has also formed, a joint venture with Hulu backer Providence Equity offering licensed online video content.

Shen said both ventures will not significantly contribute to Baidu's bottom line in the near term, but will raise ad-dollar spending among its major clients, especially for e-commerce.

"It's growing very quickly and is already meaningful. I hear people saying that this makes up 30 to 40 percent of Google's revenue, but it's not that big for Baidu ... eventually it might grow to that level," Shen said.

China is the world's largest Internet market by users, with 420 million people online. Its search industry, in which Baidu has a 73 percent market share by revenue, was worth 3.13 billion yuan ($470 million) in the third quarter, according to iResearch. Earlier this month, Baidu invested in, an e-commerce website for home decorations. At the end of the third quarter, Baidu had 5 billion yuan in cash and equivalents on its balance sheet.

"We are definitely more open-minded than we were a year ago when we looked at merger and acquisition opportunities," Shen said.

"These are exciting times now when you look at e-commerce and wireless ... With our leading position as a search site and the resources we have on our books ... it makes sense for us to look at these more open-mindedly," he said, adding that Chinese companies will be the focus of its acquisitions and investments.

Baidu is also eyeing new growth in contextual advertising, which uses a webpage's keywords to choose the ads displayed on the page. Shen said Baidu's contextual ads platform will see no big boost in the near term but that the company is upgrading the system.

"The way we think about it, we need another sort of 'Phoenix Nest' revolution, because Phoenix Nest is for paid search advertising, but we need a similar thing for contextual, and when that happens we will see huge improvement in contextual revenue," he said.

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