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China Tech Stocks Fall As Shanghai Nears Lows On Growth, Debt Fears

U.S.-traded shares of China technology companies were mixed Monday after the Shanghai exchange had another big decline Monday, with one market technician warning that the index could re-test lows set in January-February. Ralph Acampora, analyst at Altaira Capital Partners, tweeted that the Shanghai exchange “is now expected to retest its January/February 2016 low at 2,638.” Baidu ( BIDU ) stock was down more than 3% in early trading in the stock market today . Baidu announced new measures amid a probe into sponsored advertising by health care outfits. JD.com ( JD ) stock was down nearly 10%, though the e-commerce company early Monday posted Q1 revenue that rose 47% from the year-earlier quarter. Qihoo 360 Technology ( QIHU ) stock was off 3%, shares in Sohu.com ( SOHU )  slipped 2%, while NetEase ( NTES ) stock edged down about 1%. NetEase reports earnings on Wednesday. Alibaba Group ‘s ( BABA ) stock rose fractionally Monday, while Sina ( SINA ) stock was down more than 4% and  Ctrip.com International ( CTRP ) nearly 3%. The Shanghai exchange fell 2.8% on Monday to 2832.11, after sliding last week. IBD Take: YY among the China Internets falling; IBD Stock Checkup can help you assess. The People’s Daily, the government’s official newspaper, on Monday warned that China’s economic recovery might stall. The economic trend may be “L-shaped,” meaning flat growth, rather than a stronger “U-shaped” recovery, said the People’s Daily. Even so, the article said the government will not use excessive investment or rapid credit expansion to stimulate growth. One concern among China observers is the country’s widespread debt. Bank of America/Merrill Lynch, in a research report published Monday, referred to global investor George Soros’ remarks in April that China’s situation marks an “eerie resemblance” to the U.S. in 2005 to 2008, just before the financial crisis sparked the Great Recession. But BofA sees what it calls a better comparison, looking at Japan in the 1990s. “While there may be some parallels between the precrisis situation in the U.S. and China today, there arguably are even more important differences, including the nature of the increase in credit, extent of contagion risks to the broader economy, and scope for government policy to preclude or offset,” said the report. “Indeed, if we had to identify a historical antecedent for the current situation in China, a more applicable choice might be Japan during the 1990s. “That said, China’s unique situation belies any simple comparison with past crises in either developed or emerging markets, and warrants its own more in-depth investigation.” Another concern is increased scrutiny on the number of U.S.-listed China tech companies that plan to go private or delist in the U.S. in favor of China markets, where they have expected they could see higher valuations. China has said it is “reviewing market concerns about a record wave of businesses seeking higher mainland valuations with relistings there,” Bloomberg reported Sunday . Among companies with such plans, Momo ( MOMO ) stock was down 11% early Friday, while YY ( YY ) was down 9%.

Baidu Set To Report Q1 Amid ‘Low Expectations’ For Margin Growth

Baidu ( BIDU ) reports Q1 earnings after the close on Thursday, with analysts expecting China’s search leader to maintain its dominant position in mobile ads, retaining its share of ad budget allocations from large advertisers. “Regarding profitability, we see several potential upside catalysts that could positively impact Baidu’s shares in the near to medium term,” wrote ITG Research analyst Henry Guo in a research note Tuesday. Baidu stock was up a fraction in afternoon trading in the stock market today , near 188.50. Baidu stock has gained 88% since touching 100 last August, its lowest point since July 2013. But Baidu stock is down 11% in the past 12 months. Citing proprietary data, Guo said Baidu’s mobile ecosystem — its mobile search, mobile app marketplace, mobile video, and mobile browser — has stayed dominant, which Guo said “helps the company control several of the most-important mobile Internet user traffic gateways, boding well for future monetization.” Data from ITG Research indicates “that Baidu’s Mobile Search app dominates the mobile search market with more than 23% installation penetration among Chinese mobile users, well ahead of its key competitors Sogou Search (1.7%) and Qihoo 360 Technology ( QIHO ) Search (0.2%),” wrote Guo. Baidu’s rivals in mobile search include e-commerce giant Alibaba Group ( BABA ) and its No. 2 Shenma search unit. In overall search in China, Baidu vies with No. 2 Qihoo 360 Technology, which has struggled to shift to mobile. Sohu ( SOHU ) search engine Sogou is No. 3. Tencent Holdings ( TCEHY ), the third of the Baidu-Alibaba-Tencent (BAT) Chinese Internet giants, owns a big stake in Sohu’s Sogou. Baidu’s fast-growing video wing, Qiyi, surpassed Alibaba-owned Youku Tudou’s user base in early 2015, Guo said. In March 2016, Qiyi had about 20% penetration among Chinese mobile Internet users, compared to Youku Tudou’s 11.5% and Tencent Video’s 10.4%, said Guo. Baidu announced last month that the company has received a nonbinding proposal from two Baidu executives to acquire Qiyi for $2.8 billion. Already one of China’s largest online video streaming services, Qiyi is looking to become a bigger force in the country’s video-streaming and moviemaking fields, a nearly $6 billion market that also includes Baidu rivals Alibaba, Tencent and Sohu.com. Last year, Netflix ( NFLX ) said it wants to begin operating in China, but the streaming media company has given no timetable. Wall Street has “low expectations” for Baidu’s 2016 margin improvement, said Guo. Baidu’s profit margins will continue to face pressure from (1) higher traffic acquisition costs (TAC) due to increasing mobile search contribution, (2) iQiyi content cost, and (3) O2O (online-to-offline) investments, he said. TAC refers to what Baidu must pay to other sites to carry its ads. Analysts polled by Thomson Reuters expect Baidu to see Q1 revenue of RMB 15.83 billion ($2.4 billion), up 24% year over year. Analysts polled by Thomson Reuters are modeling EPS ex items to fall 11% year over year to 5.96 RMB (92 cents). FactSet is expecting revenue of $2.44 billion, up 24%. FactSet is expecting Baidu to report EPS ex items of 1.03, down 11.9%.

Baidu Reportedly Pulling A Google, Spinning Off Video Service

Baidu ( BIDU ) will reportedly spin off its professional Baidu Video service, as the China Internet search leader looks to pare is newer, money-losing businesses from its core search operation. Baidu Video would receive RMB 1 billion ($154.3 million) in new investment as it takes on two more partners, according to a report Thursday from Young’s China Business blog . Rumors about changes at Baidu Video come soon after reports  of a major corporate reorganization at Baidu that aims to separate its older, profitable search services from its newer businesses, many of which are losing money. This is similar to what Google did in creating Alphabet ( GOOGL ) as the parent company for all its operations. Like Alphabet, Baidu is investing to develop self-driving cars and other technology not related to its core search operations. In November, Baidu announced it had submitted an application for a direct-banking license in partnership with China’s Citic Bank and for an online insurance license in partnership with Allianz ( AZSEY ) and Hillhouse Capital. To continue its growth, Baidu should follow in Google’s footsteps “and split its non-core businesses from its core search and ads business. If they do this, Baidu stock would likely receive a big boost, leaving them with the cash to make a foray into the U.S. market,” Taiwan-based Sephi Shapira, CEO of mobile advertising platform MassiveImpact, told IBD via email in February. Baidu Could Be Eyeing Big Structural Changes Young’s China Business said the Baidu Video unit is separate from Baidu’s iQiyi.com, the online video service that is similar to Google’s YouTube. Baidu announced in February that it would sell money-losing iQiyi to an outside group led by Baidu CEO Robin Li. IQiyi is looking to become a bigger force in the country’s video-streaming and movie-making fields, a nearly $6 billion market that also includes Baidu rivals Alibaba Group ( BABA ), Sohu.com ( SOHU ) and Tencent Holdings ( TCEHY ). Last year, Netflix ( NFLX ) said it wants to begin operating in China, but the streaming media company has expressed uncertainty about its planned move into the country by 2016. Baidu plans several changes to its business structure, including establishment of a subsidiary that will house its online search services, said Marbridge Consulting, citing a release via Baidu’s official account on Tencent’s   WeChat mobile messaging platform. According to Marbridge , the spinoff will see New Culture Media Group and venture capital firm SAIF each invest about RMB 500 million ($77.1 million) in Baidu Video. Each of the new partners would receive about 20% of Baidu Video, Marbridge said. Baidu stock has nearly doubled since skidding to a three-year low of 100 in early February. Baidu stock broke out of a cup-with-handle base in late March, at a 189.90 buy point. Shares were flat in midday trading in the stock market today , near 194. Baidu will report Q1 earnings on April 28 and has given revenue guidance below analyst expectations, as the company invests heavily in its “O2O” (online-to-offline) strategy to draw Web shoppers to in-person services and physical stores. Baidu recently  said it is seeking  a $1 billion loan. A Baidu spokeswoman said the company aims to borrow the funds through a five-year syndicated facility for general corporate purposes, according to the Bloomberg report. Image provided by Shutterstock .