LeEco – Le Crunch.

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Crunch time appears to be fast approaching.

  • The LeEco proposition seems to be quickly unraveling as a flurry of bad news reinforces my view that this company only really has a chance if it dumps automotive.
  • New blows upon the already bruised company include:
    • Vizio: LeEco and Vizio have called off the $2bn acquisition by LeEco stating that regulatory hurdles got in the way.
    • Vizio was supposed to give LeEco a US brand with which to get a toehold in the US market while the Chinese market would become more open to Vizio.
    • I suspect that LeEco was having difficulty getting the money it raised from Sunac (see here) out of China giving it a good reason to back out of an acquisition that now makes less sense given LeEco’s current predicament.
    • 2016 revenues: LeEco appears to have massively missed its 2016 US revenue target but given that it launched in October this is hardly a surprise.
    • It looks like 2016 revenues were just $15m compared to a target of $100m but given the late launch, this target looks to have been way too ambitious.
    • Consequently, I don’t think that this reflects as badly as it would seem on the management of the US operation.
    • Job cuts: LeEco also appears to weighing up more job cuts with 175 of the 475 US workforce expected to be cut.
    • This does not come as a big surprise given the cash crunch that the company admitted to at the end of 2016 and the problems the company is having in getting money out of China.
    • However, growth companies tend not to need job cuts raising questions about the products being offered and the services that come with them.
  • This news comes on the back of abandoning its ambitious plan to build a US HQ with 12,000 employees (see here) and severe pressure being placed upon its automotive strategy.
  • Giving up the acquisition will massively increase cash for investment in the ecosystem but if it remains unable to get money out of China, not much development is likely to happen.
  • I find this situation strange as its competitors, Xiaomi, Baidu, Alibaba and so on all have substantial overseas operations which are most likely to be financed from China.
  • In my view, the biggest issue remains automotive as it has very little to do with the development of an ecosystem and is hugely capital intensive.
  • Apple and even Tesla have found that building cars is a difficult business that requires a lot of time and very deep pockets.
  • Faraday Future clearly needs hundreds of millions of dollars of new investment which LeEco simply cannot afford if it is to have any chance at delivering on its ecosystem ambitions.
  • Hence, I think that LeEco’s best interests will be served by not having this millstone hanging around its neck.
  • I continue to believe that for LeEco to have the best chance of succeeding, it needs to extract itself from Faraday Future and forget about self-driving cars.
  • Building a thriving ecosystem is difficult enough and throwing in cash constraints and management distractions can only make it next to impossible.

Xiaomi – No favours

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Xiaomi’s ecosystem remains its biggest weakness.

  • Comparing itself to Costco helps Xiaomi’s valuation somewhat but does no favours when it comes to its business model.
  • In a recent interview, Xiaomi founder said that he sees his company more like Costco than Apple which does make some sense.
  • Xiaomi has pursued a typical Internet economy model which is to gather users as quickly as it can and then monetise when their numbers hit critical mass.
  • It has done this by selling nice looking devices at very low margins and then hoping to monetise users through its ecosystem of services.
  • What Costco does is similar in that it sells groceries at wafer thin margins and makes good margins on the subscription that it charges for membership.
  • However, where Costco and Xiaomi differ is that Costco has a service that users are clearly willing to pay for but I am not convinced that Xiaomi does.
  • Around 15% of all Chinese users have a Xiaomi phone but RFM research indicates that it is the ecosystems of the BATmen (see here) that Xiaomi’s users predominantly use.
  • This strongly implies that users are buying Xiaomi phones due to attractive prices and form factor but do not care about the ecosystem that Xiaomi offers.
  • Overseas the situation is even worse because outside of China, Xiaomi sells its devices with the Google ecosystem installed because its own ecosystem is irrelevant.
  • This is the critical difference between Xiaomi and Costco.
  • I have previously estimated that Xiaomi does make some money from selling content and games ($100m in 2016 (see here)) but this is very far from Xiaomi successfully monetising its ecosystem in China.
  • To try and restore growth, Xiaomi is going into retail and plans to open 1,000 stores in China as well as a good number in India with revenues of $10bn targeted within the next three years.
  • This is the right strategy to break out of the limitations of Internet-only sales, but will have the impact of increasing costs.
  • Consequently, I am comfortable that Xiaomi could hit its RMB100bn ($14.4bn) sales target for 2017, but I am certain that margins will not be going up.
  • If I take this outlook and compare it to Costco rather than Apple, I do get a slightly better valuation but not one that would make Xiaomi’s current shareholders very happy.
  • Using Costco’s 2017 EV/Sales and EV/EBIT multiples and applying them to my estimates for 2017 Xiaomi (see here), I end up with valuations of $8.6bn / $8.3bn respectively.
  • However, in using this methodology, the question needs to be asked should Xiaomi trade at a discount because Costco has already established the service it sells whereas Xiaomi has not?
  • This is somewhat higher than my current $5bn valuation using Apple, but still way below the last raise at $45bn and the $20bn or so where I understand that the shares are changing hands.
  • I do not see any threats to Xiaomi’s viability as a company but I still think it would make a good acquisition for one of the BATmen that I think will need to become more vertically integrated to continue growing in the home market.

Didi – Nasty economics

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Didi encounters a real growth problem.

  • Didi is now the only credible ride hailing platform left in the Chinese market, but its problems are far from over because local Chinese governments are finally enforcing regulations designed to protect the taxi industry.
  • In December 2016, the governments of Shanghai and Beijing approved a policy called local cars, local drivers.
  • This meant that ride hailing companies could only use drivers who had locally registered vehicles and could prove residence in the city.
  • This may not sound like a big deal until one looks at the demographics of the urbanised workforce in China.
  • Around 40% of the workforce of both of these cities reside outside of the city and in the younger, paid part of the workforce, that number is much higher.
  • For example, prior to the enactment of this regulation, less than 3% of Didi’s Shanghai drivers had the necessary residential registration to qualify as drivers.
  • I suspect that that Didi’s Beijing drivers show similar characteristics and that other major Chinese cities also have a large migrant workforce.
  • This has not become a problem until very recently because although the policy has been approved, it has not been enforced until very recently.
  • The result has been that Didi has now been forced to substantially reduce the number of drivers in Shanghai and as of April 1st, is only allowing cars with a Beijing licence plate to operate in Beijing.
  • The net result is that supply of rides has been drastically reduced meaning that the price of those rides will inevitably increase.
  • Furthermore, on top of the service becoming more expensive, the quality of the service is also likely to meaningfully decline.
  • With less cars available, wait times will certainly rise and the chance of successfully hailing a ride will decrease.
  • Rising prices and lower reliability is likely to drive many users back into the arms of the taxi industry thereby achieving exactly the result for which the rules were created.
  • Beijing and Shanghai are the two cities which have the largest non-resident workforce but I suspect that this sort of legislation could easily be used in many of the other large Chinese cities.
  • This creates a very serious problem for Didi as, with its supply of drivers substantially limited in the areas where it has the highest demand, there will be a real crimp on its ability to grow.
  • Furthermore, there remains the very real risk that other major cities in China follow Beijing and Shanghai’s lead causing Didi further agony.
  • If this spreads, it is not inconceivable that Didi’s revenues start going backwards.
  • Didi was originally created as a taxi booking service and one possibility is for Didi to return to its roots.
  • The other is for Didi to move into the high end (where Uber started) and develop a black car offering but I think that demand for this will be quite limited.
  • This leaves Didi’s outlook at the mercy of regulation, which is not what one wants to hear when one has put money into the company at a valuation of $34bn.
  • DJI or Ant Financial are the only two private Chinese unicorns that I would be willing to consider.
  • In the listed sphere I still prefer Baidu and Tencent.

Huawei – Rivers of blood pt. IV

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I am pretty sure Huawei lost money in handsets last year.

  • Huawei reported strong growth in revenues in 2016 but that growth cost it dearly as I think that the handset business lost money as it slashed prices and ramped up spending to gain market share.
  • FY 2016 revenues grew 32% to RMB523bn ($75.1bn) but gross margin fell 114bp to 40.3% and operating margin fell by 205bp to 9.1%.
  • Huawei entered 2016 in a buoyant mood confidently stating that it would become the Number 1 seller of smartphones within 5 years.
  • In line with that goal it massively ramped up spending and cut the prices of its devices in order to close the gap to the global No. 1 smartphone maker: Samsung.
  • Unfortunately, while it was focused on Samsung, Oppo and Vivo really turned on the juice at home, costing Huawei 190bp of local market share in H2 2016.
  • The net result was lower than expected global market share gains for the full year.
  • This was a problem, because Huawei had planned for higher volumes in 2016, meaning that its OPEX budget for the year was too high.
  • Consequently, I am pretty sure that the consumer business entered negative territory which has resulted in a much more measured approach to 2017.
  • RFM research indicates that the focus of 2017 is the generation of profit, which given that Samsung still meaningfully outsells Huawei in terms of volume will require much greater austerity when it comes to OPEX.
  • Huawei is now a comfortable No. 2 in Android but because Android devices are commoditised, that means that I still see it making margins of just 2-4% in the best instance.
  • In order to earn better margin, it must become the No. 1 in terms of volume and outsell its closest rival by a factor of more than 2 to 1.
  • It is this volume advantage that allows Samsung to earn 10-12% margins on Android devices which I think is sustainable for as long as it can maintain that volume advantage.
  • This advantage closed somewhat in Q4 16A but I suspect it will widen once again in Q1 17 as Samsung recovers from the Note 7 disaster.
  • Because of these economics, Huawei has got to do far more than just catch Samsung; it must outsell it by more than 2 to 1.
  • This will be very difficult to achieve which is why I think that Huawei is also working on differentiating its products through software and services.
  • If it can create a good user experience and services that users are prepared to pay something to have access to, then it should be able to make better than commodity margins.
  • However, this is easier said than done and I think that Huawei has a lot of work to do before it will be in this position.
  • This is why, I continue to believe that its best chance of success remains in China where a tie up with Baidu or Tencent could help it plug the service gap it currently has.
  • However, this won’t help in developed markets and here Huawei must do everything that it can to develop the appeal and attractiveness of its Honor brand.
  • This will be difficult given the dominance of the Google ecosystem in these markets but there are cracks in Google’s position that might just give Huawei a chance.
  • In the meantime, I remain unconvinced that Huawei does not have the stomach or the resources to wade through the rivers of red ink that it will take to knock Samsung off its perch.
  • Consequently, I see 2017 as a consolidation year for Huawei, holding share steady and focusing on a return to profit before it considers its next move.
  • I would continue to be wary of any of the Android handset makers whose outlook is increasingly difficult as the market for devices continues to slow.
  • Apple is the only handset maker I would touch at the moment.

Tencent – Home circuit.

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I think investing in Tesla is about China, not overseas.

  • Tesla has announced that Tencent is investing $1.8bn in a 5% stake in the company that should bring in both badly needed capital as well as serving as a way to open doors in China.
  • Some commentators are of the opinion that this investment is part of Tencent’s plan to expand overseas, but I see this as a move to catch up with what is going on at home.
  • This fits nicely with Tesla’s ambitions in China which has had a pretty torrid time there since it launched in 2014.
  • RFM research clearly shows (see here) that Tencent is the dominant ecosystem in China with over 850m MaU and 77% coverage of the Digital Life Pie.
  • However, when it comes to automotive, I see it as being behind both of its major domestic rivals, Alibaba and Baidu.
  • Baidu has leadership in maps, leadership in autonomous driving and is already putting its services into cars with Baidu CarLife in conjunction with Harman.
  • Alibaba is also actively pursuing Chinese car makers to use its Yun OS software in their cars and already has a deal with SAIC.
  • On the other hand, Tencent has very little other than a small stake in Didi which is unlikely to help it much as both of the other BATmen are also shareholders.
  • This is why doing a deal with Tesla makes some strategic sense on both sides of the table.
  • Tesla gets a strong partner to help it fix the problems that it has had in terms of penetrating the Chinese market, while Tencent gets a potential route into both the automobile and autonomous driving with a major global player.
  • I view the automobile as another device alongside the smartphone, tablet, console, TV and so on for delivering Digital Life services to users.
  • Chinese cities have some of the longest commuting distances in the world (see here) meaning that the automobile is a place where those that drive spend a meaningful proportion of their day.
  • Much of the commuting is done on public transport which Tencent already has covered with its very strong presence on the smartphone.
  • Tencent will be a little more than a passive investor, being referred to as an advisor, which I take to mean helping out in China.
  • This is the latest of a series of moves that has seen Tencent address some of its weaknesses (see here and here and here) but the biggest one still remains.
  • I have long believed that integration is key to monetisation and see substantial upside in Tencent’s financials if it really embraces this notion.
  • However, I still see no evidence that Tencent is making any moves to integrate its Digital Life services into a single system where it can really understand the profiles of its users across all of its services.
  • As a result, its growth is likely to continue to come from selling games and media rather than from its ecosystem which I think limits its real long term upside.
  • Fortunately, the short-term picture remains pretty healthy and so there is still upside to be had without Tencent really developing its ecosystem, but the time is fast approaching when it will need to make that move.

Tencent – Brute force.

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Tencent has time as most gaming AIs are relatively simple.

  • Tencent is finally jumping into artificial intelligence (AI) and I think that it is fortunate in that it is not very difficult to create good algorithms for the vast majority of the games that Tencent offers.
  • Tencent has created AI Lab which now has more than 250 employees whose task it is be to create algorithms that create more sophisticated game opponents as well as chat bots for companies that use WeChat and QQ to talk to their customers.
  • The general impression of AI seems to be that as soon as one has created an AI group, superb, hyper-intelligent algorithms will come rolling out of the door but in reality, this is very far from the truth.
  • RFM research has found (see here) that single biggest determinate of AI excellence to date is time and those that have been doing it the longest tend to have the best AI.
  • This is why RFM has found that it is the search engines thatare the most advanced even though some of the biggest brains in the field are employed elsewhere.
  • With Tencent just getting into this field, I think it will be a very long time before it will be in a position to roll out algorithms that are capable of making its services meaningfully more intelligent.
  • In the long run this will be crucial to maintaining its dominance in the Digital Life segments where it is present as I think competition will become much tougher as the market matures.
  • The good news is that it is unlikely to prove very difficult to create algorithms that are more than good enough to play the games that it offers to a very high standard.
  • This is because most games are either based on hand eye co-ordination or can be solved by an algorithm using a brute-force approach.
  • Brute force involves evaluating every possible outcome from a given position and choosing the best one.
  • With today’s improvements in memory and processing power, this is not very difficult to achieve.
  • The highest profile exception is Go which has so many possible combinations that brute force becomes impossible.
  • This is why DeepMind’s AlphaGo was such a breakthrough, as it uses AI to work out which options should be searched much like a human would.
  • Tencent has produced an AI Go player called Jueyi which has been able to play to a very high standard but I think that the design has been copied from AlphaGo.
  • AI is a co-operative field and DeepMind has published most of its methodology and results for the creation of AlphaGo in the scientific magazine Nature.
  • Consequently, I do not view this as a good example of Tencent coming up with an innovation of its own and I think we will not be seeing hyper-intelligent AIs appearing in Tencent’s services anytime soon.
  • However, I think that Tencent has time as its core markets are still seeing steady growth and it should be reasonably easy to improve the AI opponents in its core segment: gaming.
  • I still like Tencent as there remains substantial upside should it really begin to monetise the ecosystem that it has created but it has a very long way to go before it can be considered a force in AI.

LeEco – Electric millstone.

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I think, LeEco must exit automotive to survive.

  • It looks very much like LeEco is giving up its grand plans for a 12,000 employee eco-headquarters in return for hard cash in order to give the ecosystem strategy time to succeed.
  • Despite these radical actions, I still think that LeEco’s only chance is to give up its automotive ambitions and focus on its core business: the ecosystem.
  • LeEco has recently raised $2.2bn (see here) which I calculated would leave $622m free to support the fledgling ecosystem of products and services.
  • However, the sale of the 48 acres it purchased from Yahoo to Genzon Group, the Chinese real estate developer this increases my estimate of free cash for investment to $1.132bn.
  • This is because to reach the $622, I took off $250 for purchasing the land but this outflow is now an inflow of $260m, improving cash flow by $510m.
  • This will give the company time to develop its offering but I remain concerned that its automotive ambitions remain a major problem.
  • LeEco’s automotive strategy is centred on an electric vehicle start-up called Faraday Future in which its founder is the major backer.
  • It broke ground on a huge 3m square-foot factory in Nevada in April 2016 but because contractors have not been paid, work has since ground to a halt.
  • Furthermore, Faraday Future has now reduced the size of the planned factory by 80% to 600,000 square-feet, cut the number of models from seven to two and delayed the factory opening by at least 1 year.
  • Faraday Future’s problems do not end there as senior management turnover has been high in the last 9 months and there could be as much as $300m in unpaid bills.
  • As Apple (see here) and even Tesla have found, building cars is a difficult business that requires a lot of time and very deep pockets.
  • I am pretty certain that Faraday Future has none of these things making its chances of long-term solvency very slim.
  • This is why I think that LeEco’s best interests will be served by not having this millstone hanging around its neck.
  • Faraday Future clearly needs hundreds of millions of dollars of new investment which LeEco simply cannot afford if it is to have any chance at delivering on its ecosystem ambitions.
  • These ambitions begin with a media consumption strategy that needs both heavy investment in terms of content and attention to detail when it comes to software and the user experience.
  • Furthermore, management needs to be focused on delivering on these ambitions rather than being distracted by building self-driving cars.
  • RFM research has found that currently, the user experience in the automobile has no effect on the user’s decision on where to live his Digital Life and therefore building a car to deliver one’s ecosystem makes no sense at all.
  • This combined with the difficulties, cost and poor profitability of automobiles, is why I think that Apple backed off (see here).
  • Hence, I think that for LeEco to have the best chance of succeeding, it needs to extract itself from Faraday Future and forget about self-driving cars.
  • Building a thriving ecosystem is difficult enough and throwing in cash constraints and management distractions can only make it next to impossible.

 

Alibaba – Five guns east

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Alibaba is going guns blazing for offline. 

  • Alibaba appears to be moving into offline retail much more quickly than I had anticipated as it is complimenting its $2.6bn bid for Intime Retail Group with a partnership with Shanghai Bailian Group which owns 4,700 stores in 200 cities in China.
  • This is a huge step forward from its bid to acquire Intime retail group which operates 29 department stores and 17 malls predominantly in the eastern province of Zhejiang where Alibaba’s home town of Hangzhou is to be found.
  • The idea of this partnership is to bring Alibaba much further into the physical world where $4.5tn of sales are still transacted every year as well as improve the offline experience that users have in Bailian stores.
  • Chinese retail is a fragmented and frustrating experience where decent service and information with regards to inventory, product lines and so on is routinely not available.
  • Consequently, when an online offering appears where this information is clear and one is able to easily purchase goods and know when they will be delivered, shoppers quickly adapt.
  • It is the terrible offline experience with regards to almost everything that has allowed so many other goods, services and activities in China to rapidly migrate from offline to mobile.
  • It these problems that Bailian hopes to fix via its partnership with Alibaba which will provide its technology, its understanding of logistics and its processing systems to modernise Bailian.
  • In return Alibaba will get a large physical presence, access to shopper data and the first big launch for Alipay into the physical world.
  • There are two large mobile payment systems in China.
  • One is Alipay which utterly dominates B2C e-commerce and the other is WeChat Pay which dominates peer to peer as well as payments to shops, restaurants and service providers.
  • This move will bring Alipay into direct competition with WeChat Pay for the first time.
  • I think this partnership will be similar to the potential deal with Intime but on a much larger scale.
  • I have previously viewed (see here) the potential deal with Intime as an experiment in retail which would then be rolled out more widely once it had been proven to work but it looks like Alibaba is going national regardless.
  • Fortunately, as this is a partnership, there will not be much downside risk if it goes wrong which leads me to believe that for Alibaba, this is really about data and pushing Alipay into a new domain.
  • If Alibaba can have a deeper understanding of, and relationship with Chinese shoppers then it will be able to more accurately predict their shopping patterns resulting in better purchasing rates and the ability to charge a higher percentage of GMV to its merchants.
  • This will translate into better revenue and profit growth as was the case in 2016 where increasing monetisation underpinned a large part of the company’s outperformance.
  • I think this expansion will be much slower in 2017, and so I remain cautious on Alibaba preferring Tencent or Baidu in China.

Huawei & Baidu – Bodies and time.

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I think Huawei would be better off doing a deal with Baidu.  

  • It looks like Huawei has decided to build its own Chinese language digital assistant to cement its recent gains at home but no matter how many bodies it throws at this task, its lack of the core raw materials (data and history) is going to cause problems.
  • The digital assistant is the first real Digital Life service that is entirely dependent on artificial intelligence for its functionality which creates a huge challenge.
  • Furthermore, in order to evolve, all digital assistants need to generate usage data which can then be used to improve the algorithms that power the user experience.
  • Even the best assistants out there today are hugely limited in terms of what they can understand and what they can achieve.
  • For example, to accurately answer questions around exchange rates, the assistant has to be taught what these are, how they work and in what form the questions are likely to be asked.
  • For example, asking Amazon Alexa how many US Dollars there are to the GB Pound provides the correct answer but ask for UAE Dirhams to the Pound or Dollar and Alexa falls silent.
  • Only Google Assistant was able to provide the right answer due to the combination of the best search system and the best AI available.
  • In effect RFM research has found that Alexa, Cortana and Siri have been programmed with a fairly narrow set of capabilities and the AI and data set is simply not there to support the service when something unexpected is requested.
  • Fortunately for Huawei, Google is not present in China but at home it will be facing an opponent that is almost as good: Baidu.
  • Baidu dominates the search market in China and has been working on its AI algorithms for nearly 20 years.
  • Furthermore, Baidu has already launched its own digital assistant called Duer which I suspect will be significantly better than anything that Huawei is likely to produce in the medium term.
  • However in China, none of the ecosystems are preinstalled devices meaning that Baidu will be unable to install Duer on the device and set it as default.
  • RFM research (see here) has found that this could confer a substantial advantage to any ecosystem as strategy is virtually absent in the Chinese market outside of the app stores.
  • Huawei as a handset maker will have this advantage and so I can see a scenario where users try its digital assistant but unless it is superb they will quickly switch to Duer.
  • This is where I think Huawei will have difficulties as even though it has 100 engineers working on this product, it is starting from scratch and building decent AI takes years and requires vast quantities of data.
  • Hence, I think it unlikely that Huawei will ever come up with a product as good as Baidu’s.
  • This is where I think Huawei and Baidu could help each other as Baidu has the product and Huawei a mechanism for distributing it.
  • A deal where Huawei installs Duer at the factory and sets it by default in return for being paid TAC (traffic acquisition cost) makes more sense to me than paying 100 engineers to come up with an inferior product.
  • This will not help Huawei’s ambitions to develop an ecosystem and generate better profitability, but TAC revenue from Baidu would certainly help improve margins.
  • Given its recent market share gains at home, the time to negotiate this deal is now rather than when its own assistant has tried and failed.
  • Although Baidu looks like it may be backing out of its ecosystem, the short-term improvement in its financials that cost cuts could generate could give the shares a lift (see here).
  • This is why it is still on my preferred list along with Tencent and Microsoft.

Baidu – One trick pony?

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Baidu may be giving up on its ecosystem.

  • There is little doubt that Baidu’s investments outside of its core search offering have proven expensive, but it appears that Baidu may be losing the stomach to endure the heavy losses required to build an ecosystem.
  • The three assets in particular are Nuomi, its e-commerce offering, iQiyi, its video streaming service and its on-demand food delivery service.
  • Nuomi and iQiyi have been the real areas of investment and in recent quarters have between them consumed over 50% of the operating profit generated by the core businesses.
  • This combined with its problems with low quality advertising and its higher tax rate, have put it under much greater pressure to deliver better profitability.
  • This has been further exacerbated by the fact that of the three BATmen, Baidu is by far the weakest both in terms of cash flow generated each quarter and cash reserves on the balance sheet.
  • This is why I suspect that Baidu has been forced to look at these investments to find ways of reducing their drain on the financial performance of the Baidu Group.
  • I understand that outside investment as well as trade sales have been considered but it looks like the most likely outcome will be heavy cost cuts.
  • This will limit both Nuomi and iQiyi’s ability to compete against Alibaba’s T-Mall, JD.com and Alibaba’s Youku Tudou leaving them as niche services rather than national leaders.
  • On the Chinese Digital Life pie (see here) Media Consumption and Shopping make up 29% of the total meaning that if Baidu was to abandon or sell these activities its coverage would drop to 24% (Search, Browsing and Mapping).
  • Consequently, I think that it would spell the end of Baidu’s ambitions to become a leading ecosystem in the Chinese market leaving it as a dominant player in just a few segments.
  • Search, Mapping and Artificial Intelligence are extremely important segments and I think that Baidu will be able to make a good living from them, but its real long-term upside will have been curtailed by this retrenchment.
  • The net result in the short-term will be a substantial improvement in its financials making the current valuation look cheap and so I suspect that news of this move will have a quite positive, but short-term, impact on the shares.
  • This is why I am happy to keep Baidu on my preferred list along with Tencent and Microsoft despite the possibility that its long-term upside may now evaporate.