KeyBanc Upgrades Baidu, Lowers Alibaba Estimates In Chinese Internet Update

After a quarterly Chinese trip, KeyBanc Capital Markets came away with mixed views on internet and e-commerce companies based out of the world's second-largest economy.

The Analyst

Analyst Hans Chung upgraded shares of Baidu Inc (ADR) BIDU from Sector Weight to Overweight with a $305 price target.

Chung maintained Overweight ratings on Alibaba Group Holding Ltd BABA and JD.Com Inc(ADR) JD. The analyst maintained a $235 price target for Alibaba and has a $51 price target for JD.com.

Baidu's Improving Near-To-Midterm Prospects 

The prospects for Baidu's core business have changed in the near-to-mid-term, Chung said. (See his track record here.) 

The analyst said he observed a sustainable ramp in newsfeed revenues, with a daily run rate that's expected to double from 30 million yuan in the fourth quarter of 2017 by the end of fiscal 2018. 

Chung forecast for Baidu's optimization cost per click model to drive higher average revenue per user at advertisers. The new Phoenix Nest system, which has been upgraded with reinforcement learning technology, could drive "incremental monetization of search queries and improve conversion rates," he said. 

KeyBanc's $305 price target for Baidu is based on $226 per share for its search and feed business, $40 per share for iQIYI, Inc IQ and $11 per share for Ctrip.Com International Ltd (ADR) CTRP, based on market value, plus $28 net cash per share.

Lowering Alibaba Estimates 

Softer near-term customer management revenue and a larger loss of DME business due to acquisition of the exclusive World Cup license led KeyBanc to lower its estimates for Alibaba. 

Ad spending is forecast to take a hit after lower-than-expected results from the June promotion event, Chung said. Yet the analyst projects higher commission revenues due to fewer subsidies.

"Positively, we believe ongoing algo upgrade and ad load increase should help reaccelerate CM revenue growth in the second half," Chung said.

JD.com's Potential For Margin Expansion

KeyBanc forecast upside to Q2 and fiscal 2018 margins for JD.com due to less promotion coupons and subsidies at Tmall during the June sales event; positive return on investments for 3P merchants; and positive adoption trends for JD Logistics services.

The Price Action

At the time of publication:

Baidu shares were rallying 3.43 percent to $260.40. 

Alibaba was rising 0.14 percent to $192.50. 

JD.com stock was advancing 0.43 percent to $39.63. 

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