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Dhinesh Ganapathiappan , Fund Manager Mike Kaufman , Senior Analyst Greg Freehling , Analyst

RESEARCH. Company : Baidu , Inc. Industry : Internet Services Recommendation : Strong Buy One Year Target Price : $340 (+43%) Date Prepared : May 16, 2009. Dhinesh Ganapathiappan , Fund Manager Mike Kaufman , Senior Analyst Greg Freehling , Analyst Jenny Heng , Analyst

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Dhinesh Ganapathiappan , Fund Manager Mike Kaufman , Senior Analyst Greg Freehling , Analyst

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  1. RESEARCH Company: Baidu, Inc. Industry: Internet Services Recommendation: Strong Buy One Year Target Price: $340 (+43%) Date Prepared: May 16, 2009 Dhinesh Ganapathiappan, Fund Manager Mike Kaufman, Senior Analyst Greg Freehling, Analyst Jenny Heng, Analyst Suzanne Tran, Analyst

  2. Company Profile • Founded in 2000 in Beijing, China • Leading search engine in China with 48% market share • Often known as the “Google of China” • Offers search for websites (740 million), audio files (10 million), images (80 million), downloaded applications, and online games • Makes it’s profit from ads alongside its search results • Also offers Baidu Post Bar (blog community), and Baidu Knows (similar to Wikipedia) • Went public in 2005 IPO at $27, opened trading at $66, and ended first trading day at $122 per share (354% gain) • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation

  3. Recent Developments • Hundreds of it’s 6,400 employee work force are on strike since early May over salary cuts and new sales commission policies • Some sales agents saw 30% cuts to base pay • Beat first quarter profit estimates in late April, but admitted slowing advertising sales and announced it will stop listing ads for unlicensed medical companies • Raised revenue guidance for current quarter to between $157-161 M versus a Wall Street forecast of $146 M • Upgraded from “Underperform” to “Hold” by Needham on April 28 following earnings release • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation

  4. Industry Analysis • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation Internet Services

  5. Industry Analysis • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation

  6. Industry Analysis • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation

  7. Key Statistics • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation

  8. Income Statement • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation

  9. Common Size Inc. Statement • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation

  10. Technical Analysis • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation

  11. Technical Analysis • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation

  12. SWOT Analysis • Strengths • Largest internet services company in China by revenue and market share • Well recognized name • China supports Baidu in competition against Google • Strong understanding of Chinese language and culture • Weaknesses • Stock richly valued • Avg Analyst price target is $240, same as current level • Almost all revenue derived from advertising • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation

  13. SWOT Analysis • Opportunities • Growing Chinese economy and Chinese internet usage penetration rate • Expansion into new geographic markets (ex: Japan) • Chinese stimulus plans boosting web infrastructure • Threats • Emergence of innovative startups • Chinese Government regulation on internet content • Prolonged economic slowdown causing deeper cutbacks in advertising spending • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation

  14. Valuation • Baidu should trade at a premium to it’s peers in China and has greater growth potential than the saturated Google • Analysts expect EPS growth of 35% a yr for the next 5 years, including 28% in 2009 and 40% in 2010 • We anticipate Baidu will continue to beat earnings estimates, with ~ $8.50/share in 2010 vs. $7.88 consensus • Given Baidu’s growth and low market cap ($8 B vs. $125 B for GOOG), it should trade at 30 to 50 times forward earnings • 30 x $8.50 = $255 (Bear case: Acceleration of slowdown) • 40 x $8.50 = $340 (Base: Sluggish economy through 2010) • 50 x $8.50 = $425 (Bull: Sharp economic recovery by yr-end) • Baidu is still trading below our Bear case (30x) even after doubling in 3 months, and we foresee continued upside as it expands its foothold in China & investor sentiment improves • Company Profile • Industry Analysis • Key Statistics • Technical Analysis • SWOT Analysis • Recommendation

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