Monday, October 20, 2008

Bullish call by JP Morgan

Expect good Q3 numbers: around top-end of its guidance
range. We believe Baidu executed well during 3Q08, despite
negative impacts from the Olympics and macro issues. We
expect Baidu to report numbers around top-end of its
guidance range (US$132M-US$136M) vs. consensus
forecast of US$133.6M.

Margins should be inline with historical range.
TAC (traffic acquisition cost) should be back to 13-14%
level in 3Q08, up from the surprising low 12.7% in 2Q08.
We maintain our diluted EPS forecast of US$1.25.

4Q08 outlook continues to be strong. We expect company
should be able to deliver ~15% sequential revenue growth
(or ~87% YoY) to ~US$155M in 4Q08, vs. consensus of
US$151.6M. We expect strong internet usage growth and
increasing ad budget allocation to online media should
benefit Baidu and other online ad companies.

To set a good opening for internet sector. Baidu is the
first Chinese Internet company to report 3Q08 results.
We believe the good results and guidance should set a
positive tone for other China internet companies.
Besides Baidu, we also like Sina and Sohu at this

Maintain Dec-08 PT of US$380, which implies
90.6x 2008E, 56.2x 2009E, and 36.9x 2010E
diluted GAAP P/E (or 83.5x 2008E, 53.6x 2009E,
and 35.8x 2010E diluted adjusted P/E). We
would advise investors to accumulate
the stock ahead of results.

Near-term share price drivers are: (1) potential upside
from conservative Q3 guidance, (2) margins improvements
in 2009 on better leverage from brand advertising, and
(3) earnings upside from new eCommerce business.

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