Analyst reaction: Morgan Stanley negative

This morning, Morgan Stanley’s Richard Ji noted that
China Central Television over the last two days called
China-based Internet search engine Baidu’s (BIDU) paid
listing practices “questionable,” in particular asserting that
“unauthorized and non-licensed medical web sites” had
captured the top listing positions ahead of legitimate web
sites, due to their willingness to pay higher prices for
popular keywords like “cancer” and “sexually transmitted
diseases.”

Ji notes that, according to the report, sites such
as tongnian.com, “a charity portal for youngsters,” are
“largely blocked from Baidu’s listings as they are unable to
afford keywords due to lack of financial resources.” Ji points
out that CCTV reports on several previous occasions have
meant big trouble for China-based public companies. In March,
he notes, Focus Media (FMCN) was the subject of a CCTV
program that singled out the company as a major source of
mobile phone spam; the company’s shares fell 35% within a
month. He also notes that Mengniu and Eli, two leader milk
producers in China, saw share prices drop 40%-60% after
CCTV reported their products were contaminated by melamine.

According to Ji, Baidu mixes its search results with sponsored
listings, “which may weaken search users’ experience.” He says
that, according to a survey by Sina.com, over 75% of a group of
5,900 users reported being confused by Baidu’s search results.
Ji notes that Baidu as of Friday was trading at a P/E in the
mid-30s based on 2008 forecasts, one of the highest multiples
among the China-based companies he follows.