Pali reiterated sell

on Jan 7th.

Pali Research is out with a research note this morning
reiterating its Sell rating and $90 price target on Baidu.
The firm cites efforts by the Chinese government to
better regulate the Internet which have intensified
significantly beginning in 2009. Specifically, Pali notes
news on January 5th that 7 "government agencies issued
a unified effort against unhealthy Internet content." These
agencies have said they are focused on reducing
"pornographic and vulgar contents that are considered
unhealthy to society and youths."

While the firm believes the Chinese internet and search
markets could continue to see healthy growth over the
next few years, Pali said its "short-to-mid term outlook
for Baidu is not bullish." Even though Baidu is currently
trading at its lowest P/E since going public, the firm feels
that "the mass media and regulatory risks are too real to
ignore."

Pali has a simple, yet effective, analysis as evidence to its
thesis; assuming no negative catalysts emerge at Baidu
over the next 12 months, and applying the low P/E of
19x the firm's FY09 EPS estimate of $6.09, Pali comes
to a stock price of $116. On the other hand, assuming that
the Chinese "government puts in place new laws that force
Baidu to change its current business model...", Pali sees
sales possibly falling by 30% "easily". Using the same
multiple to this new level of earnings, Pali arrives at a
price target of $81. Finally, in the last step of the analysis,
Pali applies a 25% probability to the first scenario, a
75% chance to the latter scenario, and arrives at a
weighted-average price target of $90.