New search system dogs Baidu

SHANGHAI, CHINA: Teething problems with its new advertising system will dog Baidu Inc when it reports its quarterly results and guidance for early 2010, but China's top search engine could gain in the longer term if Google follows through on its high-profile threat to quit China.

Long an investor darling of the China Internet world, Baidu, which will report fourth-quarter results on Feb. 9, shocked the Street in its last quarterly report by disclosing it was transiting faster-than-expected to a new advertising system.

Analysts expect the company to report a fourth-quarter profit of 37 per cent to $1.67 per American depositary share, a slowdown from headier rates of earlier periods, according to Thomson Reuters I/B/E/S. But that growth rate should pick up to a brisker 84 per cent in the first quarter as kinks get worked out, analysts estimated.

"For the near term, their revenue growth will be slower than usual, but in the long term it will be a positive catalyst for the company," said CLSA analyst Elinor Leung.

Analysts have also said Baidu could pick up a large chunk of Google's market share if the U.S. Web giant leaves China. Google said in mid January it may pull out of China because of hacking and censorship concerns.

Positive sentiment after Google's announcement helped lift Baidu shares to an all-time high earlier this month, regaining lost ground from a sharp sell-off after it first disclosed the issues with its transition to the new advertising word search system.

Rebounding ad market

Elsewhere in China's vibrant Internet space, portals like Sohu and Sina Corp, should see their prospects improve in the first half of 2010 as China's online advertising market picks up, analysts said. Sohu will lead the China Internet pack in discussing its outlook when it reports next Monday.

Analysts expected Sohu to report a 37 per cent decline in fourth-quarter profit to 91 cents per share on weakness in China's advertising market.

But that profit was still Sohu's best in three quarters, as China's advertising market shows signs of recovery. That market, including search and portal advertising, is set to grow 50 per cent in 2010 after a weak 2009, said Pacific Crest Securities analyst Steve Weinstein in a note.

Online game plays such as Tencent Holdings and Shanda Games could find the going rougher in their latest results and next few quarters because of a clampdown on games that regulators consider too violent or explicit.

"The regulatory overhang issue will continue at least for the next few months," said Citigroup analyst Alicia Yap. "We will continue to hear more stuff, like the cleaning up of content, so that will create some uncertainty."

China is home to the world's largest Internet market by users with over 380 million netizens.