Baidu

The Most Undervalued Artificial Intelligence Stock in the World

Baidu (BIDU:US is the largest search engine in China with over 80% search revenue share. Although many argue that search engine is dead, especially in China, with other internet giants and mobile app unicorn blocking search engine crawlers from collecting mobile app metadata, it’s undoubtedly search engine is an invaluable asset that can never be replaced.

Same argument was being applied to Google GOOG:US (now Alphabet Inc) some years ago. Guess what. Alphabet Inc share price has been going up one straight line and it is worth US$794.6bn!!

Baidu, on the other hand, is only worth slightly under US$40bn. If you put Baidu and Alphabet in comparison, Baidu’s market capitalization is only a paltry 5% of Alphabet. If you compare the Real GDP of U.S. and China, China is only maybe 5-10% below U.S. But, China’s population is more than 4x of the U.S. In any case, why should Baidu market value be significantly lower than Alphabet Inc.? 

Let’s take a quick look at Baidu’s businesses

Various Investments

1. 58% in iQiyi – China largest online video streaming platform. 
   • Market cap – US$14.3bnValue of Baidu’s stake – US$8.3bn
2. 20% in Ctrip – China’s largest Online Travelling Agent (OTA) with 80% market share. 
   • Market cap – US$20.62bnValue of Baidu’s stake – US$4.0bn
3. Net Cash on balance sheet – over US$10bn and free cash flow is still growing at about US$3-4bn a year.
   • In 2-year times, Net cash on balance sheet will swell to at least US$15-16bn
4. Search Engine – The Abandoned, Unloved Child
   • Generating RMB 23bn Free Cash Flow in FY2018. 
   • 20x P/E on FY2018 FCF translates to RMB 460bn valuation; or roughly US$66.7bn (@USDCNY 6.90).

Sum-of-the-Parts Valuation

• iQiyi – US$8.3bn
• Ctrip – US$4.0bn
• Net Cash by FY2021 – US$15bn
• China Search Engine – US$66.7bn
• Monopoly in China Autonomous Driving (driverless car) – US$40bn.
  • Tesla’s market value is US$42bn and the company doesn’t have good safety track record. At best an ADAS level 3 technology which is far behind Waymo and Baidu. 
• Artificial Intelligence – US$??bn
  • No one knows what A.I. can do in the future, impossible to value Baidu’s leading A.I. technology in China. 
  • With trade war spat, Baidu’s A.I. will only be more valuable, regardless of the outcome. 

Baidu’s Intrinsic Value = 8.3 + 4.0 + 15 + 66.7
= US$94bn + A.I. Tech Free of Charge!!!

Significant Share Buyback Program

Since Oct-2015, Baidu has announced a series of share buy program with minimum amount of US$1bn. Based on the company latest announcement post-1Q19 earnings call, Baidu had already announced a total of US$5bn share buyback program in less than 4 years!!!

Despite Baidu management guided low double digits revenue growth for 2Q19, and most likely for the rest of 2019, investors continue to hate this stock and the share price has gone back to 2013 level. 

We believe that
(1) US$5bn share buyback program;
(2) old timer market darling to abandon child sounds a BIG BIG value alarm for value investor.

Yes, China economy may not do well this year due to trade dispute. However, it’s hard to imagine Baidu’s free cash flow to significantly decline from US$3.4bn in FY2018 to, let’s say US$2bn. Not to mention that Baidu had already spent RMB 56bn in R&D expenditures since its IPO back in 2005. 

Imagine Baidu will generate the same amount of FCF, US$3.4bn, the stock is trading at 11.7x forward Free Cash Flow!!! We have never seen such a cheap internet giant in our life!!! 

Just do a quick screening on HKEX and NASDAQ China internet industry. There are many companies are still burning through IPO investors’ capital while the stocks are trading at Price-to-Imagination; because there is no earnings or positive free cash flow to measure it!!!

SO, WHY NOT BUY BAIDU INSTEAD???

First Idea: Media Prima

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On 2nd July 2019, AURORA MULIA SDN BHD, acquired about 123m shares of Media Prima, Malaysia’s largest free-to-air television operator. That is about 11% stake in Media Prima (Bloomberg Ticker: MPR:MK). According to The Edge Malaysia, Aurora Mulia Sdn Bhd is an affiliated company of Tan Sri Syed Mokhtar. The Edge also reported rumor has it that Tan Sri Syed Mokhtar also owns another 13% stake in Media Prima through Mitsubishi Financial Group. This gives Tan Sri Syed Mokhtar a 24% stake in Media Prima.

According to The Edge Malaysia, which found the transaction price on Bloomberg, the deal was transacted at RM0.60 per share, which is roughly 23% premium over the recently traded price of RM0.485 per share. It’s interesting to see that Tan Sri Syed Mokhtar is so confident to buy distressed assets at 23% premium.

One of our contributing members dug deeper into Bursa Malaysia disclosures and found that Mitsubishi Financial Group has been buying up stake in Media Prima since 4th April 2017. Media Prima was trading at RM1.00 – 1.20 in the 1H17. The last purchase made by Mitsubishi Financial Group was disclosed to Bursa Malaysia on 12th April 2019. The closing price of Media Prima on 12th April 2019 was RM 0.48. According to the Bursa Malaysia disclosure, Mitsubishi Financial Group (the name of the register holder) owns 142.385m shares, or 12.837% stake in Media Prima.

Assuming Mitsubishi Financial Group acquired the 12.837% stake evenly between 4th April 2017 and 12th April 2019, at price range of RM 0.48 to RM 1.10, we estimate Mitsubishi Financial Group paid an average price of RM 0.79 (based on the simple arithmetic average of RM 0.48 + RM 1.10) for the 142.385m shares. If Tan Sri Syed Mokhtar really controls the 142.385m shares of Media Prima through Mitsubishi Financial Group, Tan Sri Syed Mokhtar paid an average RM 0.70 per share for a total 265.39m shares in Media Prima. That is 44.3% premium over Media Prima’s today closing price of RM 0.485. Total capital invested in Media Prima is roughly about RM186m!!!

Based on our experience, we believe this is a very strong indicator that Media Prima business is deeply undervalued, at least in the eye of Tan Sri Syed Mokhtar. The Edge Malaysia also pointed out Tan Sri’s track record in growing his business empire since the 1990’s and 2000’s. Go get a copy of The Edge Malaysia to take a quick look at Tan Sri Syed Mokhtar’s track record in building DRB-Hicom and MMC Holdings.

Many may ask why we should buy a distressed company with so many threats from online video streaming platforms from Netflix, iFlix and Astro. Our media industry expert expresses his view that Media Prima is not just a free-to-air (FTA) television station. It is one of the largest professional video content producers in Malaysia, probably just behind Astro Malaysia due to financial constraints. Netflix does not disclose its user penetration in Malaysia. Looking at Malaysia demographic distribution and internet penetration, common sense would tell you that a good majority of the population in Malaysia still love to watch their news, dramas, and variety shows in their mother tongues.

Go do a quick Google Search, Malay/Chinese/Indians each account for roughly 65%/25%/7% respectively. There is no way Netflix will become the mainstream video platform, be it FTA or through online platform. Not to mention that Malaysia’s poor internet connectivity and speed hinders the growth of online video streaming platform. For the same reason, Astro Malaysia is still dominating the country paid TV market with an almost monopolistic market share with weak contenders struggling to gain viewership and TV advertising dollars.