Qihoo Outapcing Baidu in China Internet Race

originally appeared in Bloomberg News:

Qihoo 360 Technology Co. (QIHU), the Chinese Internet company that started offering a search engine in August, is overtaking rival Baidu Inc. (BIDU) in the stock market on prospects the newcomer will boost its share in the industry.

American depositary receipts of Qihoo jumped 5.9 percent last week to trade at 35 times estimated earnings, double the valuation of Baidu, and reversing a discount of as much as 50 percent in January. Baidu, owner of China’s most-used search engine, rose 1.3 percent last week in New York, sending valuations to 17 times profits. Qihoo’s gain helped the Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese shares in New York rise for a third week.

Qihoo’s site -- so.com, which means search in Chinese --has cornered more than 9 percent of the search market since its Aug. 16 debut, compared with Baidu’s stake of about 60 percent, according to October data from New York-based Internet-tracking firm Experian Hitwise. Qihoo will extend its rally on expectations the Beijing-based company will post faster sales growth than Baidu this year as well as in 2013, Oberweis Asset Management Inc. said.

If a small upstart takes a little bit of market share from the industry leader, it may not be a big deal for Baidu but it’s material for Qihoo, according to a fund manager who oversees $700 million, including shares of Qihoo and Baidu, at Oberweis said by phone from Lisle, Illinois, on Dec. 20. Qihoo probably has the more aggressive opportunity to hit much higher growth rates if they are successful in executing their strategies.

Sales Forecast

Qihoo, whose fourth-quarter sales projection given in November beat the median of six analysts’ estimates compiled by Bloomberg, has soared 69 percent this year. Beijing-based Baidu, down 15 percent in 2012, is forecasting the slowest revenue growth since 2009 this quarter. Analysts also forecast a 67 percent jump in Qihoo’s net income next year, compared with a 26 percent increase for Baidu, Bloomberg data show.

Qihoo develops anti-virus computer software and desktop applications that include its web browser, the most popular in China with 303 million users as of September. Searches derived from Qihoo browser’s personal start-up page have contributed 11 percent to its total query traffic last month, Hitwise data show, the most among Chinese companies with similar services.

Qihoo’s search engine ranks second after Baidu’s and its market share exceeds that of Tencent Holdings Ltd., China’s largest Internet company by market, and Sohu.com Inc.

Initial Growth

Qihoo is still gaining market share and, as a new entrant, initial growth should be strong, according to a senior analyst at Maxim Group LLC who recommends buying Qihu’s stock and selling Baidu, said by phone from New York on Dec. 21. Baidu is facing lower margins on a permanent basis. Qihoo is facing lower margins because it’s investing in the search markets, and that’s temporary.

The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., declined 1.3 percent on Dec. 21 to $39.24 for a weekly loss of 0.3 percent. The ETF has risen 13 percent this year. The Bloomberg China-U.S. index retreated 1.3 percent on Dec. 21 to 96.42, paring the measure’s gain this year to 7 percent.

The Standard & Poor’s 500 Index dropped 0.9 percent to 1,430.15 after House Republican leaders canceled a vote on higher taxes for top earners, causing a standstill in the U.S. budget talks.

We’re seeing some good engines coming from emerging markets, but it all depends on what happens in the U.S., according to an analyst who helps oversee $426 billion at HSBC Global Asset Management, said by phone from New York on Dec. 21. If the U.S. went into recession in 2013, it’s likely to become a very big drag on exports from China.

E-House Plunges

E-House China Holdings Ltd., a real estate brokerage based in Shanghai, was the worst performer on the gauge last week, losing 15 percent. Its ADRs sank 13 percent to $3.64 on Dec. 21, the biggest one-day slump since 2009. SouFun Holdings Ltd., the Beijing-based owner of the largest real estate information website in China, dropped 2.2 percent on Dec. 21, trimming its gain last week to 6.1 percent.

China won’t rule out the possibility of introducing new housing curbs after the property market rebounded in November and some regions saw “irrational exuberance,” China Securities Journal reported on Dec. 21, citing an unidentified person in the industry.

The Hang Seng China Enterprises Index slid 0.7 percent to 11,229.09 last week. The gauge has climbed 13 percent in 2012. The Shanghai Composite Index slipped 0.7 percent to 2,153.31 from the highest level in four months, bringing its loss this year to 2.1 percent.