BIDU(HOLD): QIHU(HOLD): - 'We Recommend Sell BIDU Call Options'
We recommend investors to sell call options of BIDU. We believe QIHU's search engine will have the following impact on BIDU: 1) BIDU will likely lose the majority of search queries from QIHU browsers and PSPs (personal startup pages). We are unable to define the percentage of BIDU queries that will be impacted, but industry people have a wide range estimates between 2% to 10%. 2) QIHU will likely go out and buy traffics for its independent search engine later. The competition for obtaining big traffic partnerships will likely lead to higher TAC ratio for BIDU. 3) QIHU will also seek distributors to sell its keyword search business. We expect QIHU will share more revenues with local distributors (vs. BIDU  giving out ~30%) to incentivize them. QIHU's move will likely lead to increase in BIDU's payout to distributors. In the meantime, for large advertisers, the rebate from QIHU could be higher than BIDU, stopping BIDU from continuously cutting rebates. 4) QIHU will be competing with BIDU for advertisers' budgets. Recall, our HOLD rating on BIDU is based on a view that BIDU shares would trade range bound. Given share price recovery post its earnings, as well as QIHU's new rivalry in general search, BIDU shares could face some headwind. As such, selling call options of BIDU would profit from the view of "limited upside in BIDU share price in near term". The risk of the recommendation is - BIDU will host Baidu World on September 3, on which BIDU will announce new products (most likely mobile products, in our view). The annual event in the past has not been a typical driver for its shares though.