Results: Business Stable At Huawei, Baidu

Investors see stability in Baidu results

Stability has become the buzzword of the moment for Chinese tech firms, which appears to be the driving factor behind the positive receptions for what otherwise look like so-so results from online search leader Baidu (Nasdaq: BIDU) and telecoms equipment giant Huawei. In Baidu’s case, the company has been hit by slowing revenue growth and evaporating profits in the last few quarters caused by growing competition and a sharp slowdown in ad spending. Huawei, meantime, is fighting a sluggish global economy and also growing resistance in the US and Europe to its core networking equipment.

Facing such strong headwinds, perhaps it’s not surprising that investors bid up Baidu shares by 14 percent to levels not seen for nearly a year in after-hours trade after its results came out. Huawei is privately held, but one of its own executives commented that its latest profit growth was “incredible” in the current climate.

Let’s start with Baidu, which was once a Chinese Internet superstar as it dominated the domestic online search space with well over two-thirds market share. The company reported its revenue grew 39 percent to $1.23 billion in the second quarter, while profit dipped 4.5 percent to $431 million. (results announcement)

The revenue growth was roughly comparable to the last 2 quarters, and Baidu reinforced the stability theme by forecasting that revenue would again grow by 40-43 percent in the third quarter. The company’s latest profit continued a worrisome trend that saw the figure finally start to contract after growth dropped sharply throughout last year. But investors were willing to forgive Baidu for the profit decline, which was the result of heavy spending on promotion to fend off new competition, and on new mobile Internet initiatives. Those efforts appear to be producing some results, with Baidu saying that more than 10 percent of revenue came from mobile Internet business for the first time during the quarter.

I would expect to see Baidu’s profits remain under pressure for the rest of this year, and it’s quite likely they could continue to contract for the next 2-3 quarters as it continues to spend heavily on promotions, new initiatives and M&A. But the stable revenues do look like a positive sign, and I expect we could see some upside for the company’s stock through the end of the year.

In the meantime, Huawei showed similar trends as it posted 10.8 percent revenue growth in the first half of 2013 and predicted it could maintain a similar level for the full year. (English article; Chinese article) That figure looked similar to 2012, when the company posted 8 percent revenue growth for the entire year. It was also better than the flat sales posted by top global rival Ericsson (Stockholm: ERICb) in its latest quarterly results. Huawei’s margins also held steady in the first half of the year, reinforcing the stability theme. It didn’t report on its actual first-half profit, though the “incredible” comment by an unnamed executive in one media report appears to indicate that net income grew at a rate roughly comparable to revenue growth.

While Baidu’s biggest challenges come mostly from competition in China, Huawei faces the additional challenge of growing resistance to its products in the US and Western Europe due to national security concerns. The EU is also threatening anti-dumping tariffs against equipment from Huawei and crosstown rival ZTE (HKEx: 763; Shenzhen: 0000063).

But any resistance in those markets will probably be offset for the remainder of this year and into 2014 by a coming spending boom by China’s 3 telcos on 4G networks as the regulator gets set to issue 4G licenses by the end of this year. That spending spree should help Huawei to meet its revenue targets for the rest of this year, and to even see some acceleration of its revenue growth in 2014.

Bottom line: The latest results from Baidu and Huawei reflect stability in their operations, as each grapples with stiff competition and slowing economies.

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