Baidu Acquires A Majority Stake In Nuomi To Enhance Its Mobile Business
Leading Chinese online search provider Baidu (NASDAQ:BIDU) recently entered into an agreement with online social networking firm Renren to purchase a 59% stake in Nuomi, a group buying site, for $160 million in cash. [1] The deal represents another step by Baidu to enhance its position in the rapidly evolving Chinese mobile Internet market.
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The Chinese Internet market is seeing a transition towards greater mobile usage. Out of the 591 million Internet users in the country at the end of June 2013, 464 million (around 79%) used mobile devices to access the Internet. [2] The market’s future growth is expected to come from mobile devices as China’s smartphone market has been growing rapidly over the recent years. According to Canalys, smartphone shipments in China reached 88.1 million in Q2 2013 compared to 32.9 million for the U.S. [3].
This presents a challenge for Baidu as it has a low market share on mobile devices (37.5%) compared to desktops (over 70%). [4] However, the company is aggressively taking steps to address this situation. Last month, it signed a deal to purchase 91 Wireless Websoft (which operates two leading third-party app distribution platforms in China) in a deal valued at $1.9 billion.
We believe Nuomi’s acquisition will help Baidu strengthen its e-commerce business. As a leader in the search advertising space, Baidu is facing increasing competition from Tencent and Alibaba in the Chinese mobile Internet market. Nuomi recorded 3.8 million active paying users and 120 million general merchandise sales in the second quarter of 2013. [1]. Mobile devices contributed around 30% of Nuomi’s sales during the period, and we expect Baidu to enhance its mobile location-based services and maps offering with this acquisition.
According to Datatuan, Nuomi controls around 5.9% of the group-buying sector in China. [5]. It has been facing huge losses since its inception due to intense competition. However, this sector is seeing a consolidation and we expect it to become profitable after only a few players are left. With the majority stake in Nuomi now being owned by Baidu, we expect the group-buying site to aggressively expand into several Chinese cities to boost its market share.
We believe Renren will also gain significantly from this partnership. It had faced huge losses due to investments in Nuomi and other businesses and selling off a stake in this business will allow the company to focus more on its core social networking business. We believe the company’s valuation will rise with this deal.
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Our $128 price estimate for Baidu’s stock represents around 5% downside to the current market price.
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Notes:- Baidu Signs Definitive Agreement with Renren for Strategic Investment in Nuomi, Baidu, August 23, 2013 [↩] [↩]
- China’s Internet users grow to 591 million, PCWorld, July 17, 2013 [↩]
- China’s top five vendors account for 20% of the world’s smart phone shipments, Canalys, August 5, 2013 [↩]
- China’s Baidu reports weaker profit growth in Q1, PCWorld, April 25, 2013 [↩]
- China’s Baidu buys majority stake in group buying site Nuomi, PCWorld, August 23, 2013). ((2013 Q1 – China Daily Deal Market Report – A Stable Start, Dataotuan, May 16, 2013 [↩]