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PO VIEW-China's Google hopeful needs an edge

Chinese search engine could become one of the hottest U.S. initial public offerings this year in light of Wall Street's interest in China and online seach engines.

But Baidu needs to find an edge over Google, which is expanding in China, to justify its high premiums.

The Beijing-based company's price to earnings ratio, based on an assumed pricing of $20 and annualized earnings of the most recent quarter, is an astounding 528, as calculated by Francis Gaskins, an IPO expert with

Google Inc. (GOOG.O: Quote, Profile, Research), which launched a blockbuster $3 billion IPO last year, had a P/E ratio of 73 before it went public in August, based on its IPO price of $85, Gaskins said. Google shares have surged to $290.

The fact that Baidu is only selling $75 million of shares means demand could well exceed supply when it debuts on Nasdaq on Aug. 4 under the proposed symbol "BIDU." Goldman Sachs and Credit Suisse First Boston are lead managers.

"Seventy five million dollars is almost nothing for an IPO," Gaskins said. "If you want to participate in China's search market, there is nobody else."

China, already the world's largest computer market, has become a key battlefield for all the major Web search players, including Google, Yahoo Inc. (YHOO.O: Quote, Profile, Research), and Microsoft Corp.'s (MSFT.O: Quote, Profile, Research) search offering.

Shanghai iResearch has estimated that China's Web search market was worth about $50 million in 2004 and is forecast to expand to about $200 million by 2006.

Adding allure to Baidu's IPO is Google's 2.6 percent stake in the company. There is speculation that Google might acquire Baidu to expand quickly in China, similar to what eBay Inc. (EBAY.O: Quote, Profile, Research) did to Chinese online auction house Eachnet.

But if Google choses to go into China alone, that could present a big risk for Baidu.

The Silicon Valley-based U.S. search giant has won a license to operate in China and bought a Web address there. Google is hiring staff with the aim of opening an office in the country this year,

Five-year-old Baidu is still China's most popular search service. It is the nation's second largest Web Site and seventh largest globally measured by user traffic, says, a San Francisco-based Internet traffic ranking company. Baidu had more than 34,600 online market customers in 2004.

But Google has clearly gained in popularity there, particularly among those who can read English.

Fay Qian, an international news editor for a Shanghai newspaper, said she uses both but prefers Google over Baidu.

"Google has multiple languages and I can use it as a dictionary," Qian said. "But sometimes I cannot access certain search results so I have to revert to Baidu."

Qian was not sure what caused the problem. But Chinese authorities briefly blocked access to Google in 2002 over concerns the search engine could be used by local citizens to find information on politically sensitive topics.

Baidu has its own legal issues. The Financial Times reported earlier this month that Baidu has agreed to remove links to thousands of Internet sites offering pirated music, following complaints by R2G, a tracker of piracy and manager of licenses for music publishers.

Music download has been an important differentiation at Baidu, whose main page looks almost identical to that of Google's except Baidu has MP3 search and message board tabs.

The fact Google is relatively new in China means that it does not have as many advertisements as Baidu, which is a big draw for Yue Futao, editor of China Business News.

"But when Google starts competing aggressively in the China market their Web Site might soon have too many ads as well," said Yue, who mostly uses Google.
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