FUND RAISING: Baidu Pumps Up Dining, Spring Air in Japan

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Bottom line: Baidu’s new fund raising for its O2O take-out dining service is aimed at finding strategic partners and deflecting criticism from its shareholders, while Spring Airlines new fund-raising presages an aggressive expansion into Japan.

Baidu beefs up take-out dining service

A couple of major fund-raising stories are in the headlines on this final trading day of 2015, setting the stage for what’s likely to be a busy year ahead in the take-out dining and budget air travel sectors. The larger of the 2 items has online search leader Baidu (Nasdaq: BIDU) reportedly near a deal to raise up to $500 million for its young and fast-growing online-to-offline (O2O) take-out dining service. The smaller has China’s oldest budget carrier Spring Airlines (Shanghai: 601021) in the process of raising nearly 1 billion yuan ($150 million) to fuel its expansion into nearby Japan.

These 2 deals cap a year that saw an explosion in private funding for start up Chinese companies in the first half of 2015, including several deals worth more than $1 billion. But the pace of funding has slowed sharply in the last few months due to concerns over China’s slowing economy, and these latest 2 deals are likely to become the new norm in terms of deal sizes we’ll see in 2016.

We’ll begin with Baidu, which is aggressively building up its take-out dining service that lets consumers order from a wide selection of restaurants and then have food delivered to their homes. As a Shanghai resident, I can testify that Baidu’s take-out delivery drive into China’s largest city was quite sudden and began around the middle of the year.

Now it’s difficult to walk more than a block or two without seeing one of Baidu’s signature red take-out bicycles on the road, and the company has undoubtedly spent heavily to boost its presence in such a short time. According to the latest reports, Baidu is now in talks to raise between $300-$500 million to fund the service’s expansion, and hopes to complete the deal by sometime next month. (English article; Chinese article)

Baidu actually has quite a lot of cash on hand and access to much more credit, meaning it could easily fund its take-out dining service expansion by itself if it wanted. But the company came under fire earlier this year from shareholders who complained it was using its lucrative core search service to subsidize its newer money-losing business, including its Qunar (Nasdaq: QUNR) online travel business and its Nuomi group buying service.

Accordingly, I expect this move to bring in outside partners is aimed at deflecting more similar criticism involving the take-out dining service, and is also probably aimed at bringing in strategic partners like restaurant chains. Word of the funding plan comes just days after rival take-out service Ele.me reportedly received $1.2 billion in new funding from e-commerce giant Alibaba (NYSE: BABA). (previous post)

Japan Expansion for Spring

Next there’s Spring Airlines, which is one of my favorite companies from an investment perspective, even though I personally don’t care for their budget travel services. The company is China’s earliest budget carrier, and is one of the nation’s few airlines that behaves like a truly commercial company rather than less efficient state-run rivals that dominate the sector.

The company raised nearly $300 million in a domestic IPO at the start of this year, and its shares have soared more than 3 fold since then. Now media are reporting that Spring is in the process of assembling 18 billion yen, or nearly 1 billion yuan, in new funds to assist its first big overseas expansion into Japan. (Chinese article)

Spring is recruiting mostly Japanese investors into this new fund raising, and those companies will hold about two-thirds of the stock in its Japan unit by the time this latest round is complete. There’s no word on how many cities Spring hopes to serve in Japan under this expansion, nor what kind of competition it will face in the market. But based on my positive impressions about Spring, the company could potentially do quite well in the market as it looks to spread its wings and become a regional budget carrier.

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