Chinese firms are flooding the market with third-quarter results, with industry bellwethers Baidu (Nasdaq: BIDU) and ZTE (HKEx: 763; Shenzhen: 000063) both reporting figures that show continuation of recent trends. First Baidu, which reported a healthy rise of around 80 percent in both revenue and profit, as it banked on strong demand for ads on its search site, China’s dominant player with more than two-thirds of the market. (company announcement) Baidu further predicted that revenue will continue to grow at similar rates in the fourth quarter, as healthy demand continues. I previously predicted a sharp slowdown in ad spending could be looming as a much-needed correction looms for China’s overinflated Internet bubble, but clearly Baidu is seeing no signs of that yet. I still think such a correction is coming, and will hit Baidu’s top and bottom lines when it does; but despite signs of trouble from the group buying sector and some e-commerce firms, we won’t see the first real signs of a downturn until the first or most likely the second quarter of next year. As to ZTE, the company also reported third-quarter revenue grew at a healthy 37 percent, accelerating from the first half of the year as it focused on building up its cellphone business, which was up more than 50 percent in the first 9 months of 2011. (Chinese article) But while revenue rose, its third quarter profit fell by nearly 40 percent, also accelerating from the first half of the year, as it continued its risky strategy of grabbing global market share for its handset business by selling its low-end smartphones at prices near or perhaps even below its costs. This strategy could work in the end if ZTE can raise its prices after it gains market share. But it could also backfire if consumers come to associate the company with cheap products and aren’t willing to pay a premium for its cellphones. The company’s heavy reliance on Google’s (Nasdaq: GOOG) Android smartphone operating system also puts it at risk of potential lawsuits from Apple (Nasdaq: AAPL), which has already files similar suits against some other major cellphone makers.
Bottom line: The latest Baidu and ZTE results show continuation of recent trends, though the former remains at risk due to a possible Internet bubble, and the latter from a risky expansion strategy.
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◙ Baidu Mobile OS, Homepage Revamp Look Like Dicey Bets 百度新举措旨在冒险一搏
◙ Low-Cost Apple iPhone to Bite ZTE, Lenovo 苹果推低端iPhone 冲击中兴和联想
◙ ZTE Gambles With Smartphone Share Grab 中兴通讯押注智能手机业务
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