Many economists believe China will overtake the United States as the world’s largest economy by 2028 given its current growth rate. The country is a global manufacturing hub with an affinity for technological innovations and development. Investor and founder of the world’s largest actively managed ETF company Ark Investment, Cathie Wood, has been betting on the Asian giant’s growth prospects for some time.
Large-cap Chinese companies Tencent Holdings, Limited (TCEHY) and Baidu, Inc. (BIDU) represent two of Wood’s biggest bets in China. She owns 6.82 million shares of TCEHY and 4.32 million shares of BIDU. Her TCEHY holdings have a combined 1.11% weighting in Ark, while BIDU stock has a 2.05% combined weighting.
Both the stocks have gained significantly over the past year. While BIDU gained 113.4% over this period, TCEHY returned 57%. In terms of past six-month performance, BIDU is the clear winner with 52.8% gains versus TCEHY’s 6.9% returns. However, shares of BIDU have declined 5.2% year-to-date, while TCEHY has gained 11.5%.
But which stock is a better buy now? Let’s find out.
Latest Developments
On May 2, BIDU launched a paid, driverless taxi service in Beijing, representing a milestone in the autonomous driving industry. It is the first Chinese company to commercialize autonomous driving technology.
In March, BIDU priced a global offering of 95 million shares from which it raised approximately HK$23.94 billion. The company plans to use the proceeds for research and development on innovative technologies and the commercialization of its artificial intelligence innovations.
On April 28, TCEHY was named as one of the 100 most influential companies in the world by the Time Magazine. The company’s robust expansion amid the COVID-19 pandemic last year made it one of the most successful tech companies in China. It also received an excellence award for its cloud services at the Singapore Business Review’s technology excellence awards 2021. Tencent Cloud established infrastructure in 27 regions around the globe to facilitate cloud computing, making it one of the major players in this industry.
Recent Financial Results
TCEHY’s non-IFRS revenues increased 26% year-over-year to $20.49 billion for the fourth quarter, ended December 31, 2020. Its operating profit stood at $5.28 billion, representing a 29% rise from the year-ago value. Its net income rose 30% from the same period last year to $5.09 billion.
BIDU’s revenues came in at $4.64 billion for the fourth quarter ended December 31, up 5% year-over-year. Its non-GAAP operating income rose 4% from the same period last year to $1.08 billion, while its adjusted EBITDA improved 5% from the year-ago value to $1.31 billion.
Past and Expected Financial Performance
TCEHY’s revenues increased at a 26.6% CAGR over the past three years. The company’s net income and EPS grew at CAGRs of 30.8% and 30.1%, respectively, over this period. And its EPS increased 71.3% year-over-year.
BIDU’s revenues increased at a 7.3% CAGR over the past three years, while its net income improved 7.1% over this period. Its EPS rose 1,061% year-over-year, and at a 7.4% CAGR over the past three years. BIDU’s EBITDA increased by 28.6% year-over-year; TCEHY’s EBITDA rose 23.8% over the same period.
Analysts expect TCEHY’s EPS to decline by 78% in its fiscal first quarter (ended March 2021), and 79.6% in the ongoing quarter (ending June 2021). Its annual EPS is expected to rise 26.5% in fiscal 2021 and 2.6% in 2022. TCEHY has an impressive earnings surprise history; it beat the Street’s EPS estimates in each of the trailing four quarters. The consensus revenue estimates indicate an 80.8% decline in the about-to-be-reported quarter, a 21.2% rise in fiscal 2021, and 19.6% improvement next year.
In comparison, BIDU’s EPS is expected to rise 33.3% in the first quarter, 8.3% in the second quarter, 3.4% in the current year, and 21.6% next year. Analysts expect the company’s revenues to improve 30.7% in the quarter ended March 2021, 19.3% in the current year, and 14% in fiscal 2022.
Profitability
TCEHY’s trailing-12-month revenue is 4.50 times BIDU’s. However, BIDU’s 49.56 % gross profit margin is slightly higher than TCEHY’s 45.97%. Also, BIDU’s 31.24% trailing-12-month levered free cash flow margin s higher than TCHEY’s 20.8%.
However, TCEHY’s net income margin and ROE of 33.16% and 25.28%, respectively, are significantly higher than BIDU’s 20.99% and 10.43%.
Valuation
In terms of non-GAAP trailing-12-month P/E, TCEHY is currently trading at 46.19x, 110.1% higher than BIDU, which is currently trading at 21.99x. TCEHY is also more expensive than BIDU in terms of trailing-12-month PEG (0.44x vs 0.02x) and forward EV/sales (8.54x vs 3.26x).
Additionally, BIDU’s 13.37x forward EV/EBITDA multiple compares favorably with TCEHY’s 22.90x.
Thus, BIDU is the more affordable stock.
POWR Ratings
BIDU has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. However, TCEHY has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 different factors. with the weighting of each optimized to improve overall performance.
BIDU has a B grade for Value, which is consistent with its lower-than-industry P/E and PEG ratios. TCEHY has a C grade for Value, indicating a slight premium compared to industry peers.
Of the 79 stocks in the China group, BIDU is ranked #9 while TCEHY is ranked #29.
Beyond what we’ve mentioned above, one can check out BIDU’s Ratings for Stability, Sentiment, Momentum, Growth, and Quality here. Also, click here to view all TCEHY ratings.
The Winner
TCEHY is currently under federal scrutiny for alleged monopoly practices. Moreover, several law firms have issued class action lawsuits against the company for potential violations of federal securities laws. Because the Chinese government is expected to impose a hefty fine on the company soon, TCEHY’s profit margins are expected to remain low in the near term.
BIDU is expected to grow substantially in the coming months owing to its diversified business operations and large customer base. Because analysts expect the company’s financials to improve substantially in 2021, BIDU is the better investment bet here.
Our research shows that the odds of success increase if you one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to view the top-rated stocks in the China group.
TCEHY shares were trading at $78.41 per share on Tuesday afternoon, down $1.72 (-2.15%). Year-to-date, TCEHY has gained 9.07%, versus a 11.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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