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The dominant search engine company of China – Baidu (BIDU - Free Report) – released upbeat second-quarter results after the market closed on July 27. The company beat estimates on both lines and provided an optimistic outlook, which brightened investors’ mood and pushed up the stock price. Shares of BIDU gained about 4.7% after hours, at the time of writing.

Q2 in Detail

The Beijing-based company’s second-quarter 2017 earnings per share of $2.36 beat analysts’ estimate of $1.44. Total revenue of $3.079 billion surged 14.3% year over year exceeding the estimate of $3.06 billion. There was a 5.6% rise in online marketing revenues. Mobile sales made up about 72% of total revenues, up from 62% a year earlier.

The search engine posted operating income growth of 46.9%, beating estimates by 43%, thanks to cost curtailment. Bloomberg’s article highlighted that sales, general and marketing expenses declined 30%. With this, expenses declined 26% or more for four quarters in a row. Most importantly, the company’s traffic-acquisition cost declined, both in absolute terms and as a percentage of sales.

Outlook

The outlook is encouraging too. Baidu anticipates total revenue for Q3 of 2017 to range between $3.41 billion and $3.50 billion. The mid-point of the projected revenue beat analysts’ estimate of $3.43 billion.

Market Impact   

Quite expectedly, Baidu’s upbeat results and guidance stoked optimism among investors as the stock traded in the green after hours. Investors should also note that Baidu has gained about 22.3% so far this year (as of July 27, 2017).

Why Forget Big U.S. Tech ETFs and Play Baidu ETFs Instead?

Investors should note that big tech stocks and ETFs have been under pressure for quite some time now on overvaluation concerns. While the sector has recorded occasional improvements, the momentum remained subdued overall. Technology Select Sector SPDR ETF (XLK - Free Report) was up 5.7% in the last three months and has returned 3.1% in the last one month (as of July 27, 2017). On the other hand, China tech ETF Guggenheim China Technology ETF (CQQQ - Free Report) jumped 15.2% in the lastthree months and has returned 7.1% in the last one month (as of July 27, 2017) (read: Move Over FAANGs: China Tech Stocks and ETFs are the Hottest).

Investors should note that search-engine Alphabet Inc. (GOOGL - Free Report) lost about 4% in the last five days against 5% gains in Baidu (as of July 27, 2017) (read: Correction in U.S. Tech Sector? Inside Most-Hurt ETFs).

Baidu has a sizable exposure (at least over 6%) in many internet and China-based funds like China Technology ETF (CQQQ - Free Report) , CSI China Internet ETF (KWEB - Free Report) , NASDAQ China Technology ETF (QQQC - Free Report) and Golden Dragon Halter USX China Portfolio (PGJ - Free Report) .
 
This suggests that the performance of these funds is highly dependent on Baidu. As a result, the above-mentioned ETFs could gain ahead. Below, we have highlighted four funds that have big exposure to Baidu (read: What Does the MSCI Inclusion Mean for China A Shares and ETFs?):

KWEB in Focus

This China internet ETF gives exposure to a variety of industries in the Technology space. Baidu holds the third position with about 8.14% exposure. The fund has gained about 52% in the year-to-date frame (as of July 27, 2017).

QQQC in Focus

The stock under review, Baidu, occupies the third position in the basket with 8.29% of assets. The fund charges 65 bps in fees. QQQC has added about 23.9% in the year-to-date frame (as of July 27, 2017).

PGJ in Focus

Baidu holds the fifth position with about 7.9% exposure. The fund has gained about 44.8% in the year-to-date frame (as of July 27, 2017).

CQQQ in Focus

The fund looks to track the AlphaShares China Technology Index. Here also, the in-focus Baidu takes the fourth spot in its 72-security basket with a 6.8% share. The fund charges 70 bps in fees. The fund is up 43.6% so far this year (as of July 27, 2017).

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