Double Down on a Big Chinese Winner

09/09/2010 12:00 pm EST

Focus: STOCKS

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, thinks Chinese stocks will rally and residential real estate won’t crash, and he likes Baidu.com, China’s Internet champion.

During the past few months, I have discussed my expectation that the [Standard & Poor’s] 500 would be stuck in a 10% range between 1,040 and 1,150 throughout the summer.

I think this sideways congestion will likely continue, and I continue to recommend you to buy on dips and position yourself for the rally I'm expecting in November and December.

Given the strength in the Chinese economy, I continue to expect Chinese stocks to outperform in the coming rally, with another 25% to 40% up side by year-end. The unprecedented growth drivers in China will continue directing investors to where the real opportunity resides.

Beijing does not want to see the Chinese property market go down too much, because that would hurt economic growth. The government just wants to see prices stabilize and neutralize the negative public sentiment against high housing prices.

The overbuilding in commercial real estate is far more severe than [in] residential real estate. There is far weaker underlying demand for office space than for housing. Vacancy rates run as high as 40% in major cities.

I expect residential real estate prices to remain stable in China over the next couple of years, but I think commercial real estate prices may fall by as much as 30%.

[Meanwhile,] Baidu.com (Nasdaq: BIDU) is unveiling a new feature that will likely keep users on its site for longer. The company will now launch third-party offerings in Baidu's application library directly on Baidu.com—rather than on another web site, providing a potential revenue boost for the company.

For example, if a user searches for a specific online game, the new function will produce a pop-up window containing the game, which can be played immediately without the user’s leaving the Baidu site.

This is an interesting example of the company breaking into new ground, rather than following other web giants, such as Google (Nasdaq: GOOG), and adapting other innovations to better fit the needs of Chinese consumers.

I'm looking at this development, along with Baidu's application library, with interest, as the company plans to greatly expand the number of applications available in coming years.
 
Baidu is also looking at merger and acquisition opportunities and is in talks with several companies.

Earlier this month, Baidu’s [stock] tried to clear its consolidation period and break out of its current range, but couldn't fight the broad market and fell back to around its ten-week moving average. However, [recently] the stock [has again found] support and [is] bouncing higher, along with the market.

This could offer a buying opportunity, especially as the broader market heads higher. So, let's raise our buy limit for BIDU to $80. (It closed above $84 Wednesday—Editor.)

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