China's Baidu Ready to Rocket - TheStreet

China's Baidu Ready to Rocket

E-commerce fueled by credit card expansion in China means big gains for the search engine.
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Baidu.com

(BIDU) - Get Report

may be in for an unexpected boost.

While an old story in the U.S. and Europe, e-commerce is only now poised to take off in China. Baidu, by far the country's most popular search engine, could be a big beneficiary as online retailers rush to buy more online search ads.

Indeed, the company may also be well-positioned to up its game and participate in the industry more directly by rolling out its own e-commerce service.

That could present even more upside for the stock, which has already gained more than 65% year to date and closed off $5.41 at $181 Tuesday.

"Previously, one of the biggest negatives for the stock was that China does not have an e-commerce market, and so growth for search engines would be limited," says Susquehanna Financial Group analyst Ming Zhao, whose company does investment banking with Baidu.

But taking a closer look at popular Chinese online commerce companies such as

Taobao.com

, a part of the Alibaba holding company, suggests that e-commerce in the country may finally be ready to explode.

The volume of merchandise shipped using Taobao grew 136% year over year to $909 million in the first quarter of 2007. That volume should further accelerate to $5.3 billion for 2007 and $13 billion in 2009, Zhao estimates.

To watch Brittany Umar and Vishesh Kumar's video interview of this column, click here

.

An e-commerce explosion is being fueled by the growing spread of credit cards in China, which previously served as a major bottleneck by not allowing consumers to pay for online purchases.

But

China Merchants Bank

, the country's largest credit card issuer, has now issued 10 million credit cards, and that number is set to double in 2007, Citibank analyst Jason Brueschke wrote in a research note last week.

"We believe that one of the key driving factors in e-commerce adoption in China is the rising penetration of credit cards," wrote Brueschke, whose company makes a market in Baidu shares.

Indeed, the recent renewed rush by American e-commerce companies to charge into China may serve as further evidence of the growth prospects there. In June,

Amazon.com

(AMZN) - Get Report

announced that

it would increase its investment in the company.

"With something growing this fast and doing this well, as far as investment goes, we would like to double down,'' Amazon CEO Jeff Bezos said at a press conference then.

"Double down is a term used in backgammon, which means when you like the odds, you want to increase the investment,'' the CEO said.

And despite

stumbling early and having to pull out,

eBay

(EBAY) - Get Report

also announced in June that it was set to enter China again.

The company will feature increased fraud protection measures and partner with the local

Tom Online

this time around.

Want more? Check out TheStreet.com TV video. Vinesh Kumar discusses Baidu with TheStreet.com Tv's Brittany Umar.

Still, Chinese businesses may be much better positioned to benefit from growth in the country than are American entrants, given the complexity of the local markets.

Baidu's continued dominance over

Google

(GOOG) - Get Report

in China, even though the search giant has repeatedly noted the importance of the Chinese market, provides a shining example.

Baidu now commands a 65% market share in China compared with about 20% for Google, Piper Jaffray analyst Gene Munster wrote in a research report on Monday.

And though an industry of consultants that advise on how to make Web sites more relevant for search engines does not yet exist in China, "Baidu's sales and customer service teams are hand-holding customers through the process and educating the Chinese market about search advertising," wrote Munster, whose firm makes a market in Baidu shares.

Baidu's extending dominance in search may now also be boosted by the growth of e-commerce, if other markets are any indication.

E-commerce is "a key driving force in accelerating the growth of the online search market, which is what we have observed in more developed search markets such as the U.S.," Brueschke wrote.

But beyond benefiting from the e-commerce-driven growth in search advertising, Baidu may also have the opportunity to participate in the market more directly by setting up its own portal for shoppers.

All the company would have to do is to copy a model already employed to great success by South Korea-based Web portal

Naver

, Zhao says.

Critics of the stock would point to its already lofty 60 times forward earnings multiple, or its huge 2.2 price-to-earnings-to growth multiple. But the unexpected rise of e-commerce could present an even bigger opportunity.

For other stock ideas in China, check out these portfolios in Stockpickr: High Quality China Stocks; Top 10 China Stocks; and Chinese Rocket Stocks.