What Baidu's 'Land Grabbing Mode' Is And Why It Can Hurt Margins

• Baidu Inc (ADR) BIDU shares have been treading a downward path in 2015 and are down 37 percent year-to-date.
• UBS analyst Erica Poon Werkun maintained a Buy rating on the company, while reducing the price target from $235 to $214.
• Baidu’s O2O investments are likely to restrict the company’s margins in the near future, Werkun stated.

Baidu’s shares have declined 28 percent since June 30, when the company announced an Rmb20 billion investment for Baidu Nuomi over a three-year period. Analyst Eric Werkun believes that the expectation of a significant margin impact of the company’s O2O investments could partly be the reason for the stock’s underperformance.

“In this early development stage, O2O models like food delivery and group-buy for dining and movie tickets are in 'land grabbing' mode with priority on GMV and not profitability,” the UBS report noted, while adding that Baidu is aggressively adopting “front-loading promotional efforts.”

Werkun expects Baidu’s SG&A ratio to surge in 2H15 and 1H16. The company is likely to report 3Q15 revenues of Rmb18.35 billion, operating margins of 10.4 percent and non-GAAP EPS of Rmb7.46.

The non-GAAP EPS estimates for 2015, 2016 and 2017 have been reduced from Rmb40.05 to Rmb33.9, from Rmb59.20 to Rmb41.30 and from Rmb76.35 to Rmb60.75, respectively.