Source: Leverage Shares

Considering data from March 2022 till the 28th of February in 2024, US traded volumes have surpassed those in China on only 22 days; the latter tend to be anywhere from 10% to 706% greater than the former on any given day. Daily price performance upticks in the Chinese stock tend to be higher while downturns tend to lesser than that seen in the U.S. stock.

Despite the ADS effectively being derived from the Chinese share, the two aren’t necessarily fungible: effectively, one would have to separately dispose the ADS and buy the Chinese stock (if an investor was qualified by the Chinese government to do so). In fact, an increasing number of instituitional investors with the wherewithal to establish a commercial relationship within China’s jurisdiction have been switching to holding the Chinese stock over the ADS in greater proportions in instances where the company is “dual-listed”. In Baidu’s case, the benefit of this is clear: the ADS is at 63.4% of its value in March 2022 while the stock is at 71.98%.

Furthermore, the company repurchased $1.2 billion worth of stock from the public through 2020 and 2021. Given the trajectory of the stock in 2021, this ensured a 242% valuation premium to remaining shareholders who cumulatively received a $2.9 billion bump by the end of the year. In 2022, the company’s board announced a new share repurchase program with an upper limit of $5 billion, effective through 2025. As of 2023, the company has spent $669 million of this amount. However, given the stock trajectory, this only returned $318 million (or a 53% deficit) to shareholders.

Nonetheless, given that up to $4.7 billion is still on the table, this is the second benefit given to shareholders: there is a high likelihood of finding at least one “guaranteed” buyer for the stock: the company itself.

Be it ADS or stock, there is a recalibration of sorts, as per the company’s messaging which seems to imply that it will soon be less “online marketing” (a mature business segment) and more “AI-relevant” (a business with substantial growth potential, many competitors and unknown regulatory hurdles). It’s important for investors to be attuned to what they’re buying into: the present or the future. If the present, passthrough earnings will likely remain impacted as the company grows towards its desired future. If the latter, there are many hurdles to overcome.

In the present, the stock is likely overvalued; in the future, the stock might turn out to be cheap right now. What bridges the present and the future is the depth of investor conviction in the company’s leadership being able to do this transition.

Footnotes:

1. “Baidu Announces ADS to Share Ratio Change”, Baidu Investor Relation, 28 April 2010
2. “Has this ratio ever changed? If so, when and how?”, Baidu Investor FAQs accessed as of 29 February 2024