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August 20, 2024

As I mentioned before, when looking at these Chinese Big Tech companies there’s no need to worry about their fundamentals. These stocks are dirt “cheap,” but that’s been the story for awhile. And they continue to get “cheaper.”

There are several reasons institutional investors have avoided these Chinese stocks, which include China’s macro conditions, political tensions with the U.S., the VIE structure of the shares, and the potential risk of outright war with the U.S. over Taiwan.

That said, over the years there’s been pockets to “rent” China’s Big Tech stocks for a quarter.

Last week, BABA announced their earnings and jumped higher after an initial decline. JD also reported and ran up.

BIDU is due to report this week and PDD is next week.

This may be that quarter to be long China.

GOOGL + MORE 

BIDU has been known as “the Google of China” because of their search & advertising business. It’s been their bread & butter.

But over the last few years, the company has been spending billions of dollars on Apollo Go, their Autonomous Driving business.

Wuhan is the largest market for Apollo Go with 300 Robotaxis on the road, where 70% were fully driverless. Management said they expect that to be 100% soon.

Besides the R&D costs, safety drivers and building the cars are BIDU’s biggest costs. With safety drivers being phased out in Wuhan and their newest car models 50% cheaper to build, they seem to have a handle on this business. In fact, management expects to breakeven “in the near future.”

This is a big deal. Wuhan is their Autonomous Driving model they plan to replicate in other regions.

The more robotaxis on the road, the more data they collect, the better the autonomous driving becomes.

The goal is not much different than what TSLA is looking at… licensing/selling software packages.

Value

The value placed on Apollo Go's competitors is quite interesting.

Pony.ai has been operating robotaxis in Beijing and Guangzhou, China for the last two years. Over the last 8 years they raised $5.2Bn from parties such as Toyota and Saudi Public Investment Fund. Their last funding round was reported to value Pony.ai at $8.5Bn.

Not bad.

But consider that Waymo (owned by Google) in the U.S. is valued anywhere between $30Bn to a pie-in-the-sky $175Bn by a Morgan Stanly Analyst.

Now consider that BIDU only has a total market cap of $32Bn, which includes:

• a large search/advertising business, “the Google of China.”  
• an AI cloud business.
• Ernie, their competitor to ChatGPT.
• And iQIYI, the “Netflix of China,” which is one of the largest online video sites in the world.

Plus Apollo Go.

Here’s the incredible part…

Of the $32Bn market cap, $16Bn is net-cash!!!

So, ya… BIDU is cheap.

The Trade

The chart has been straight down, but BIDU is showing some signs of life here.

While BIDU call activity has picked up ahead of earnings, there’s been significant Call buyers in the KWEB ETF. KWEB is the China Internet ETF.

On Monday, someone bought 93,000 KWEB March 2025 $30 Calls for ~$1.53.

Last Tuesday, someone sold 87,000 KWEB December 20^th $25 Puts to finance the buy of 81,000 KWEB December 20^th $28 - $32 Call Spreads for even.

So instead of just BIDU, they want all the Chinese Tech names.

That said, if all of them start to move, BIDU has a great “story” that investors could easily understand.

BIDU earnings are due out on Thursday.

We want to play the (potential) momentum here over the next few months and get the next earnings report as well. It likely comes after November expiration.

I like the following:

Buy 1 BIDU December 20^th $100 Calls for $4.80
Sell 1 BIDU November 15^th $115 Calls at $1.20
Net-debit = $3.60

This is with stock down $1.00 pre-market at $80.18. Down $2 and you can try $0.25 lower ... $3.35.

The Target Stock Price is $120.

Note: You can also just buy a smaller amount of the $100 Calls and wait for an opportunity to sell some calls later. I think this is a good price here for that spread.