Mizuho Reiterates a 'Buy' on Baidu (BIDU) Despite JOYY Short Reports

James Lee, a managing director at Mizuho Securities, maintained Baidu (NASDAQ: BIDU) as the top China Internet pick despite negative reports surrounding JOYY, which is in the process of being acquired by Baidu.

Short-seller Muddy Waters described JOYY as "a multibillion-dollar fraud", shortly after Baidu announced it agreed to pay $3.6 billion for Joyy’s live-streaming business YY Live.

Muddy Waters accuses a Chinese social media company of issuing misleading business information to the investing public. As much as 90% of YY Live’s live-streaming revenue is fraudulent, according to a year-long investigation conducted by Muddy.

“We conclude that YY’s component businesses are a fraction of the size it reports, and that the company’s reported user metrics, revenues, and cash balances are predominantly fraudulent,” said the report.

BIDU stock closed 1.29% lower yesterday while shares of JOYY crashed over 26%.

“In light of this report, we have confidence in Baidu management to conduct additional due diligence on issues raised by the report. At the same time, we believe that the acquisition could be delayed if YY hires an independent advisor to conduct its own reviews, very similar to what IQ did when facing an allegation of accounting improprieties a few months ago. Furthermore, a potential SEC inquiry could also slow the process,” Lee writes in a note sent to clients today.

In case the takeover fails, BIDU will either build a live streaming platform internally or seek other acquisition candidates, Lee adds.

The analyst doesn’t seem concerned for BIDU as he reiterated $185 price target on the stock.

“Our thesis has not changed, and we see several catalysts on the horizon: (1) continued acceleration into FY21 with a strong pipeline; (2) potential monetization of voice search that makes up <20% of search volume; (3) unlock value of AD, which could be $15bn+, or 20% upside to our PT; (4) increase shareholder value with the sales of IQ; (5) increase share buybacks (at ~$2.5bn now) by raising USD debt,” concludes Lee.

For an analyst ratings summary and ratings history on Baidu click here. For more ratings news on Baidu click here.

Shares of Baidu closed at $141.00 yesterday.

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