Google might be getting out of China, but international investors are going all in on Chinese search giant Baidu, the company that likely stands to gain the most for Google's departure. Here's a report from UBS via the FT's Alphaville blog:
Baidu would benefit most from Google’s departure. The Chinese search engine market is a duopoly with Baidu and Google together accounting for 90% of revenue and 95% traffic market share (Baidu itself has 62% and 74% respectively). Baidu would emerge as the dominant player with even more bargaining power with its customers. And even if Google can successfully solve this problem and continue its presence in China, in our view Baidu will still benefit incrementally from advertisers’ concerns over spending on Google.cn.
We upgrade Baidu to Buy from Neutral and PT from US$380 to US$523. This incorporates a 50% probability weighting to our new base case valuation of $453 (assuming Google continues to operate in China) and 50% weighting to our bullcase valuation of $593 (assuming Google closes its Chinese operations).
Investors don't feel it's likely that another foreign search engine, such as Microsoft's Bing, will step in to fill the void since local affilates are going to be wary about collaborating with another foreign company.
As a weird coda to this story, Yahoo, whose executives were lambasted as moral "pygmies" on the floor of congress two years ago for their role in the arrest of a Chinese dissident, for once look like they've outsmarted their arch-rival. TechCrunch writes;
In retrospect Yahoo has played China far better than Google. It pulled out of the country years ago, knowing it wouldn’t win and owns nearly 40% of the [Chinese internet portal] Alibaba, a company that very definitely knows how to grow in China. Entrepreneur and angel investor in China Bill Bishop —who hasn’t always agreed with my China coverage in the past—pointed this out, adding “Not often Yahoo looks smarter than Google.”