Google Inc. (GOOG) and Baidu Inc. (BIDU) have faced-off in China over the past few years with Baidu managing to beat Google at the search game in the world’s largest economy. This fact alone, however, doesn’t make Baidu a buy. Though Google certainly doesn’t need another feather in its cap, Google is the more attractive stock of the two right now, and the company has reason to be optimistic about its prospects in Baidu’s home market as well.

Ubiquitous Internet giant Google Inc. [[GOOG]] announces it second quarter earnings Thursday, and with its stock price climbing nearly 4% over the last four days the market seems to be optimistic. The optimism is shared by analysts who expect sales growth of 4.3% year-over-year and earnings-per-share growth of nearly 10%.

More interesting for Google’s long-term prospects is not its earnings report but rather a “strange but true” story from more than a week ago – Google’s search engine and other services were briefly blocked nationwide in China for offering pornographic websites in its search results. Sex is taboo in China and most experts argue it was simply grandstanding by China’s regime, but more important than the particular logic of the temporary block was the rise in Baidu Inc. [[BIDU]], China’s largest search provider, shares.

The bump in Baidu’s prices was unjustified because the block was not permanent nor should it become a trend (which would be an obvious benefit to Baidu); counterintuitively, following the logic of there is no such thing as bad press, the blocking of Google – which was trumpeted on state-owned television in the country – actually led to an increase in Google China traffic once the ban was lifted.

Baidu is certainly the Chinese search engine to beat, commanding 64% of its search market compared to Google’s 30%, in other words the Google of China is Baidu. But Baidu is only a buy if its valuation is attractive and it can maintain is dominance against Google in China.

By the Numbers
Baidu:
Market capitalization $10.3 billion
P/E 65.61
Forward P/E 36.47
PEG (5-year) 1.44

Google:
Market capitalization $134.1 billion
P/E 31.06
Forward P/E 17.59
PEG (5-year) 1.08

Though a simplistic comparison, Google is more attractively priced than Baidu right now, even when accounting for projected growth over the next five years. Much of this is a reflection of the respective performance of Google and Baidu shares over the last 12 months: Baidu shares have managed to gain more than 2% while Google is down nearly 20%. Google has gotten cheaper.

Will Google Become the Google of China?
One of the fundamental reasons Google trails Baidu in China is Baidu simply has a better search product. As a Chinese-language search engine, Baidu.com is considered to be the leader with a more advanced algorithm that even allows users to search by phonetics – seemingly an arbitrary feature but actually quite important due to the difficulties of written Mandarin. This is an advantaged it is unlikely for Google to overcome any time soon – but surprisingly shifting demographics may make it unnecessary.

Google is the go-to search engine in China for English-language searches, given its expertise in that area, and unfortunately for Baidu the focus on English-language education in China combined with wealth of information in English on the Internet are driving the English-language search market in China to be a bigger slice of the pie. Worse for Baidu, the average Chinese user doing English-language searches is upper-class and urban – a superior profile from advertisers’ points of view.

Baidu also drives a substantial portion of its traffic from a music search services that allows users to search and easily download songs from third party websites – a feature with nothing comparable to it in Google. No longer, Google now offers music search in China – and its search allows direct downloads of free, licensed songs – improving on Baidu (yes, be jealous, in China you can download free, legal music from the libraries of companies like EMI Group, Warner Music, Sony and others).

Lastly, Google is now the exclusive search provider for the country’s largest wireless carrier, China Mobile [[CHL]]. Right now it is not a big deal, but with 488 million subscribers, more than the entire U.S. population and more than the total number of people currently accessing the Internet in China. When cellular users begin accessing the web through their phones – and they will eventually – Google may be handed market share on a silver platter.

Bottom-line
Certainly Baidu does plan on rolling-over for Google. Baidu is planning on releasing a peer-to-peer search, possible a very popular product in a country with almost non-existent copyright enforcement, and a rural encyclopedia which would contain thousands of entries geared towards China’s gigantic and largely untapped rural population that is increasing its Internet use by the day.

Nonetheless, Baidu seems to be on the defensive recently despite its large lead in market share. When Baidu’s CFO Jennifer Li’s commented late last month that Baidu is considering acquisitions because the “Internet is at an early stage of its development…and [Baidu needs] to stay ahead” – the cynical takeaway isn’t that Baidu is on the prowl but rather that the company thinks it can’t “stay ahead” through internal product development.

The simple fact is there are a lot of reasons to be optimistic on Google’s chances in this fight. This, combined with superior valuation, makes Google the buy right now, not Baidu.

China Life Insurance Company Ltd. (LFC) shares may be up more than 20 percent in 2009, but the stock could be a good buy now given its future prospects.

China Life Insurance Company Ltd. [[LFC]], the largest life insurance provider in China, may have already risen more than 20 percent so far in 2009, but many investors remain bullish on the company. The Chinese life insurance industry is still growing steadily, while the company’s reasonable multiple and strong growth rates make it a compelling value in today’s market.

The life insurance industry is attractive to many investors, including Warren Buffett, thanks to its strong cash flow generation. In fact, net cash provided from operating activities at China Life Insurance amounted to $12.4 billion – or 63.9 percent of its net income. Recently, this cash has been used to purchase underperforming securities, but a turnaround could be on the way.

Meanwhile, more normalized interest rates going forward should help grow profitability at China Life Insurance. After all, interest rates affect returns on safe investment assets; declining rates expose them to reinvestment risks, while rising rates can generate unrealized capital losses for debt securities designated as trading. The earlier happens to be true in today’s environment.

China Life Insurance saw its revenues jump from $7.1 billion in 2004 to more than $43.6 billion in 2007, but fell to $19.4 billion in 2008. However, the company’s balance sheet remains robust with a current ratio of 1.21 with approximately $5 billion in cash and cash equivalents on its books. These levels suggest that the company will be able to weather the economic storm.

In the end, China Life Insurance faced a temporary setback thanks to the global economic crisis and lower interest rates in China. However, these problems should be solved as interest rates normalize and the economy recovers. Investors willing to wait out the storm may find this stock quite profitable over the long-term.

China Natural Gas, Inc. (CHNG) shares are trading on par with U.S. companies like XTO Energy Inc. (XTO) and EOG Resources, Inc. (EOG) despite stronger growth rates and a growing amount of cash in its coffers.

China Natural Gas, Inc. [[CHNG]], the first China-based natural gas company publicly traded in the U.S., may be trading at a premium to some of its U.S. peers, but it remains sharply undervalued given its growth rates and future prospects. In fact, a simple price-earnings to growth analysis suggests that the stock should be trading closer to $25 per share.

During the first quarter, China Natural Gas reported revenues that grew 31.9% to $14.96 million and net income that grew 49.6% to $4.2 million. Meanwhile, the company’s balance sheet is extremely robust with total assets of $123.18 million compared to just $5 million in liabilities. The company also reported cash of over $9 million, or $0.62 per share.

China Natural Gas’ true value lies in its cash flows from operations, which increased 78.1% to $6.23 million. After approximately $3 million in property and equipment expenses, this led to a $3.2 million net increase in cash and cash equivalents. Strong cash flows lead to increase cash on the books and negate the need to raise future funding from debt or especially equity.

Assuming no growth in earnings through the remainder of this year, China Natural Gas would be trading at approximately 3.5x projected earnings. And assuming growth rates of 10% going forward, this would equate to a price-earnings to growth ratio of under 0.4, which indicates that the stock is sharply undervalued. Based on this metric, a fair price would be closer to $25 per share.

In the end, China Natural Gas was only recently listed on the Nasdaq after moving up from the OTC-BB exchanges. As a result, many institutional investors have yet to discover this stock. Prudent investors may want to take a look at this stock if looking for a Chinese company that is profitable, growing and undervalued on a price-earnings to growth basis.

China Automotive Systems, Inc. (CAAS), an automotive parts manufacturer, is one of the cheapest stocks in a sector that is being largely ignored and enterprising investors could stand to profit!

The automotive industry may not be popular in the United States, but China’s automotive industry is still growing strong. Behind the boom are parts suppliers like China Automotive Systems, Inc. [[CAAS]], which manufactures power steering systems and other component parts for automobiles through its majority owned subsidiary Great Genesis Holdings Limited.

China’s automotive industry has rapidly expanded since the year 2000. In 2008, 9.34 million motor vehicles were manufactured in China, surpassing the United States as the second largest automobile maker after Japan. Meanwhile, China is now the largest car market in the world given its growing population and increasing wealth as the country matures.

During the first quarter, sales increased 7.7% to $44.69 million, but net income fell by nearly half to $2.25 million. However, a closer look at the loss shows that the majority of the fall could be attributed to losses on derivative securities and financial expenses. Given that these derivatives are now marked to fair value, there could be some upside in future quarters.

During the second quarter, China Automotive Systems expects to earn $52 million in sales with earnings per share between $0.18 and $0.22. The company attributed the improved results to strong cash flows from operations and renewed contracts with several key customers. As a result, it appears that the first quarter’s dip was a one-time event that shouldn’t sway opinion.

However, China Automotive Systems’ real value is largely derived from the large amount of cash on its books. As of March 31, 2009, the company reported cash of over $45.42 million, or $1.68 per share, which represents over 30% of its market capitalization. Subtracting out this cash, the stock trades at a price-earnings multiple of just 9.7x compared to its current 14.41x.

In the end, China Automotive Systems is a strong company operating in an industry that isn’t getting much attention. Investors looking for a profitable and undervalued Chinese stock may want to take a look at this under-followed company that appears to be turning itself around after a rough first quarter, and could be poised for success down the road.