Shares of Baidu could do better than Alibaba when it joins the MSCI China Index

Baidu will likely see an influx of new investors thanks to an important change made by MSCI. As a result, it could join Alibaba in Wall Street’s good graces regarding Chinese stocks. It also might steal some of Tencent’s thunder.

Baidu logo

Granted Alibaba’s standing on Wall Street has been knocked down a few notches recently, but it still remains a hot stock.

Baidu to join MSCI China Index

Last month MSCI announced that it will begin including foreign listed companies in its country indexes. Tencent has dominated the MSCI China Index with a 10.3% weighting, reports Aaron Back of The Wall Street Journal. Currently Alibaba and Baidu are not in the index, but that will change was MSCI executes its plan.

Both companies will likely see heightened interest when they become part of the index because so many funds follow the indexes. Last June, $228 billion worth of passive funds tracked and invested according to the MSCI Emerging Markets Index. It was also the benchmark used by $1.52 trillion worth of actively managed funds.

Of course the numbers are going to be different for the MSCI China Index, but they highlight how important MSCI’s indexes are for the global fund industry.

Baidu’s weighting will be double Alibaba’s at first

Alibaba has been a Wall Street darling since its initial public offering, and much of the coverage about the MSCI’s change has focused on the Chinese e-commerce leader. However, Back points out that Baidu could benefit even more than Alibaba from inclusion in the MSCI China Index.

A simulation that was published in October indicated that Alibaba could have a weighting of 3.1% when it joins the index, but Baidu’s weighting could be 6.5%. MSCI sets the weightings of the companies in its indexes according to available free float, which means Alibaba with its larger market capitalization would get a smaller weighting than Baidu because its available free float is smaller.

In March, it’s expected that Alibaba’s weighting will increase because the lockups on some insider-owned shares will expire. At that point, the Chinese online retailer will see its free float more than double.

Baidu may outperform Alibaba

Back expects Baidu’s stock price to be stronger than Alibaba’s even when the two companies’ weightings are about equal. He notes that while Wall Street has been showing Alibaba with attention and capital, Baidu has essentially fallen by the wayside and been ignored. Baidu’s market value is currently about a third the size of Alibaba’s.

In spite of the correction in Alibaba’s share price, the stock still remains 27% higher than the IPO price. Since September when Alibaba’s IPO was held, shares of Tencent have climbed 8%, and Baidu’s stock has fallen 8%.

Back also notes that Baidu stock is trading at a discount to both rivals even though its growth profile is similar to those. When it joins the MSCI China Index, however, more fund managers are going to sit up and take notice.

As of this writing, shares of Baidu were down by 086% to $270.84, while Alibaba shares were down by 0.57% to $86.15 and Tencent stock was up by 3.93% at the Hong Kong Stock Exchange.