(Yicai Global) Oct. 26 -- The share price of Baidu Inc. [NASDAQ:BIDU] has hit new highs since the Chinese tech giant shifted its business focus toward artificial intelligence (AI). Kweichow Moutai Co. [SHA:600519], indisputably the best-known premium Chinese liquor brand, has shattered records for most expensive shares in the country. As of yesterday, the former was valued at USD91.545 billion, while the latter's worth stood at USD106.7 billion (CNY709 billion). They have comparable market caps but are from markedly different sectors, prompting the question as to which offers greater value for investors.

What Triggered the Stock Rallies?

Both companies have undergone leapfrog growth in markets this year.

Kweichow Moutai's capitalization scaled from USD60 billion (CNY400 billion) to over CNY700 billion and Baidu has gained some USD30 billion in the past four months.

A general recovery in the baijiu (Chinese liquor) market has clearly buoyed Moutai. As a top label it boasts an unrivaled brand image and scarcity value, and this makes the company a very attractive direct play for equity investors. Also, solid earnings results have boosted its forceful rally.

Shipments of Moutai's flagship product, Feitian, have swelled by about 35 percent since the third quarter and unrelentingly lofted sales for its 'moutai-flavor' series, whose responsible division reached its CNY4.3 billion sales target 100 days in advance.

The baijiu business inheres within the agricultural industry, which is known for certain in-built constraints. Moutai's market cap has already reached a peak, and it is unlikely to go further, baijiu marketing specialist Cai Xuefei told Yicai Global. A rise in the value of the flagship Feitian product sparked the price rally, as did the moutai-flavor line's robust sales.

Baidu's success in the capital market this year is a different story. While the other two 'BAT' firms (Baidu, Alibaba Group Holding [NYSE:BABA] and Tencent Holdings Ltd. [HKG:0700]) have been locked in a battle for the title of most expensive Chinese tech stock, Baidu's share price slackened as its earnings went downhill four months ago. The gap in market cap between Baidu and another internet behemoth JD.com Inc. [NASDAQ:JD] narrowed to merely USD600 million, or one percent of the latter's capitalization, at market close on June 24. Back then the market was expecting JD.com to overtake it in a few trading days and bounce Baidu from the BAT bloc.

As it turned out, however, the search company rallied 40.29 percent in the following three months, and its share price skyrocketed from USD179.79 to USD252.22. The gap with JD.com widened again from USD600 million to over USD30 billion.

The turning point came after the release of its second quarter report.

The firm defied expectations by reaping bumper earnings results, rocketing its share price 14 percent in a few days on the news.

The report also adduced persuasive evidence of the excellent development potential of the firm's streaming ad business. Despite Toutiao's stiff competition, Baidu's daily active news feeds users topped 100 million, and feed ad revenues spiked from CNY10 million a day in the first quarter to CNY30 million, the report showed. 

Before Baidu manages to commercialize AI products on an extensive scale, news feed advertising will remain a main growth driver and thus many Wall Street analysts have raised their ratings for the company.

Shi Jialong, an analyst at Nomura Securities, is cautious about the outlook for Baidu's search business, but the fast-growing feed ads business will give it some much-needed breathing space in financial year 2017-2018, as total revenue from the business will hit CNY13 billion (12 percent of total operating income) next year. The market undervalued Baidu's video streaming arm, Iqiyi.com, the brokerage also argued.

Before that, many institutions were confused by Baidu's unclear strategy and poorly-structured businesses, said Li Zhigang, a global market analyst at Hong Kong-based Prestige Securities in an interview with Yicai Global. By contrast, JD.com has a distinct advantage in terms of having a clear focus on its core business, e-commerce. "Later on, the gap between the two widened after Baidu sharpened its strategy and refocused on AI as its main business," Li said.

Which Company Is More Valuable?

So which company is more recommendable for investors?

Baidu has outperformed Moutai in terms of operating income, net profits and profit growth in the first half, but the latter posted higher revenue growth.

During the period, Baidu logged a total revenue of CNY37.7 billion, a rise of 10.5 percent on the year. Moutai's total revenue rose by 33.11 percent to CNY24.19 billion. Baidu's net profit came in at CNY6.192 billion for a 40 percent increase, against Moutai's CNY11.251 billion and 27.81 percent. 

From a long-term perspective, the extent of Baidu's upside potential depends on the performance of Baidu Search, profitability of its news feed ads business, potential earnings gains that may arise from sales of its food delivery and other secondary businesses, and financial business spinoff, as well as monetization of its AI products and services.

AI is the icon of future of technology. The open AI ecosystem strategy Baidu unveiled in July -- the dialog AI system DuerOS and the open-source driving automation platform Apollo at the frontend, supplemented with Baidu Brain and Smart Cloud on the backend -- gives the capital market more scope for imagination.

As AI becomes Baidu's strongest point and biggest growth driver, the emerging technology is, after all, still fledgling, and it will take a lot of investment and time before it yields any profit. For the firm to effectively integrate technology and business resources is thus crucial. The key is how to apply the technology in commercial scenarios. On the cloud computing front, Baidu is going toe-to-toe with its two arch-rivals, Alibaba and Tencent.

Looking back at Kweichow Moutai, its share price has rallied by almost 65 percent thus far this year, far higher than the gains posted by the Shanghai Composite Index (less than 10 percent) and CSI 300 (19 percent) in the same period.

"Prices of Moutai products peaked at over CNY2,000 in 2012, and the 'guidance price' is only CNY1,300 now. Product prices have peaked off, but the share price is well above the historical average. Such an unusual phenomenon is a clear sign that the share price is artificially inflated because of the firm's scarcity value. The firm has continuously diversified its investment businesses, and the transition has become increasingly visible through value amplification in recent years," Cai opined.

Almost all analysts have grown very bullish about Moutai nowadays, in stark contrast to prevalent bearish predictions and comments about four years ago. Future key factors determining Moutai's share price are 'trends and humanity,' not value, Dong Baozhen, a veteran investor in the company and founder of private equity firm Pi Ji Tai Fund, said at a recent investment conference.

Surprisingly, however, Moutai's institutional investors have decided to lower their holdings despite the recent rallies. Two of its 10 largest shareholders, China Securities Finance Corp. and E-Fund Asset Management (Hong Kong), both sold part of their stakes in Kweichow Moutain in the third quarter, the firm's latest quarterly report informed.