Baidu (BIDU) is reportedly planning to launch its own smartphone running on an upgraded version of Baidu Yi, its customized mobile operating system based on Android.

The new smartphone may be manufactured by Foxconn and be Baidu-branded. Baidu has already launched some smartphones with partners like Dell, which run on the Yi OS.

China has seen its mobile Internet penetration increase rapidly in the past couple of years. We expect the growth to continue going forward, and lead to a steady increase in the Chinese mobile advertising market.

Baidu will compete with the likes of Google (GOOG), Apple (AAPL) and Microsoft (MSFT) in the Chinese smartphone market. (Microsoft owns and publishes Top Stocks, an MSN Money site.) By launching its own platform targeted specifically at the Chinese demographic, and integrating it with all of its online services, Baidu is hoping to expand its user base by leveraging the growing smartphone penetration and eventually monetize it through mobile advertising or something else.

Baidu is also in talks with global handset manufacturers to make smartphones powered by Baidu Yi, for the Chinese market. If Baidu's platform takes off, it could drive significant mobile search volume for Baidu, and further increase its search market share in China, just as we project. You can check out any impact in its online search market share using the chart above.

We currently have a $127 Trefis price estimate for Baidu, which stands 2% above its market price. Search advertising accounts for a significant portion of its overall value.

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