Chinese Internet Stock Picks…in search of the next Baidu (BIDU)

By: ispeculatornew
Date posted: 03.17.2010 (4:20 am) | Write a Comment  (2 Comments)

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Generally, I follow two types of stocks on IntelligentSpeculator, ETF’s and internet stocks. As far as the internet, I don’t think many would argue that China represents a land of opportunity for internet businesses. With over 1 billion people, a fairly closed market (thanks to the language barrier among other factors) and a population rapidly becoming richer, the opportunities are almost endless. Last year I had an incredible run taking Baidu (BIDU) in my 4 stock picks. I currently am struggling having chosen Sohu which for some reason, is still struggling this year. More on that later on.

Finding new stocks to follow

I had described in the past how I use a dashboard to track possible stock opportunities. In the past month or so, I have improved the ways I’m gathering news and numbers which has made it easier to track these stocks. With 5 stocks live most of them time, I am now looking to add 1-2 stocks to the ones that I follow. I will probably not trade these stocks right now as I will continue to track news and numbers before making a pick. It is similar to AOL, which I have been tracking for a few months now and will soon “give myself the ok” to start trading. But I will get there and I think it’s better earlier than later.

Chinese internet space

One thing I miss about the US internet space is the pre-Google era. Remember a few years ago when there were tens of decent internet players. We had Yahoo, MSN, Altavista, Lycos, etc, etc. All of these competed for market share and it created many trading opportunities. I still think that these will come back but right now, the main internet battles are between two or three players in the US.

In China however, consolidation has not yet taken place and apart from Baidu in search, there are not many dominant players. This creates many different possibilities for all of the stocks listed on US exchanges. Most of them are and right now, I would not get involved with the others, which are listed on Chinese stock markets. There are many reasons but obviously trading costs are one. But also, one of the advantages of investing in those listed in the US is that I have more confidence in their financial statements because US regulations are very strict and while there are some exceptions, generally this makes it more challenging to “falsify” numbers.

Challenges

Obviously, the main challenge is the language. This makes it difficult to visit the actual websites, get information from the companies and so. I would say that I must rely a lot more on research reports for these companies than I would for US companies which I can either be a consumer of, or at least get an idea of what they are offering.

As well, since I am not a Chinese consumer, I do not know the resources that would best track these companies and while I have been improving my information sources, they are still not up to par with sources for traffic trends for example on their websites.

Finally, being so far from the end consumer also means that I am not fully aware of trends, what is “in”, and what isn’t as well rumours about all of these companies. This can make a difference obviously.

Currently Tracked

As discussed above, I currently track 3 internet companies:

Baidu (BIDU): Largest Chinese search engine, which has been getting an incredible amount of time on the news in recent days and weeks as speculation of a Google pull out from the Chinese markets intensify. An already volatile stock, the speculation around its main competitor has made Baidu a great day trading position. Since that is not what I’m doing, I’m not currently trading Baidu.

Sohu (SOHU): 2nd largest portal (similar to a Yahoo business model), but the largest one traded on US markets. It looks attractive at the current valuations so I’m very ok being long the stock despite its poor performance so far this year.

Ctrip (CTRP): Ctrip is an online travel agent, that has a very good position in the Chinese market. I’ve had trades on the name before and things went well!

Candidates

So here are the main names I considered adding to my dashboard in order to eventually trade them:

TickerNamePricePE RatioPE Next YearSales GrowthAnalyst ratingBook ValueBetaRevenue/ShareSales 5Y Avg GrowthEPS 5Y Avg GrowthSales 5Y Avg GrowthEPS 5Y Avg Growth
AAPLApple Inc109.3317.1612.896.954.2719.020.7930.0429.8931.32N/AN/A
AOLAOL Inc45.4930.4619.475.854.0929.761.229.9-2.93N/A4.8633.55

Among those, I personally believe the two more interesting ones to add are:

Shanda (SNDA)
NetEase (NTES)

Both are of signifciant size, growing fast and are in the booming online gaming industry. So there you go! Do any of you like any of the other stocks?

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2 Comments

  1. Comment by Catarina — March 17, 2010 @ 7:40 am

    Nice post! I think that Google’s biggest threats will increasingly come from China!!

    For that I don’t understand the move about Google to have stopped censoring its China search engine… Rumors say that Google wants the Chinese government to ‘formally’ kick them out of China?!? However Chinese people are not willing to lose Google… And I sympathize!!

  2. Comment by IS — March 26, 2010 @ 3:56 pm

    @Catarina – They might but I would say that for some reason, few foreign companies have been able to get a decent presence in the US market, by far the biggest. Even big players like Baidu have not been able so far. But maybe at some point in the future….

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